Part II

 
CONTENT

Federal Register: August 26, 2009 (Volume 74, Number 164)

Proposed Rules

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From the Federal Register Online via GPO Access [wais.access.gpo.gov]

DOCID:fr26au09-18

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Part II

Federal Reserve System

12 CFR Part 226

Truth in Lending; Proposed Rule

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FEDERAL RESERVE SYSTEM 12 CFR Part 226

Regulation Z; Docket No. R-1366

Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; request for public comment.

SUMMARY: The Board proposes to amend Regulation Z, which implements the

Truth in Lending Act (TILA), and the staff commentary to the regulation, as part of a comprehensive review of TILA's rules for closed-end credit. This proposal would revise the rules for disclosures of closed-end credit secured by real property or a consumer's dwelling, except for rules regarding rescission and reverse mortgages, which the

Board anticipates will be reviewed at a later date. Published elsewhere in today's Federal Register is the Board's proposal regarding rules for disclosures of open-end credit secured by a consumer's dwelling.

Disclosures provided at application would include a Board-published one-page ``Key Questions to Ask About Your Mortgage'' document that explains potentially risky loan features, and a Board-published one- page ``Fixed vs. Adjustable Rate Mortgages'' document. Transaction- specific disclosures required within three business days of application would summarize key loan terms. The calculation of the annual percentage rate and the finance charge would be revised to be more comprehensive, and their disclosures improved. Consumers would receive a ``final'' TILA disclosure at least three business days before consummation. Certain new post-consummation disclosures would be required. In addition, the proposed revisions would prohibit certain payments to mortgage brokers and loan officers that are based on the loan's terms or conditions, and prohibit steering consumers to transactions that are not in their interest to increase compensation received.

Rules regarding eligibility restrictions and disclosures for credit insurance and debt cancellation or debt suspension coverage would apply to all closed-end and open-end credit transactions.

DATES: Comments must be received on or before December 24, 2009.

ADDRESSES: You may submit comments, identified by Docket No. R-1366, by any of the following methods:

Agency Web Site: http://www.federalreserve.gov. Follow the instructions for submitting comments at http://www.federalreserve.gov/ generalinfo/foia/ProposedRegs.cfm.

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments.

E-mail: regs.comments@federalreserve.gov. Include the docket number in the subject line of the message.

FAX: (202) 452-3819 or (202) 452-3102.

Mail: Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue,

NW., Washington, DC 20551.

All public comments are available from the Board's Web site at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons. Accordingly, your comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper in Room MP-500 of the Board's Martin Building (20th and C

Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Jamie Z. Goodson, Jelena McWilliams,

Nikita M. Pastor, or Maureen C. Yap, Attorneys; Paul Mondor, Senior

Attorney; or Kathleen C. Ryan, Senior Counsel. Division of Consumer and

Community Affairs, Board of Governors of the Federal Reserve System, at

(202) 452-3667 or 452-2412; for users of Telecommunications Device for the Deaf (TDD) only, contact (202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Background on TILA and Regulation Z

Congress enacted the Truth in Lending Act (TILA) based on findings that economic stability would be enhanced and competition among consumer credit providers would be strengthened by the informed use of credit resulting from consumers' awareness of the cost of credit. One of the purposes of TILA is to provide meaningful disclosure of credit terms to enable consumers to compare credit terms available in the marketplace more readily and avoid the uninformed use of credit.

TILA's disclosures differ depending on whether credit is an open- end (revolving) plan or a closed-end (installment) loan. TILA also contains procedural and substantive protections for consumers. TILA is implemented by the Board's Regulation Z. An Official Staff Commentary interprets the requirements of Regulation Z. By statute, creditors that follow in good faith Board or official staff interpretations are insulated from civil liability, criminal penalties, or administrative sanction.

II. Summary of Major Proposed Changes

The goal of the proposed amendments to Regulation Z is to improve the effectiveness of disclosures that creditors provide to consumers in connection with an application and throughout the life of a mortgage.

The proposed changes are the result of the Board's review of the provisions that apply to closed-end mortgage transactions. The proposal would apply to all closed-end credit transactions secured by real property or a dwelling, and would not be limited to credit secured by the consumer's principal dwelling. The Board is proposing changes to the format, timing, and content of disclosures for the four main types of closed-end credit information governed by Regulation Z: (1) disclosures at application; (2) disclosures within three days after application; (3) disclosures three days before consummation; and (4) disclosures after consummation. In addition, the Board is proposing additional protections related to limits on loan originator compensation.

Disclosures at Application. The proposal contains new requirements and changes to the format and content of disclosures given at application, to make them more meaningful and easier for consumers to use. The proposed changes include:

Providing a new one-page Board publication, entitled ``Key

Questions to Ask About Your Mortgage,'' which would explain the potentially risky features of a loan.

Providing a new one-page Board publication, entitled

``Fixed vs. Adjustable Rate Mortgages,'' which would explain the basic differences between such loans and would replace the lengthy Consumer

Handbook on Adjustable-Rate Mortgages (CHARM booklet) currently required under Regulation Z.

Revising the format and content of the current adjustable- rate mortgage (ARM) loan program disclosure, including: a requirement that the disclosure be in a tabular question and answer format, a streamlined plain-language disclosure of interest rate and payment information, and a new disclosure of potentially risky features, such as prepayment penalties.

Disclosures within Three Days after Application. The proposal also contains revisions to the TILA disclosures provided within three days after

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application (the ``early TILA disclosure'') to make the information clearer and more conspicuous. The proposed changes include:

Revising the calculation of the finance charge and annual percentage rate (APR) so that they capture most fees and costs paid by consumers in connection with the credit transaction.

Providing a graph that would show consumers how their APR compares to the APRs for borrowers with excellent credit and for borrowers with impaired credit.

Summarizing key loan features, such as the loan term, amount, and type, and disclosing total settlement charges, as is currently required for the good faith estimate of settlement costs

(GFE) under the Real Estate Settlement Procedures Act (RESPA) and

Regulation X.

Requiring disclosure of potential changes to the interest rate and monthly payment.

Adopting new format requirements, including rules regarding: type size and use of boldface for certain terms, placement of information, and highlighting certain information in a tabular format.

Disclosures Three Days before Consummation. The proposal would require creditors to provide a ``final'' TILA disclosure that the consumer must receive at least three business days before consummation.

In addition, two proposed alternatives regarding redisclosure of the

``final'' TILA disclosure include:

Alternative 1: If any terms change after the ``final''

TILA disclosures are provided, then another final TILA disclosure would need to be provided so that the consumer receives it at least three business days before consummation.

Alternative 2: If the APR exceeds a certain tolerance or an adjustable-rate feature is added after the ``final'' TILA disclosures are provided, then another final TILA disclosure would need to be provided so that the consumer receives it at least three business days before consummation. All other changes could be disclosed at consummation.

Disclosures after Consummation. The proposal would change the timing, content and types of notices provided after consummation. The proposed changes include:

For ARMs, increasing advance notice of a payment change from 25 to 60 days, and revising the format and content of the ARM adjustment notice.

For payment option loans with negative amortization, requiring a monthly statement to provide information about payment options that include the costs and effects of negatively-amortizing payments.

For creditor-placed property insurance, requiring notice of the cost and coverage at least 45 days before imposing a charge for such insurance.

Loan Originator Compensation. The proposal contains new limits on originator compensation for all closed-end mortgages. The proposed changes include:

Prohibiting certain payments to a mortgage broker or a loan officer that are based on the loan's terms and conditions.

Prohibiting a mortgage broker or loan officer from

``steering'' consumers to transactions that are not in their interest in order to increase the mortgage broker's or loan officer's compensation.

III. The Board's Review of Closed-End Credit Rules

The Board has amended Regulation Z numerous times since TILA simplification in 1980. In 1987, the Board revised Regulation Z to require special disclosures for closed-end ARMs secured by the borrower's principal dwelling. 52 FR 48665; Dec. 24, 1987. In 1995, the

Board revised Regulation Z to implement changes to TILA by the Home

Ownership and Equity Protection Act (HOEPA). 60 FR 15463; Mar. 24, 1995. HOEPA requires special disclosures and substantive protections for home-equity loans and refinancings with APRs or points and fees above certain statutory thresholds. Numerous other amendments have been made over the years to address new mortgage products and other matters, such as abusive lending practices in the mortgage and home-equity markets.

The Board's current review of Regulation Z was initiated in

December 2004 with an advance notice of proposed rulemaking.\1\ 69 FR 70925; Dec. 8, 2004. At that time, the Board announced its intent to conduct its review of Regulation Z in stages, focusing first on the rules for open-end (revolving) credit accounts that are not home- secured, chiefly general-purpose credit cards and retailer credit card plans. In December 2008, the Board approved final rules for open-end credit that is not home-secured. 74 FR 5244; Jan. 29, 2009.

\1\ The review was initiated pursuant to requirements of section 303 of the Riegle Community Development and Regulatory Improvement

Act of 1994, section 610(c) of the Regulatory Flexibility Act of 1980, and section 2222 of the Economic Growth and Regulatory

Paperwork Reduction Act of 1996. An advance notice of proposed rulemaking is published to obtain preliminary information prior to issuing a proposed rule or, in some cases, deciding whether to issue a proposed rule.

Beginning in 2007, the Board proposed revisions to the rules for closed-end credit in several phases:

HOEPA. In 2007, the Board proposed rules under HOEPA for higher-priced mortgage loans (2007 HOEPA Proposed Rule). The final rules, approved in July 2008 (2008 HOEPA Final Rule), prohibited certain unfair or deceptive lending and servicing practices in connection with closed-end mortgages. The Board also approved revisions to advertising rules for both closed-end and open-end home-secured loans to ensure that advertisements contain accurate and balanced information and do not contain misleading or deceptive representations.

The final rules also required creditors to provide consumers with transaction-specific disclosures early enough to use while shopping for a mortgage. 73 FR 44522; July 30, 2008.

Timing of Disclosures for Closed-End Mortgages. On May 7, 2009, the Board approved final rules implementing the Mortgage

Disclosure Improvement Act of 2008 (the MDIA).\2\ The MDIA adds to the requirements of the 2008 HOEPA Final Rule regarding transaction- specific disclosures. Among other things, the MDIA and the final rules require early, transaction-specific disclosures for mortgage loans secured by dwellings even when the dwelling is not the consumer's principal dwelling, and requires waiting periods between the time when disclosures are given and consummation of the transaction. 74 FR 23289;

May 19, 2009.

\2\ The MDIA is contained in Sections 2501 through 2503 of the

Housing and Economic Recovery Act of 2008, Public Law 110-289, enacted on July 30, 2008. The MDIA was later amended by the

Emergency Economic Stabilization Act of 2008, Public Law 110-343, enacted on October 3, 2008.

This proposal would revise the rules for disclosures for closed-end credit secured by real property or a consumer's dwelling. The Board anticipates reviewing the rules for rescission and reverse mortgages in the next phase of the Regulation Z review.

A. Coordination With Disclosures Required Under the Real Estate

Settlement Procedures Act

The Board anticipates working with the Department of Housing and

Urban Development (HUD) to ensure that TILA and Real Estate Settlement

Procedures Act of 1974 (RESPA) disclosures are compatible and complementary, including potentially developing a single disclosure form that creditors could use to combine the initial disclosures required under TILA and

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RESPA. The two statutes have different purposes but have considerable overlap. Harmonizing the two disclosure schemes would ensure that consumers receive consistent information under both laws. It may also help reduce information overload by eliminating some duplicative disclosures. Consumer testing would be used to ensure consumers could understand and use the combined disclosures. In the meantime, the Board is proposing a revised model TILA form so that commenters can see how the Board's proposed revisions to Regulation Z might be applied in practice.

RESPA, which is implemented by HUD's Regulation X, seeks to ensure that consumers are provided with timely information about the nature and costs of the settlement process and are protected from unnecessarily high real estate settlement charges. To this end, RESPA mandates that consumers receive information about the costs associated with a mortgage loan transaction, and prohibits certain business practices. Under RESPA, creditors must provide a GFE within three business days after a consumer submits a written application for a mortgage loan, which is the same time creditors must provide the early

TILA disclosure. RESPA also requires a statement of the actual costs imposed at loan settlement (HUD-1 settlement statement). In November 2008, HUD published revised RESPA rules, including new GFE and HUD-1 settlement statement forms, which lenders, mortgage brokers, and settlement agents must use beginning on January 1, 2010. 73 FR 68204;

Nov. 17, 2008. In addition to revised disclosures of settlement costs, the revised GFE now includes loan terms, some of which would also appear on the TILA disclosure, such as whether there is a prepayment penalty and the borrower's interest rate and monthly payment. The revised GFE form was developed through HUD's consumer testing.

TILA, which is implemented by the Board's Regulation Z, governs the disclosure of the APR and certain loan terms. This proposal contains a revised model TILA form that was developed through consumer testing. In addition to a revised disclosure of the APR and loan terms, the revised

TILA disclosure would include the total settlement charges that appear on the GFE required under RESPA. Total settlement charges would be added to the TILA form because consumer testing conducted by the Board found that consumers wanted to have settlement charges disclosed on the

TILA form.

The proposed revised TILA form and HUD's revised GFE would represent significant improvements, but overlap between the two forms could be eliminated to reduce information overload and consistency issues. There have been previous efforts to develop a combined TILA and

RESPA disclosure form, which were fueled by the amount, complexity, and overlap of information in the disclosures. Under a 1996 congressional directive, the Board and HUD studied ways to simplify and improve the disclosures. In July 1998, the Board and HUD submitted a joint report to Congress that provided a broad outline intended to be a starting point for consideration of legislative reform of the mortgage disclosure requirements (the 1998 Joint Report).\3\ The 1998 Joint

Report included a recommendation for combining and simplifying the

RESPA and TILA disclosure forms to satisfy the requirements of both laws. In addition, The 1998 Joint Report recommended that the timing of the TILA and RESPA disclosures be coordinated. Recent regulatory changes addressed the timing issues so that initial disclosures required under TILA and RESPA would be delivered at the same time.

\3\ Bd. of Governors of the Fed. Reserve Sys. and U.S. Dep't of

Hous. and Urban Dev., Joint Report to the Congress Concerning Reform to the Truth in Lending Act and the Real Estate Settlement

Procedures Act (1998), available at http://www.federalreserve.gov/ boarddocs/rptcongress/tila.pdf.

B. The Bankruptcy Act's Amendment to TILA

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

(Bankruptcy Act) primarily amended the federal bankruptcy code, but also contained several provisions amending TILA. With respect to open- end and closed-end dwelling-secured credit, the Bankruptcy Act requires that the credit application disclosure contain a statement warning consumers that if the loan exceeds the fair market value of the dwelling, then the interest on that portion of the loan is not tax deductible, and the consumer should consult a tax advisor for further information on tax deductibility. This proposal would implement this

Bankruptcy Act provision.

C. The MDIA's Amendments to TILA

On July 30, 2008, Congress enacted the MDIA.\4\ The MDIA codified some of the requirements of the Board's 2008 HOEPA Final Rule, which required transaction-specific disclosures to be provided within three business days after an application is received and before the consumer has paid a fee, other than a fee for obtaining the consumer's credit history.\5\ The MDIA also expanded coverage of the early disclosure requirement to include loans secured by a dwelling even when it is not the consumer's principal dwelling. In addition, the MDIA required creditors to mail or deliver early TILA disclosures at least seven business days before consummation and provide corrected disclosures if the disclosed APR changes in excess of a specified tolerance. The consumer must receive the corrected disclosures no later than three business days before consummation. The Board implemented these MDIA requirements in final rules published May 19, 2009, and effective July 30, 2009. 74 FR 23289; May 19, 2009.

\4\ As noted, Congress subsequently amended the MDIA with the

Emergency Economic Stabilization Act of 2008.

\5\ To ease discussion, the description of the closed-end mortgage disclosure scheme includes MDIA's recent amendments to TILA and the disclosure timing requirements of the 2008 HOEPA Final Rule that will be effective July 30, 2009.

The MDIA also requires payment examples if the interest rate or payments can change. Such disclosures are to be formatted in accordance with the results of consumer testing conducted by the Board. Those provisions of the MDIA will not become effective until January 30, 2011, or any earlier compliance date established by the Board. This proposal would implement those MDIA provisions.

D. Consumer Testing

A principal goal for the Regulation Z review is to produce revised and improved mortgage disclosures that consumers will be more likely to understand and use in their decisions, while at the same time not creating undue burdens for creditors. Currently, Regulation Z requires creditors to provide at application an ARM loan program disclosure and the CHARM booklet. An early TILA disclosure is required within three business days of application and at least seven business days before consummation for closed-end mortgages.

In 2007, the Board retained a research and consulting firm (ICF

Macro) that specializes in designing and testing documents to conduct consumer testing to help the Board's review of mortgage rules under

Regulation Z. Working closely with the Board, ICF Macro conducted several tests in different cities throughout the United States. The testing consisted of four focus groups and eleven rounds of one-on-one cognitive interviews. The goals of these focus groups and interviews were to learn how consumers shop for

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mortgages and what information consumers read when they receive mortgage disclosures, and to assess their understanding of such disclosures.

The consumer testing groups contained participants with a range of ethnicities, ages, educational levels, and mortgage behaviors, including first-time mortgage shoppers, prime and subprime borrowers, and consumers who had obtained one or more closed-end mortgages. For each round of testing, ICF Macro developed a set of model disclosure forms to be tested. Interview participants were asked to review model forms and provide their reactions, and were then asked a series of questions designed to test their understanding of the content. Data were collected on which elements and features of each form were most successful in providing information clearly and effectively. The findings from each round of interviews were incorporated in revisions to the model forms for the following round of testing.

Specifically, the Board worked with ICF Macro to develop and test several types of closed-end disclosures, including:

Two Board publications to be provided at application, entitled ``Key Questions To Ask About Your Mortgage'' and ``Fixed vs.

Adjustable Rate Mortgages'';

An ARM loan program disclosure to be provided at application;

An early TILA disclosure to be provided within three business days of application, and again so that the consumer receives it at least three business days before consummation;

An ARM adjustment notice to be provided after consummation; and

A payment option monthly statement to be provided after consummation.

Exploratory focus groups. In February and March 2008 the Board worked with ICF Macro to conduct four focus groups with consumers who had obtained a mortgage in the previous two years. Two of the groups consisted of subprime borrowers and two consisted of prime borrowers, with creditworthiness determined by their answers to questions about prior financial hardship, difficulties encountered in shopping for credit, and the rate on their current mortgage. Each focus group consisted of between seven and nine people that discussed issues identified by the Board and raised by a moderator from ICF Macro.

Through these focus groups, the Board gathered information on how consumers shop for mortgages, what information consumers currently use in making decisions about mortgages, and what perceptions consumers had of TILA disclosures currently provided in the shopping and application process.

Cognitive interviews on existing disclosures. In 2008, the Board worked with ICF Macro to conduct five rounds of cognitive interviews with mortgage customers (seven to eleven participants per round). These cognitive interviews consisted of one-on-one discussions with consumers, during which consumers described their recent mortgage shopping experience and reviewed existing sample mortgage disclosures.

In addition to learning about shopping behavior, the goals of these interviews were: (1) To learn more about what information consumers read when they receive current mortgage disclosures; (2) to research how easily consumers can find various pieces of information in these disclosures; and (3) to test consumers' understanding of certain mortgage related words and phrases. 1. Initial design of disclosures for testing. In the fall of 2008, the Board worked with ICF Macro to develop sample mortgage disclosures to be used in later rounds of testing, taking into account information learned through the focus groups and the cognitive interviews. 2. Additional cognitive interviews and revisions to disclosures. In late 2008 and early 2009, the Board worked with ICF Macro to conduct six additional rounds of cognitive interviews (nine or ten participants per round), where consumers were asked to view new sample mortgage disclosures developed by the Board and ICF Macro. The rounds of interviews were conducted sequentially to allow for revisions to the testing materials based on what was learned from the testing during each previous round.

Results of testing. Several of the model forms were developed through the testing. A report summarizing the results of the testing is available on the Board's public Web site: http:// www.federalreserve.gov.

Many consumer testing participants reported that they did not shop for a lender or a mortgage. Several stated that they were referred to a lender by a realtor, family member or friend, and that they relied on that lender to get them a loan. Participants who reported shopping for a mortgage relied on originators' oral quotes for interest rates, monthly payments, and closing costs. Most participants stated that once they had applied for a particular loan and received a TILA disclosure they ceased shopping. Some cited the time involved, and the amount of documentation required, as factors for limiting their shopping. These findings suggest that consumers need information early in the process and that information should not be limited to information about ARMs.

Therefore, the proposal would require creditors to provide key information about evaluating loan terms at the time an application form is provided, as discussed below. 1. Disclosures provided to consumers before application. Currently, creditors must provide the CHARM booklet before a consumer applies or pays a nonrefundable fee, whichever is earlier. The booklet explains how ARMs generally work. Testing showed that participants found the

CHARM booklet too lengthy to be useful, although some liked specific elements such as the glossary. In addition, creditors must provide an

ARM loan program disclosure for each ARM loan program in which the consumer expresses an interest, before the consumer applies or has paid a nonrefundable fee. The ARM loan program disclosure currently must include either a 15-year historical example of rates and payments for a

$10,000 loan, or the maximum interest rate and payment for a $10,000 loan originated at the interest rate in effect for the disclosure's identified month and year. Many testing participants found the narrative form of the current ARM loan program disclosure difficult to read and understand. Some participants mistook the historical examples to be their actual loan rate and payments. Participants also found the content of the disclosure too general to be useful to them when comparing between lenders or products, and noted the absence of key loan information, such as the interest rate.

Thus, the proposal would require creditors to provide, for all closed-end mortgages, a one-page document that explains the basic differences between fixed-rate mortgages and ARMs, and a one-page document that would explain potentially risky features of a mortgage in a plain-English question and answer format. In addition, the proposal would streamline the content of the ARM loan program disclosure to highlight in a table form information that participants found most useful, such as interest rate and payment adjustments, and to provide information about program-specific loan features that could pose greater risk, such as prepayment penalties. Consumer testing suggested that highlighting such information in a table form improved participants' ability to identify and understand the information provided about key loan features. 2. Disclosures provided to consumers after application. Currently, creditors

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must provide an early TILA disclosure within three business days after application and at least seven business days before consummation, and before the consumer has paid a fee other than a fee for obtaining the consumer's credit history. If the APR on the early TILA disclosure exceeds a certain tolerance before consummation, the creditor must provide corrected disclosures that the consumer must receive at least three days before consummation. If any term other than the APR becomes inaccurate, the creditor must give the corrected disclosure no later than at consummation.

The early TILA disclosure--and any corrected disclosure--must provide certain information, such as the loan's annual percentage rate

(APR), finance charge, amount financed, and total of payments.

Participants in consumer testing indicated that much of the information in the current TILA disclosure was of secondary importance to them when considering a loan. Participants consistently looked for the contract rate of interest, monthly payment, and in some cases, closing costs.

Most participants assumed that the APR was the contract rate of interest, and that the finance charge was the total of all interest they would pay if they kept the loan to maturity. Most identified the amount financed as the loan amount. When asked to compare two loan offers using redesigned model forms that contained these disclosures, few participants used the APR and finance charge to compare the loans.

In addition, some participants had difficulty determining whether the loan tested had a variable or fixed rate and understanding the payment schedule's relationship to the changing interest rate. Many did not understand what circumstances would trigger a prepayment penalty.

Thus, the proposal contains a number of revisions to the format and content of TILA disclosures to make them clearer and more conspicuous.

To enhance the effectiveness of the finance charge as a disclosure of the true cost of credit, the proposal would require a simpler, more inclusive approach. The disclosure of the APR would be enhanced to improve consumers' comprehension of the cost of credit. In addition, to help consumers determine whether the loan offered is affordable for them, creditors would be required to summarize key loan terms and highlight interest rate and payment information in a table. Consumer testing showed that using special formatting requirements, consistent terminology and a minimum 10-point font, would ensure that consumers are better able to identify and review key loan terms. 3. Disclosures required after consummation. Currently, creditors must provide advance notice to a consumer before the interest rate and monthly payment adjust on an ARM. The ARM adjustment notice must provide certain information, including current and prior interest rates, the index values upon which the current and prior interest rates are based, and the payment that would be required to amortize the loan fully at the new interest rate. The Board worked with ICF Macro to develop a revised ARM adjustment notice that would enhance consumers' ability to identify and understand changes being made to their loan terms. Consumer testing of the revised ARM adjustment notice indicated that consumers understood the content and were able correctly to identify the amount and due date of the new payment. Thus, under the proposal, creditors would be required to provide the ARM adjustment notice in a revised format that would highlight changes being made to the interest rate and the monthly payment, and provide other important information, such as the due date of the new payment and the loan balance.

Currently, creditors are not required to provide disclosures after consummation for negatively-amortizing loans. The Board worked with ICF

Macro to develop a monthly statement that compares the amount and the impact on the loan balance of a fully-amortizing payment, interest-only payment, and minimum payment. Consumer testing of the proposed monthly statement indicated that consumers understood the content, easily recognized the payment options highlighted in the table, and understood that by making only the minimum payment they would be borrowing more money and increasing their loan balance. Thus, to improve consumer understanding of the risks associated with payment option loans, the

Board proposes to require, not later than 15 days before a periodic payment is due, a monthly statement of payment options that explains the impact of payment choice on the loan balance.

Additional testing during and after the comment period. During the comment period, the Board will work with ICF Macro to conduct additional testing of model disclosures. After receiving comments from the public on the proposal and the proposed disclosure forms, the Board will work with ICF Macro to further revise model disclosures based on comments received, and to conduct additional rounds of cognitive interviews to test the revised disclosures. After the cognitive interviews, quantitative testing will be conducted. The goal of the quantitative testing is to measure consumers' comprehension of the newly-developed disclosures with a larger and more statistically representative group of consumers.

E. Other Outreach and Research

The Board also solicited input from members of the Board's Consumer

Advisory Council on various issues presented by the review of

Regulation Z. During 2009, for example, the Council discussed ways to improve disclosures for home-secured credit. In addition, Board staff met or conducted conference calls with various industry and consumer group representatives throughout the review process leading to this proposal. Board staff also reviewed disclosures currently provided by creditors, the Federal Trade Commission's (FTC) report on consumer testing of mortgage disclosures,\6\ HUD's report on consumer testing of the GFE,\7\ and other information.

\6\ James M. Lacko and Janis K. Pappalardo, Fed. Trade Comm'n,

Improving Consumer Mortgage Disclosures: An Empirical Assessment of

Current and Protoype Disclosure Forms (2007), (``Improving Consumer

Mortgage Disclosures'') available at http://www2.ftc.gov/os/2007/06/

P025505MortgageDisclosureReport.pdf.

\7\ U.S. Dep't. of Hous. and Urban Dev., Summary Report:

Consumer Testing of the Good Faith Estimate Form (GFE) (2008), available at http://www.huduser.org/publications/pdf/Summary_

Report_GFE.pdf.

F. Reviewing Regulation Z in Stages

The Board is proceeding with a review of Regulation Z in stages.

This proposal largely contains revisions to rules affecting closed-end credit transactions secured by real property or a dwelling. Published elsewhere in today's Federal Register is the Board's proposal regarding disclosures for open-end credit secured by a consumer's dwelling.

Closed-end mortgages are distinct from other TILA-covered products, and conducting a review in stages allows for a manageable process. To minimize compliance burden for creditors offering other closed-end credit, as well as home-secured credit, the proposed rules that would apply only to closed-end home-secured credit are organized in sections separate from the general disclosure requirements for closed-end rules.

Although this reorganization would increase the size of the regulation and commentary, the Board believes a clear delineation of rules for closed-end, home-secured loans pending the review of the remaining closed-end rules provides a clear compliance benefit to creditors.

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G. Implementation Period

The Board contemplates providing creditors sufficient time to implement any revisions that may be adopted. The Board seeks comment on an appropriate implementation period.

IV. The Board's Rulemaking Authority

TILA Section 105. TILA mandates that the Board prescribe regulations to carry out the purposes of the act. TILA also specifically authorizes the Board, among other things, to:

Issue regulations that contain such classifications, differentiations, or other provisions, or that provide for such adjustments and exceptions for any class of transactions, that in the

Board's judgment are necessary or proper to effectuate the purposes of

TILA, facilitate compliance with the act, or prevent circumvention or evasion. 15 U.S.C. 1604(a).

Exempt from all or part of TILA any class of transactions if the Board determines that TILA coverage does not provide a meaningful benefit to consumers in the form of useful information or protection. The Board must consider factors identified in the act and publish its rationale at the time it proposes an exemption for comment. 15 U.S.C. 1604(f).

In the course of developing the proposal, the Board has considered the views of interested parties, its experience in implementing and enforcing Regulation Z, and the results obtained from testing various disclosure options in controlled consumer tests. For the reasons discussed in this notice, the Board believes this proposal is appropriate pursuant to the authority under TILA Section 105(a).

Also, as explained in this notice, the Board believes that the specific exemptions proposed are appropriate because the existing requirements do not provide a meaningful benefit to consumers in the form of useful information or protection. In reaching this conclusion with each proposed exemption, the Board considered (1) the amount of the loan and whether the disclosure provides a benefit to consumers who are parties to the transaction involving a loan of such amount; (2) the extent to which the requirement complicates, hinders, or makes more expensive the credit process; (3) the status of the borrower, including any related financial arrangements of the borrower, the financial sophistication of the borrower relative to the type of transaction, and the importance to the borrower of the credit, related supporting property, and coverage under TILA; (4) whether the loan is secured by the principal residence of the borrower; and (5) whether the exemption would undermine the goal of consumer protection. The rationales for these proposed exemptions are explained in part VI below.

TILA Section 129(l)(2). TILA also authorizes the Board to prohibit acts or practices in connection with:

Mortgage loans that the board finds to be unfair, deceptive, or designed to evade the provisions of HOEPA; and

Refinancing of mortgage loans that the Board finds to be associated with abusive lending practices or that are otherwise not in the interest of the borrower.

The authority granted to the Board under TILA Section 129(l)(2), 15

U.S.C. 1639(l)(2), is broad. It reaches mortgage loans with rates and fees that do not meet HOEPA's rate or fee trigger in TILA Section 103(aa), 15 U.S.C. 1602(aa), as well as mortgage loans not covered under that section, such as home purchase loans. Moreover, while

HOEPA's statutory restrictions apply only to creditors and only to loan terms or lending practices, Section 129(l)(2) is not limited to acts or practices by creditors, nor is it limited to loan terms or lending practices. See 15 U.S.C. 1639(l)(2). It authorizes protections against unfair or deceptive practices ``in connection with mortgage loans,'' and it authorizes protections against abusive practices ``in connection with refinancing of mortgage loans.'' Thus, the Board's authority is not limited to regulating specific contractual terms of mortgage loan agreements; it extends to regulating loan-related practices generally, within the standards set forth in the statute.

HOEPA does not set forth a standard for what is unfair or deceptive, but the Conference Report for HOEPA indicates that, in determining whether a practice in connection with mortgage loans is unfair or deceptive, the Board should look to the standards employed for interpreting State unfair and deceptive trade practices statutes and the Federal Trade Commission Act (FTC Act), Section 5(a), 15 U.S.C. 45(a).\8\

\8\ H.R. Rep. 103-652, at 162 (1994) (Conf. Rep.).

Congress has codified standards developed by the Federal Trade

Commission (FTC) for determining whether acts or practices are unfair under Section 5(a), 15 U.S.C. 45(a).\9\ Under the FTC Act, an act or practice is unfair when it causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. In addition, in determining whether an act or practice is unfair, the FTC is permitted to consider established public policies, but public policy considerations may not serve as the primary basis for an unfairness determination.\10\

\9\ See 15 U.S.C. 45(n); Letter from Commissioners of the FTC to the Hon. Wendell H. Ford, Chairman, and the Hon. John C. Danforth,

Ranking Minority Member, Consumer Subcomm. of the H. Comm. on

Commerce, Science, and Transp. (Dec. 17, 1980).

\10\ 15 U.S.C. 45(n).

The FTC has interpreted these standards to mean that consumer injury is the central focus of any inquiry regarding unfairness.\11\

Consumer injury may be substantial if it imposes a small harm on a large number of consumers, or if it raises a significant risk of concrete harm.\12\ The FTC looks to whether an act or practice is injurious in its net effects.\13\ The FTC has also observed that an unfair act or practice will almost always reflect a market failure or market imperfection that prevents the forces of supply and demand from maximizing benefits and minimizing costs.\14\ In evaluating unfairness, the FTC looks to whether consumers' free market decisions are unjustifiably hindered.\15\

\11\ Statement of Basis and Purpose and Regulatory Analysis,

Credit Practices Rule, 42 FR 7740, 7743; Mar. 1, 1984 (Credit

Practices Rule).

\12\ Letter from Commissioners of the FTC to the Hon. Wendell H.

Ford, Chairman, and the Hon. John C. Danforth, Ranking Minority

Member, Consumer Subcomm. of the H. Comm. on Commerce, Science, and

Transp., n.12 (Dec. 17, 1980).

\13\ Credit Practices Rule, 42 FR at 7744.

\14\ Id.

\15\ Id.

The FTC has also adopted standards for determining whether an act or practice is deceptive (though these standards, unlike unfairness standards, have not been incorporated into the FTC Act).\16\ First, there must be a representation, omission or practice that is likely to mislead the consumer. Second, the act or practice is examined from the perspective of a consumer acting reasonably in the circumstances.

Third, the representation, omission, or practice must be material. That is, it must be likely to affect the consumer's conduct or decision with regard to a product or service.\17\

\16\ Letter from James C. Miller III, Chairman, FTC to the Hon.

John D. Dingell, Chairman, H. Comm. on Energy and Commerce (Oct. 14, 1983) (Dingell Letter).

\17\ Dingell Letter at 1-2.

Many States also have adopted statutes prohibiting unfair or deceptive acts or practices, and these statutes employ a variety of standards, many of them different from the standards

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currently applied to the FTC Act. A number of States follow an unfairness standard formerly used by the FTC. Under this standard, an act or practice is unfair where it offends public policy; or is immoral, unethical, oppressive, or unscrupulous; and causes substantial injury to consumers.\18\

\18\ See, e.g., Kenai Chrysler Ctr., Inc. v. Denison, 167 P.3d 1240, 1255 (Alaska 2007) (quoting FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244-45 n.5 (1972)); State v. Moran, 151 N.H. 450, 452, 861 A.2d 763, 755-56 (N.H. 2004) (concurrently applying the FTC's former test and a test under which an act or practice is unfair or deceptive if ``the objectionable conduct * * * attain[s] a level of rascality that would raise an eyebrow of someone inured to the rough and tumble of the world of commerce.'') (citation omitted); Robinson v. Toyota Motor Credit Corp., 201 Ill. 2d 403, 417-418, 775 N.E.2d 951, 961-62 (2002) (quoting 405 U.S. at 244-45 n.5).

In developing proposed rules under TILA Section 129(l)(2)(A), 15

U.S.C. 1639(l)(2)(A), the Board has considered the standards currently applied to the FTC Act's prohibition against unfair or deceptive acts or practices, as well as the standards applied to similar State statutes.

V. Discussion of Major Proposed Revisions

The goal of the proposed revisions is to improve the effectiveness of the Regulation Z disclosures that must be provided to consumers for closed-end credit transactions secured by real property or a dwelling.

To shop for and understand the cost of home-secured credit, consumers must be able to identify and comprehend the key terms of mortgages. But the terms and conditions for mortgage transactions can be very complex.

The proposed revisions to Regulation Z are intended to provide the most essential information to consumers when the information would be most useful to them, with content and formats that are clear and conspicuous. The proposed revisions are expected to improve consumers' ability to make informed credit decisions and enhance competition among creditors. Many of the changes are based on the consumer testing that was conducted in connection with the review of Regulation Z.

In considering the proposed revisions, the Board sought to ensure that the proposal would not reduce access to credit, and sought to balance the potential benefits for consumers with the compliance burdens imposed on creditors. For example, the proposed revisions seek to provide greater certainty to creditors in identifying what costs must be disclosed for mortgages, and how those costs must be disclosed.

More effective disclosures may also reduce confusion and misunderstanding, which may also ease creditors' costs relating to consumer complaints and inquiries.

A. Disclosures at Application

Currently, Regulation Z requires pre-application disclosures only for variable-rate transactions. For these transactions, creditors are required to provide the CHARM booklet and a loan program disclosure that provides twelve items of information at the time an application form is provided or before the consumer pays a nonrefundable fee, whichever is earlier.

``Key Questions to Ask about Your Mortgage'' publication. Since 1987, the number of loan products and product features has grown, providing consumers with more choices. However, the growth in loan features and products has also made the decision-making process more complex for consumers. The proposal would require creditors to provide to consumers a one-page Board publication entitled, ``Key Questions to

Ask about Your Mortgage.'' Creditors would be required to provide this document for all closed-end loans secured by real property or a dwelling, not just variable-rate loans, before the consumer applies for a loan or pays a nonrefundable fee, whichever is earlier. The publication would inform consumers in a plain-English question and answer format about potentially risky features, such as interest-only, negative amortization, and prepayment penalties. To enable consumers to track the presence or absence of potentially risky features throughout the mortgage transaction process, the key questions and answers provided in this one-page document would also be included in the ARM loan program disclosure and the early and final TILA disclosures.

``Fixed vs. Adjustable Rate Mortgages'' publication. Instead of the

CHARM booklet, the proposal would require creditors to provide a one- page Board publication entitled, ``Fixed vs. Adjustable Rate

Mortgages'' for all closed-end loans secured by real property or a dwelling, not just variable-rate loans. The publication would contain an explanation of the basic differences between fixed-rate mortgages and ARMs. Although the requirement to provide a CHARM booklet would be eliminated, the Board would continue to publish the CHARM booklet as a consumer-education publication.

ARM loan program disclosure. Currently, for each variable-rate loan program in which a consumer expresses an interest, creditors must provide certain information, including the index and margin to be used to calculate interest rates and payments, and either a 15-year historical example of rates and payments for a $10,000 loan, or the maximum interest rate and payment for a $10,000 loan originated at the interest rate in effect for the disclosure's identified month and year.

Based on consumer testing, the proposal would simplify the ARM loan program disclosure to focus on the interest rate and payment and the potential risks associated with ARMs. Information on how to calculate payments, and the effect of rising interest rates on monthly payments would be moved to the early TILA disclosure provided after application.

Placing the information there will allow the creditor to customize the information to the consumer's potential loan, making the information more useful to consumers. The proposed ARM loan program disclosure would be provided in a tabular question and answer format to enable consumers to easily locate the most important information.

B. Disclosures Within Three Days After Application

TILA and Regulation Z currently require creditors to provide an early TILA disclosure within three business days after application and at least seven business days before consummation, and before the consumer has paid a fee other than a fee for obtaining the consumer's credit history. If the APR on the early TILA disclosure exceeds a certain tolerance before consummation, the creditor must provide corrected disclosures that the consumer must receive at least three days before consummation. If any term other than the APR becomes inaccurate, the creditor must give the corrected disclosure no later than at consummation.

The early TILA disclosure, and any corrected disclosure, must include certain loan information, including the amount financed, the finance charge, the APR, the total of payments, and the amount and timing of payments. The finance charge is the sum of all credit-related charges, but excludes a variety of fees and charges. TILA requires that the finance charge and the APR be disclosed more conspicuously than other information. The APR is calculated based on the finance charge and is meant to be a single, unified number to help consumers understand the total cost of credit.

Calculation of the finance charge. The proposal contains a number of revisions to the calculation of the finance charge and the disclosure of the finance charge and the APR to improve consumers'

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understanding of the cost of credit. Currently, TILA and Regulation Z permit creditors to exclude several fees or charges from the finance charge, including certain fees or charges imposed by third party closing agents; certain premiums for credit or property insurance or fees for debt cancellation or debt suspension coverage, if the creditor meets certain conditions; security interest charges; and real-estate related fees, such as title examination or document preparation fees.

Consumer groups, creditors, and government agencies have long been dissatisfied with the ``some fees in, some fees out'' approach to the finance charge. Consumer groups and others believe that the current approach obscures the true cost of credit. They contend that this approach creates incentives for creditors to shift the cost of credit from the interest rate to ancillary fees excluded from the finance charge. They further contend that this approach undermines the purpose of the APR, which is to express in a single figure the total cost of credit. Creditors maintain that consumers are confused by the APR and that the current approach creates significant regulatory burdens. They contend that determining which fees are or are not included in the finance charge is overly complex and creates litigation risk.

The Board proposes to use its exception and exemption authority to revise the finance charge calculation for closed-end mortgages, including HOEPA loans. The proposal would maintain TILA's definition of a ``finance charge'' as a fee or charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to the extension of credit. However, the proposal would require the finance charge to include charges by third parties if the creditor requires the use of a third party as a condition of or incident to the extension of credit (even if the consumer chooses the third party), or if the creditor retains a portion of the third-party charge (to the extent of the portion retained). Charges that would be incurred in a comparable cash transaction, such as transfer taxes, would continue to be excluded from the finance charge. Under this approach, consumers would benefit from having a finance charge and APR disclosure that better represent the cost of credit, undiluted by myriad exclusions for various fees and charges. This approach would cause more loans to be subject to the special protections of the

Board's 2008 HOEPA Final Rule, special disclosures and restrictions for

HOEPA loans, and certain State anti-predatory lending laws. However, the proposal could also reduce compliance burdens, regulatory uncertainty, and litigation risks for creditors.

Disclosure of the finance charge and the APR. Currently, creditors are required to disclose the loan's ``finance charge'' and ``annual percentage rate,'' using those terms, more conspicuously than the other required disclosures. Consumer testing indicated that consumers do not understand the term ``finance charge.'' Most consumers believe the term refers to the total of all interest they would pay if they keep the loan to maturity, but do not realize that it includes the fees and costs associated with the loan. For these reasons, the proposal replaces the term ``finance charge'' with ``interest and settlement charges'' to make clear it is more than interest, and the disclosure would no longer be more conspicuous than the other required disclosures.

In addition, the disclosure of the APR would be enhanced to improve consumers' comprehension of the cost of credit. Under the proposal, creditors would be required to disclose the APR in 16-point font in close proximity to a graph that compares the consumer's APR to the

HOEPA average prime offer rate for borrowers with excellent credit and the HOEPA threshold for higher-priced loans. This disclosure would put the APR in context and help consumers understand whether they are being offered a loan that comports with their creditworthiness.

Interest rate and payment summary. Currently, creditors are required to disclose the number, amount, and timing of payments scheduled to repay the loan. Under the MDIA's amendments to TILA, creditors will be required to provide examples of adjustments to the regularly required payment based on the change in interest rates specified in the contract. Consumer testing consistently indicated that consumers shop for and evaluate a mortgage based on the contract interest rate and the monthly payment, but consumers have difficulty understanding such terms using the current TILA disclosure. Under the proposal, creditors would be required to disclose in a tabular format the contract interest rate together with the corresponding monthly payment, including escrows for taxes and property and/or mortgage insurance. Special disclosure requirements would be imposed for adjustable-rate or step-rate loans to show the interest rate and payment at consummation, the maximum interest rate and payment at first adjustment, and the highest possible maximum interest rate and payment.

Additional special disclosures would be required for loans with negatively-amortizing payment options, introductory interest rates, interest-only payments, and balloon payments.

Disclosure of other terms. In addition to the interest rate and monthly payment, consumer testing indicated that consumers benefit from the disclosure of other key terms in a clear format. Thus, the proposal would require creditors to provide in a tabular format information about the loan amount, the loan term, the loan type (such as fixed- rate), the total settlement charges, and the maximum amount of any prepayment penalty. In addition, creditors would be required to disclose in a tabular question and answer format the ``Key Questions about Risk,'' which would include information about potentially risky loan features such as prepayment penalties, interest-only payments, and negative amortization.

C. Disclosures Three Days Before Consummation

As noted above, the creditor is required to provide the early TILA disclosure to the consumer within three business days after receiving the consumer's written application and at least seven business days before consummation, and before the consumer has paid a fee other than a fee for obtaining the consumer's credit history. If the APR on the early TILA disclosure exceeds a certain tolerance before consummation, the creditor must provide corrected disclosures that the consumer must receive at least three days before consummation. If any term other than the APR becomes inaccurate, the creditor must give the corrected disclosure no later than at consummation. The consumer may waive the seven- and three-day waiting periods for a bona fide personal financial emergency.

There are, however, long-standing concerns about consumers facing different loan terms or increased settlement costs at closing. Members of the Board's Consumer Advisory Council, participants in public hearings, and commenters on prior Board rulemakings have expressed concern about consumers not learning of changes to credit terms or settlement charges until consummation. In addition, consumer testing indicated that consumers are often surprised at closing by changes in important loan terms, such as the addition of an adjustable-rate feature. Despite these changes, consumers report that they have proceeded with closing because they lacked alternatives (especially in the case of a home purchase loan), or

Page 43240

were told that they could easily refinance with better terms in the near future.

For these reasons, the proposal would require the creditor to provide a final TILA disclosure that the consumer must receive at least three business days before consummation, even if no terms have changed since the early TILA disclosure was provided. In addition, the Board is proposing two alternative approaches to address changes to loan terms and settlement charges during the three-business-day waiting period.

Under the first approach, if any terms change during the three- business-day waiting period, the creditor would be required to provide another final TILA disclosure and wait an additional three business days before consummation could occur. Under the second approach, creditors would be required to provide another final TILA disclosure, but would have to wait an additional three business days before consummation only if the APR exceeds a designated tolerance or the creditor adds an adjustable-rate feature. Otherwise, the creditor would be permitted to provide the new final TILA disclosure at consummation.

D. Disclosures After Consummation

Regulation Z requires certain notices to be provided after consummation. Currently, for variable-rate transactions, creditors are required to provide advance notice of an interest rate adjustment.

There are no disclosure requirements for other post-consummation events.

ARM adjustment notice. Currently, for variable-rate transactions, creditors are required to provide a notice of interest rate adjustment at least 25, but no more than 120, calendar days before a payment at a new level is due. In addition, creditors must provide an adjustment notice at least once each year during which an interest rate adjustment is implemented without an accompanying payment change. These disclosures must include certain information, including the current and prior interest rates and the index values upon which the current and prior interest rates are based.

Under the proposal, creditors would be required to provide the ARM adjustment notice at least 60 days before payment at a new level is due. This proposal seeks to address concerns that consumers need more than 25 days to seek out a refinancing in the event of a payment adjustment. This notice is particularly critical for subprime borrowers who may be more vulnerable to payment shock and may have a more difficult time refinancing a loan.

Payment option statement. Currently, creditors are not required to provide disclosures after consummation for negatively amortizing loans, such as payment option loans. To ensure consumers receive information about the risks associated with payment option loans (e.g., payment shock), the proposal would require creditors to provide a periodic statement for payment option loans that have negative amortization. The disclosure would contain a table with a comparison of the amount and impact on the loan balance and property equity of a fully-amortizing payment, interest-only payment, and minimum negatively-amortizing payment. This disclosure would be provided not later than 15 days before a periodic payment is due.

Creditor-placed property insurance notice. Creditors are not currently required under Regulation Z to provide notice before charging for creditor-placed property insurance. Industry reports indicate that the volume of creditor-placed property insurance has increased significantly. Consumers struggling financially may fail to pay required property insurance premiums unaware that creditors have the right to obtain such insurance on their behalf and add the premiums to their outstanding loan balance. Such premiums are often considerably more expensive than premiums for insurance obtained by the consumer.

Thus, under the proposal, creditors would be required to provide notice to consumers of the cost and coverage of creditor-placed property insurance at least 45 days before a charge is imposed for such insurance. In addition, creditors would be required to provide consumers with evidence of such insurance within 15 days of imposing a charge for the insurance.

E. Prohibitions on Payments to Loan Originators and Steering

Currently, creditors pay commissions to loan originators in the form of ``yield spread premiums.'' A yield spread premium is the present dollar value of the difference between the lowest interest rate a lender would have accepted on a particular transaction and the interest rate a loan originator actually obtained for the lender. Some or all of this dollar value is usually paid to the loan originator by the creditor as a form of compensation, though it may also be applied to other closing costs.

Yield spread premiums can create financial incentives to steer consumers to riskier loans for which loan originators will receive greater compensation. Consumers generally are not aware of loan originators' conflict of interest and cannot reasonably protect themselves against it. Yield spread premiums may provide some benefit to consumers because consumers do not have to pay loan originators' compensation in cash or through financing. However, the Board believes that this benefit may be outweighed by costs to consumers, such as when consumers pay a higher interest rate or obtain a loan with terms the consumer may not otherwise have chosen, such as a prepayment penalty or an adjustable rate.

In response to these concerns, the 2007 HOEPA Proposed Rule attempted to address the potential unfairness through disclosure. The proposal would have prohibited a creditor from paying a mortgage broker more than the consumer had previously agreed in writing that the mortgage broker would receive. A mortgage broker would have had to enter into the written agreement with the consumer, before accepting the consumer's loan application and before the consumer paid any fee in connection with the transaction (other than a fee for obtaining a credit report). The agreement also would have disclosed (1) that the consumer ultimately would bear the cost of the entire compensation even if the creditor paid part of it directly; and (2) that a creditor's payment to a broker could influence the broker to offer the consumer loan terms or products that would not be in the consumer's interest or the most favorable the consumer could obtain.

Based on analysis of comments received on the 2007 HOEPA Proposed

Rule, the results of consumer testing, and other information, the Board withdrew the proposed provisions relating to broker compensation in the 2008 HOEPA Final Rule. In particular, the Board's consumer testing raised concerns that the proposed agreement and disclosures would confuse consumers and undermine their decisionmaking rather than improve it. Participants often concluded, not necessarily correctly, that brokers are more expensive than creditors. Many also believed that brokers would serve their best interests notwithstanding the conflict resulting from the relationship between interest rates and brokers' compensation.\19\ The proposed disclosures presented a significant risk of misleading consumers regarding both the relative costs of brokers and lenders and the role of brokers in their

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transactions. In withdrawing the broker compensation provisions of the

HOEPA proposal, the Board stated it would continue to explore options to address potential unfairness associated with loan originator compensation arrangements.

\19\ See Macro International, Inc., Consumer Testing of Mortgage

Broker Disclosures (July 10, 2008), available at http:// www.federalreserve.gov/newsevents/press/bcreg/ 20080714regzconstest.pdf.

To address the concerns related to loan originator compensation, the Board proposes to prohibit payments to loan originators that are based on the loan's terms and conditions. This prohibition would not apply to payments that consumers make directly to loan originators. The

Board solicits comment on an alternative that would allow loan originators to receive payments that are based on the principal loan amount, which is a common practice today. If a consumer directly pays the loan originator, the proposal would prohibit the loan originator from also receiving compensation from any other party in connection with that transaction. These rules would be proposed under the Board's

HOEPA authority to prohibit unfair or deceptive acts or practices in connection with mortgage loans.

Under the proposal, a ``loan originator'' would include both mortgage brokers and employees of creditors who perform loan origination functions. The 2007 HOEPA Proposed Rule covered only mortgage brokers. However, a creditor's loan officers frequently have the same discretion as mortgage brokers to modify loans' terms to increase their compensation, and there is evidence that creditors' loan officers engage in such practices.

The Board also seeks comment on an optional proposal that would prohibit loan originators from directing or ``steering'' consumers to a particular creditor's loan products based on the fact that the loan originator will receive additional compensation even when that loan may not be in the consumer's best interest. The Board solicits comment on whether the proposed rule would be effective in achieving the stated purpose. In addition, the Board solicits comment on the feasibility and practicality of such a rule, its enforceability, and any unintended adverse effects the rule might have.

F. Additional Protections

Credit insurance or debt cancellation or debt suspension coverage eligibility for all loan transactions. Currently, creditors may exclude from the finance charge a premium or charge for credit insurance or debt cancellation or debt suspension coverage if the creditor discloses the voluntary nature and cost of the product, and the consumer signs or initials an affirmative request for the product. Concerns have been raised about creditors who sometimes offer products that contain eligibility restrictions, specifically age or employment restrictions, but do not evaluate whether applicants for the products actually meet the eligibility restrictions at the time of enrollment. Subsequently, consumers' claims for benefits may be denied because they did not meet the eligibility restrictions at the time of enrollment. Consumers are presumably unaware that they are paying for a product for which they will derive no benefit. Under the proposal, creditors would be required to determine whether the consumer meets the age and/or employment eligibility criteria at the time of enrollment in the product and provide a disclosure that such a determination has been made. The proposal is not limited to mortgage transactions and would apply to all closed-end and open-end transactions.

VI. Section-by-Section Analysis

Section 226.1 Authority, Purpose, Coverage, Organization, Enforcement, and Liability 1(b) Purpose

Section 226.1(b) would be revised to reflect the fact that Sec. 226.35 prohibits certain acts or practices for transactions secured by the consumer's principal dwelling. In addition, Sec. 226.1(b) would be revised to reflect the proposal to broaden the scope of Sec. 226.36

(from transactions secured by the consumer's principal dwelling to all transactions secured by real property or a dwelling). 1(d) Organization 1(d)(5)

The Board proposes to revise Sec. 226.1(d)(5) to reflect the scope of Sec. Sec. 226.32, 226.34, and 226.35. The Board would also revise

Sec. 226.1(d)(5) to reflect the proposed change in the scope of Sec. 226.36, and the addition of new Sec. Sec. 226.37 and 226.38.

Section 226.2 Definitions and Rules 2(a) Definitions 2(a)(24) Residential Mortgage Transaction

Regulation Z, Sec. 226.2(a)(24), defines a ``residential mortgage transaction'' as ``a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in the consumer's principal dwelling to finance the acquisition or initial construction of that dwelling.'' Currently, comment 2(a)(24)-1 states that the term is important in five provisions in Regulation Z, including assumption under Sec. Sec. 226.18(q) and 226.20(b). However, the proposed rule would expand coverage of the assumption rules to cover any closed-end credit transaction secured by real property or a dwelling. Thus, the Board proposes to revise comments 2(a)(24)-1, -2, and -5 to reflect this change.

Section 226.3 Exempt Transactions 3(b) Credit Over $25,000 Not Secured by Real Property or a Dwelling

TILA and Regulation Z cover all credit transactions that are secured by real property or a principal dwelling in which the amount financed exceeds $25,000. 15 U.S.C. 1603(3). Section 226.3(b), which implements TILA Section 104(3), provides that credit transactions over

$25,000 not secured by real property, or by personal property used or expected to be used as the principal dwelling of the consumer, are exempt from Regulation Z. 15 U.S.C. 1603(3).

As noted in the discussion under Sec. Sec. 226.19 and 226.38, the

Board proposes to require creditors to provide certain disclosures for all closed-end transactions secured by real property or a dwelling, not just principal dwellings. However, the Board recognizes that, if personal property that is a dwelling but not the borrower's principal dwelling secures a loan of over $25,000, it is not covered by TILA in the first instance. For example, Regulation Z does not apply to a

$26,000 loan that is secured by a manufactured home that is not the consumer's second or vacation home. Notwithstanding this exemption, the

Board solicits comment on whether consumers in these transactions receive adequate information regarding their loan terms and are afforded sufficient protections. The Board also seeks comment on the relative benefits and costs of applying Regulation Z to these transactions.

Section 226.4 Finance Charge

Background

Section 106(a) of TILA provides that the finance charge in a consumer credit transaction is ``the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit.'' 15 U.S.C. 1605(a). The finance charge does not include charges of a type payable in a comparable cash transaction.

Id. The finance charge does not include fees or charges imposed by third party closing agents, such as settlement agents, attorneys, and title companies, if the creditor does not require the imposition

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of those charges or the services provided, and the creditor does not retain the charges. Id. Examples of finance charges include, among other things, interest, points, service or carrying charges, credit report fees, and credit insurance premiums. Id.

The finance charge is significant for two reasons. First, it is meant to represent, in dollar terms, the ``cost of credit'' in whatever form imposed by the creditor or paid by the borrower. Second, the finance charge is used in calculating the annual percentage rate (APR) for the loan, 15 U.S.C. 1606, which represents the ``cost of credit, expressed as a yearly rate.'' Sec. 226.22(a)(1). Together, these two interrelated terms are among the most important terms disclosed to consumers under TILA.

While the test for determining what is included in a finance charge is very broad, TILA Section 106 excludes from the definition of the finance charge various fees or charges. The statute excludes from the finance charge: Premiums for credit insurance if coverage is not required to obtain credit, certain disclosures are provided to the consumer, and the consumer affirmatively requests the insurance in writing; and premiums for property and liability insurance written in connection with a consumer credit transaction if the insurance may be obtained from a person of the consumer's choice and certain disclosures are provided to the consumer. 15 U.S.C. 1605(b) and (c). Statutory exclusions also apply to certain security interest charges, including:

(1) Fees or charges required by law and paid to public officials for determining the existence of, or for perfecting, releasing, or satisfying, any security related to the credit transaction; (2) premiums for insurance purchased instead of perfecting any security interest otherwise required by the creditor; and (3) taxes levied on security instruments or the documents evidencing indebtedness if payment of those taxes is required to record the instrument securing the evidence of indebtedness. 15 U.S.C. 1605(d). Finally, the statute excludes from the finance charge various fees in connection with loans secured by real property, such as title examination fees, title insurance premiums, fees for preparation of loan-related documents, escrows for future payment of taxes and insurance, notary fees, appraisal fees, pest and flood-hazard inspection fees, and credit report fees. 15 U.S.C. 1605(e).

Through the exclusions described above, the Congress has adopted a

``some fees in, some fees out'' approach to the finance charge with some fees automatically excluded from the finance charge and other fees excluded from the finance charge provided certain conditions are met.

The regulation tracks this approach with a three-tiered approach to the classification of fees or charges: (1) Some fees or charges are finance charges; (2) some fees and charges are not finance charges; and (3) some fees and charges are not finance charges, but only if certain conditions are met. As a result, neither the finance charge nor the corresponding APR disclosed to the consumer reflect the consumer's total cost of credit.

Section 226.4(a) defines the finance charge as ``the cost of consumer credit as a dollar amount.'' Consistent with TILA Section 106(a), the finance charge includes ``any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit'' and does not include ``any charge of a type payable in a comparable cash transaction.'' Sec. 226.4(a). The finance charge also includes fees and amounts charged by someone other than the creditor if the creditor requires the use of a third party as a condition of or incident to the extension of credit, even if the consumer can choose the third party, or if the creditor retains a portion of the third party charge (to the extent of the portion retained). Sec. 226.4(a)(1).

The Board has adopted provisions in the regulation to give effect to each of the statutory exclusions and conditional exclusions from the finance charge. Closing agent charges are not included in the finance charge unless the creditor requires the particular services for which the consumer is charged, requires imposition of the charge, or retains a portion of the charge (to the extent of the portion retained). Sec. 226.4(a)(2). Premiums for credit insurance may be excluded from the finance charge if insurance coverage is not required by the creditor, certain disclosures are provided to the consumer, and the consumer affirmatively requests the insurance coverage in a writing signed or initialed by the consumer. Sec. 226.4(d)(1). Premiums for property and liability insurance may also be excluded from the finance charge if the insurance may be obtained from a person of the consumer's choice and certain disclosures are provided to the consumer. Sec. 226.4(d)(2).

Certain security interest charges enumerated in the statute, such as taxes and fees prescribed by law and paid to public officials for determining the existence of, or for perfecting, releasing, or satisfying, a security interest, are excluded from the finance charge.

Sec. 226.4(e). The regulation also excludes from the finance charge the real estate related fees enumerated in Section 106(e) of TILA.

Sec. 226.4(c)(7).

Over time, the Board, by regulation, has contributed to the ``some fees in, some fees out'' approach to the finance charge by determining that certain other charges not specifically excluded by the statute are not finance charges. These regulatory exclusions often sought to bring logical consistency to the treatment of fees that are similar to fees the statute excludes or conditionally excludes from the finance charge.

Charges excluded from the finance charge by regulation include: Charges for debt cancellation or debt suspension coverage if the coverage is not required by the creditor, certain disclosures are provided to the consumer, and the consumer affirmatively requests the coverage in a writing signed or initialed by the consumer; and fees for verifying the information in a credit report. See Sec. 226.4(d)(3) and comment 4(c)(7)-1. The additional fees the Board has excluded from the finance charge generally are closely analogous or related to fees that the statute excludes or conditionally excludes from the finance charge. For example, premiums for voluntary debt cancellation coverage are closely analogous to premiums for voluntary credit insurance, which TILA excludes from the finance charge. Likewise, charges for verifying a credit report are related to the credit report itself.

Concerns With the Current Approach to Finance Charges

The ``some fees in, some fees out'' approach to the finance charge has been problematic both for consumers and for creditors since TILA's inception. Many of these problems were described in the 1998 Joint

Report.\20\

\20\ The 1998 Joint Report at 8-16.

One fundamental problem is that there are two views of what is meant by the ``cost of credit.'' From the creditor's perspective, the cost of credit means the interest and fee income that the creditor receives or requires in exchange for providing credit to the consumer.

From the consumer's perspective, however, the cost of credit means what the consumer pays for the credit, regardless of the persons to whom such amounts are paid.\21\ The statute uses both of these approaches in designating which fees are and are not included in the finance charge.

\21\ See The 1998 Joint Report at 10.

The influence of the creditor's perspective on the cost of credit is evident in how the ``some fees in, some

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fees out'' approach to the finance charge has evolved and been applied to loans secured by real property. Many services provided in connection with real estate loans are performed by third parties, such as appraisers, closing agents, inspectors, public officials, attorneys, and title companies. Some of these services are required by the creditor, while others are not. In either case, the fees for these services generally are remitted in whole or in part to the third party.

In some cases, the creditor may have little control over the fees imposed by these third parties. From the creditor's perspective, the creditor generally does not receive and retain these charges in connection with providing credit to the consumer. From the consumer's perspective, however, these third-party charges are part of what the consumer pays to obtain credit.\22\

\22\ See The 1998 Joint Report at 11.

Another problem with the ``some fees in, some fees out'' approach is that it undermines the effectiveness of the APR as an accurate measure of the cost of credit expressed as a yearly rate. The APR is designed to be a benchmark for consumer shopping. In consumer testing conducted for the Board, however, the APR appeared not to be fulfilling that objective in connection with mortgage loans.

A single figure such as the APR is simple to use, particularly if consumers can use it to evaluate and compare competing products, rather than having to evaluate multiple figures.\23\ This is especially true for a figure such as the APR, which has a forty-year history in consumer disclosures, and thus is familiar to consumers. Nevertheless, if that single figure is not understood by consumers or does not fully represent what it purports to represent, the usefulness of that figure is undermined. Consumer testing shows that most consumers do not understand the APR, and many believe that the APR is the interest rate.

\23\ See The 1998 Joint Report at 9.

Under the current ``some fees in, some fees out'' approach to the finance charge, mortgage lenders also have an incentive to unbundle the cost of credit and shift some of the costs from the interest rate into ancillary fees that are excluded from the finance charge and not considered when calculating the APR, resulting in a lower APR than otherwise would have been disclosed. This further undermines the usefulness of the APR and has resulted in the proliferation of ``junk fees,'' such as fees for preparing loan-related documents. Such unbundling of the cost of credit, and the resulting pricing complexity, can have a detrimental impact on consumers. For example, research undertaken by HUD suggests that borrowers experience great difficulty when deciding whether the tradeoff between paying higher up-front costs or paying a higher interest rate is in their best interest, and that borrowers who do not pay up-front loan origination fees generally pay less than borrowers who do pay such fees.\24\ To the extent that the

APR calculation includes most or all fees, the APR can reduce the incentive for lenders to include junk fees in credit agreements.\25\

\24\ U.S. Department of Housing and Urban Development, A Study of Closing Costs for FHA Mortgages at x-xi and 2-4 (May 2008).

\25\ See The 1998 Joint Report at 9.

Based on extensive outreach conducted by Board staff, there appears to be a broad consensus that the ``some fees in, some fees out'' approach to the finance charge and corresponding APR calculation and disclosure is seriously flawed. Many industry representatives consider the finance charge definition overly complex. For creditors, this complexity creates significant regulatory burden and litigation risk.

While some industry representatives generally favor a more inclusive measure, they have not advocated a specific test for determining the finance charge.

Consumer advocates believe that the exclusions from the finance charge undermine the purpose of the finance charge and the APR, which is to measure the cost of credit. Some consumer advocates have recommended a ``but for'' test that would include in the finance charge all fees except those that the consumer would pay if he or she were not

``obtaining, accessing, or repaying the extension of credit,'' such as fees paid in comparable cash transactions.\26\

\26\ Renuart, Elizabeth and Diane E. Thomson, The Truth, the

Whole Truth, and Nothing but the Truth: Fulfilling the Promise of

Truth in Lending, 25 Yale J. on Reg. 181, 230 (2008).

In the 1998 Joint Report, the Board and HUD recommended that the

Congress adopt a more comprehensive definition of the finance charge.\27\ The Board and HUD recommended adopting a ``required-cost of credit'' test that would include in the finance charge ``the costs the consumer is required to pay to get the credit.'' \28\ Under this approach, the finance charge would include (and the APR would reflect) costs required to be paid by the consumer to obtain the credit, including many fees currently excluded from the finance charge, such as application fees, appraisal fees, document preparation fees, fees for title services, and fees paid to public officials to record security interests.\29\ Under the ``required-cost of credit'' test, fees for optional services, such as premiums for voluntary credit insurance, would be excluded from the finance charge.\30\

\27\ The 1998 Joint Report at 15-16.

\28\ The 1998 Joint Report at 13, 16.

\29\ The 1998 Joint Report at 13.

\30\ The 1998 Joint Report at 13.

The Board's Proposal

A simpler, more inclusive test for determining the finance charge.

The Board believes consumers would benefit from having a disclosure that includes fees or charges that better represent the full cost of credit undiluted by myriad exclusions, the basis for which consumers cannot be expected to understand. In addition, having a single benchmark figure--the APR--that is simple to use should allow consumers to evaluate competing mortgage products by reviewing one variable. The

Board also believes that such a disclosure would reduce compliance burdens, regulatory uncertainty, and litigation risks for creditors who must provide accurate TILA disclosures.

Thus, the Board would retain the APR as a benchmark for closed-end transactions secured by real property or a dwelling but is proposing certain revisions designed to make the APR more useful to consumers.

First, as discussed below, the Board is proposing to provide consumers with more helpful explanation of the APR and what it represents.

Second, the Board is proposing to require disclosure of the APR together with a new disclosure of the interest rate, as discussed below. Third, the Board is proposing to replace the ``some fees in, some fees out'' approach for determining the finance charge with a simpler, more inclusive approach for determining the finance charge that is based on TILA Section 106(a), 15 U.S.C. 1605(a). This approach is designed to ensure that the finance charge and the corresponding APR disclosed to consumers fulfills the basic purpose of TILA by providing a more complete and useful measure of the cost of credit.

Pursuant to its authority under TILA Sections 105(a) and (f) of

TILA, 15 U.S.C. 1604(a) and (f), the Board is proposing to amend Sec. 226.4 to make most of the current exclusions from the finance charge inapplicable to closed-end credit transactions secured by real property or a dwelling. For such loans, the Board is proposing to replace the

``some fees in, some fees out'' approach with a simpler, more inclusive test based on the definition of finance

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charge in TILA Section 106(a), 15 U.S.C. 1605(a), for determining what fees or charges are included in the finance charge. The Board believes that the current patchwork of fee exclusions from the definition of the finance charge is not consistent with TILA's purpose of disclosing the cost of credit to the consumer. The Board believes that a more inclusive approach to determining the finance charge would be more consistent with TILA's purpose, enhance consumer understanding and use of the finance charge and APR disclosures, and reduce compliance costs.

The Board also believes that the proposed revisions to the finance charge may enhance competition for third-party services since creditors would likely be more mindful of fees or charges that must be included in the finance charge and APR.

The proposed test for determining the finance charge tracks the language of current Sec. 226.4 but excluding Sec. 226.4(a)(2).

Specifically, under this test, a fee or charge is included in the finance charge for closed-end credit transactions secured by real property or a dwelling if it is (1) ``payable directly or indirectly by the consumer'' to whom credit is extended, and (2) ``imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.'' The finance charge would continue to exclude fees or charges paid in comparable cash transactions. See Sec. 226.4(a). The finance charge also includes charges by third parties if the creditor: (1) Requires use of a third party as a condition of or incident to the extension of credit, even if the consumer can choose the third party; or (2) retains a portion of the third-party charge, to the extent of the portion retained. See Sec. 226.4(a)(1). Other exclusions from the finance charge for closed-end credit transactions secured by real property or a dwelling would be limited to late fees and similar default or delinquency charges, seller's points, and premiums for property and liability insurance.

As new services are added, and new fees are charged, in connection with closed-end credit transactions secured by real property or a dwelling, creditors would have to apply the basic test in making judgments about whether or not new fees must be included in the finance charge. The Board requests comment on whether further guidance is needed to assist creditors in making these determinations, and, if so, what specific guidance would be helpful.

Loans covered. Section 226.4 is part of Subpart A, General, as opposed to Subpart C, Closed-End Credit. Nevertheless, the proposed amendments to Sec. 226.4 would apply only to closed-end credit transactions secured by real property or a dwelling, consistent with the general scope of this proposed rule. The Board seeks comment on whether the same amendments should be made applicable to other closed- end credit and may consider such amendments under a future review of

Regulation Z. Contemporaneous with this proposal, the Board is publishing separately proposed rules regarding home equity lines of credit (HELOCs). Accordingly, the Board is not proposing to apply the changes to the finance charge determination to HELOCs in this rulemaking. As discussed in the HELOC proposal, the Board believes that changing the definition of finance charge for HELOC accounts would not have a material effect on the HELOC disclosures and accordingly is unnecessary.

Impact on coverage of other rules. One potential consequence of adopting a more inclusive test for determining the finance charge is that more loans may qualify as ``HOEPA loans,'' as described in TILA

Section 103(aa), and therefore be subject to the additional disclosures and prohibitions applicable to such loans under TILA Section 129.

Similarly, more loans may be subject to the Board's recently adopted protections for higher-priced mortgage loans under Sec. 226.35, which become effective on October 1, 2009. 73 FR 44522; Jul. 30, 2008.

Finally, more loans may qualify as covered loans under certain State anti-predatory lending laws that use the APR as a coverage test. The

Board has conducted some analysis to quantify these impacts.

To estimate representative charges, the Board obtained information from a 2008 survey conducted by Bankrate.com on closing costs for each state, based on a $200,000 hypothetical mortgage loan.\31\ Using these estimates, and scaling those that are calculated as a percentage of loan amount as necessary, the Board estimated the effect on the APRs of first-lien loans in two databases: HMDA records, which include most closed-end home loans, and data obtained from Lender Processing

Services, Inc. (LPS), which include mostly prime and near-prime home loans serviced by several large mortgage servicers.

\31\ To supplement the Bankrate.com survey with estimated recording fees and taxes, which the survey did not include, the

Board used the Martindale-Hubbell service's digest of State laws. As discussed below, the Board is not proposing to revise comment 4(a)- 5, which provides principles for determining the treatment of taxes based on the party on whom the law imposes the tax. For the sake of simplicity, the Board did not attempt to distinguish such laws on this basis and, instead, included all recording taxes in the finance charge under the proposal. The analysis thus may have included some recording taxes in the finance charge under the proposal that could have been excluded under comment 4(a)-5.

On the basis of this analysis, the Board estimates that proposed

Sec. 226.4 would increase the share of first-lien refinance and home improvement loans covered by HOEPA, under Sec. 226.32, by about 0.6 percent. While this increase is small, the Board also notes that, because very few HOEPA loans are originated overall, the absolute number of loans covered would increase markedly--more than 350 percent.

Because the HMDA data do not include APRs for loans below the rate spread reporting thresholds, see 12 CFR 203.4(a)(12), 2006 LPS data were used to estimate the impact on coverage of Sec. 226.35. Based on this analysis, the Board estimates that about 3 percent of the first- lien loans in the loan amount range of the typical home purchase or refinance loan ($175,000 to $225,000) that were below the Sec. 226.35

APR threshold would have been above the threshold if proposed Sec. 226.4 had been in effect at the time.

The Board also examined HMDA data for the impact of the proposed, more inclusive finance charge definition on APRs in certain states.

Specifically, the Board considered the APR tests for coverage of first- lien mortgages under the anti-predatory lending laws in the District of

Columbia (DC), Illinois, and Maryland. These laws are the only three

State anti-predatory lending laws with APR coverage thresholds that are lower than the federal HOEPA APR threshold, for first-lien loans, of 800 basis points over the U.S. Treasury yield on securities with comparable maturities. DC and Illinois use a threshold of 600 basis points, and Maryland uses a threshold of 700 basis points, over the comparable Treasury yield.\32\ Freddie Mac and Fannie Mae have policies under which they will not purchase loans that exceed the Illinois thresholds,\33\ but they have no such policies with regard to DC or

Maryland. The Board estimates that proposed Sec. 226.4 would convert the following percentages of first-lien loans that are under the applicable APR threshold into loans that exceed that threshold and thus would become covered by the applicable State anti-predatory lending law: DC, 2.5%; Illinois, 4.0%; Maryland, 0.0%.

\32\ DC Code Ann. 26-1151.01(7)(A)(i); Ill. Comp. Stat. ch. 815, 137/10; Md. Code Ann. Com. Law 12-1029(a)(2).

\33\ http://www.freddiemac.com/learn/pdfs/uw/Pred_ requirements.pdf; https://www.efanniemae.com/sf/guides/ssg/annltrs/ pdf/2003/03-12.pdf.

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The Board notes that the impact of the proposed finance charge definition on APRs varies among loans based on two significant factors.

First, because many of the affected charges are fixed dollar amounts, the impact is significantly greater for smaller loans. Second, the impact likely would vary geographically because some charges, notably title insurance premiums and recording fees and taxes, vary considerably by state. The Board believes the proposal, on balance, would be in consumers' interests but seeks comment on these consequences of the proposal and the impact it may have on loans that could become subject to these various laws.

Legal authority. The Board is proposing to adopt the simpler, more inclusive test for determining the finance charge and corresponding APR pursuant to its general rulemaking, exception, and exemption authorities under TILA Section 105. Section 105(a) directs the Board to prescribe regulations to carry out the purposes of this title, which include facilitating consumers' ability to compare credit terms and helping consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a), 1604(a). Section 105(a) generally authorizes the Board to make adjustments and exceptions to TILA to effectuate the statute's purposes, to prevent circumvention or evasion of the statute, or to facilitate compliance with the statute. 15 U.S.C. 1601(a), 1604(a).

The Board has considered the purposes for which it may exercise its authority under TILA Section 105(a) carefully and, based on that review, believes that the proposed adjustments and exceptions are appropriate. The proposal has the potential to effectuate the statute's purpose by better informing consumers of the total cost of credit and to prevent circumvention or evasion of the statute through the unbundling or shifting of the cost of credit from finance charges to fees or charges that are currently excluded from the finance charge.

The Board believes that Congress did not anticipate how such unbundling would undermine the purposes of TILA, when it enacted the exceptions.

For example, fees for preparation of loan-related documents are excluded from the finance charge by TILA Section 106(e), 15 U.S.C. 1605(e); in practice, document preparation fees have become a common vehicle used by creditors to enhance their revenue without having any impact on the finance charge or APR. A simpler, more inclusive approach to determining the finance charge also would facilitate compliance with the statute.

TILA Section 105(f) generally authorizes the Board to exempt any class of transactions from coverage under any part of TILA if the Board determines that coverage under that part does not provide a meaningful benefit to consumers in the form of useful information or protection. 15 U.S.C. 1604(f)(1). The Board is proposing to exempt closed-end transactions secured by real property or a dwelling from the complex exclusions in TILA Section 106(b) through (e), 15 U.S.C. 1605(b) through (e). TILA Section 105(f) directs the Board to make the determination of whether coverage of such transactions under those exclusions provides a meaningful benefit to consumers in light of specific factors. 15 U.S.C. 1604(f)(2). These factors are (1) the amount of the loan and whether the disclosure provides a benefit to consumers who are parties to the transaction involving a loan of such amount; (2) the extent to which the requirement complicates, hinders, or makes more expensive the credit process; (3) the status of the borrower, including any related financial arrangements of the borrower, the financial sophistication of the borrower relative to the type of transaction, and the importance to the borrower of the credit, related supporting property, and coverage under TILA; (4) whether the loan is secured by the principal residence of the borrower; and (5) whether the exemption would undermine the goal of consumer protection.

The Board has considered each of these factors carefully and, based on that review, believes that the proposed exemptions are appropriate.

Mortgage loans generally are the largest credit obligation that most consumers assume. Most of these loans are secured by the consumer's principal residence. For many consumers, their mortgage loan is the most important credit obligation that they have. Consumer testing suggests that consumers find the finance charge and APR disclosures confusing and unhelpful when shopping for a mortgage. Along with other changes, replacing the patchwork ``some fees in, some fees out'' approach to determining the finance charge with a more inclusive approach that reflects the consumer's total cost of credit has the potential to further the goals of consumer protection and promote the informed use of credit for mortgage loans. Adoption of a more inclusive finance charge also would simplify compliance, reduce regulatory burden, and reduce litigation risk for creditors.

The Board's exception and exemption authority under Sections 105(a) and (f) does not apply in the case of a mortgage referred to in Section 103(aa), which are high-cost mortgages generally referred to as ``HOEPA loans.'' The Board does not believe that this limitation restricts its ability to apply the revised provisions regarding finance charges to all mortgage loans, including HOEPA loans. This limitation on the

Board's general exception and exemption authority is a necessary corollary to the decision of the Congress, as reflected in TILA Section 129(l)(1), to grant the Board more limited authority to exempt HOEPA loans from the prohibitions applicable only to HOEPA loans in Section 129(c) through (i) of TILA. See 15 U.S.C. 1639(l)(1). Here, the Board is not proposing any exemptions from the HOEPA prohibitions. This limitation does raise a question as to whether the Board could use its exception and exemption authority under Sections 105(a) and (f) to except or exempt HOEPA loans, but not other types of mortgage loans, from other, generally applicable TILA provisions. That question, however, is not implicated by this proposal.

Here, the Board is proposing to apply its general exception and exemption authority to enhance the finance charge disclosure for all loans secured by real property or a dwelling, including both HOEPA and non-HOEPA loans, in order to fulfill the statute's purpose of having the finance charge and APR disclosures reflect the total cost of credit. It would not be consistent with the statute or with

Congressional intent to interpret the Board's authority under Sections 105(a) and (f) in such a way that the proposed revisions could apply only to mortgage loans that are not subject to HOEPA. Reading the statute in a way that would deprive HOEPA borrowers of improved finance charge and APR disclosures is not a reasonable construction of the statute and contravenes the Congress's goal of ensuring ``that enhanced protections are provided to consumers who are most vulnerable to abuse.'' \34\

\34\ H.R. Conf. Rept. 103-652 at 159 (Aug. 2, 1994).

The Board solicits comment on all aspects of this proposal, including the cost, burden, and benefits to consumers and to industry regarding the proposed revisions to the determination of the finance charge. The Board also requests comment on any alternatives to the proposal that would further the purposes of TILA and provide consumers with more useful disclosures. 4(a) Definition

Comment 4(a)-5 contains guidance for determining whether taxes should be treated as finance charges. Generally, a tax imposed on the creditor is a finance

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charge if the creditor passes it through to the consumer. If applicable law imposes a tax solely on the consumer, on the creditor and consumer jointly, on the credit transaction itself without specifying a liable party, or on the creditor with direction or authorization to pass it through to the consumer, the tax is not a finance charge. Consequently, an examination of the law imposing each tax that is paid by the consumer is required to determine whether such taxes are finance charges. This examination of laws creates burden for creditors and may result in inconsistent treatment of similar taxes. The resulting disclosures likely are not as useful to consumers as they might be if all taxes were treated consistently. The Board seeks comment on whether the rules for determining the finance charge treatment of taxes imposed by State and local governments should be simplified and, if so, how.

The Board also seeks comment on whether any such simplification should be for purposes of closed-end transactions secured by real property or a dwelling only or should have more general applicability.

Proposed new comment 4(a)-6 would clarify that there is no comparable cash transaction in a transaction where there is no seller, such as a refinancing, and thus the comparable cash transaction exclusion from the finance charge does not apply to such transactions. 4(a)(2) Special Rule; Closing Agent Charges

The Board is proposing to amend Sec. 226.4(a)(2), which set out special rules for closing agent charges, in light of the proposed new

Sec. 226.4(g), discussed below. As a result, this provision would no longer apply to closed-end credit transactions secured by real property or a dwelling because the fees excluded by Sec. 226.4(a)(2) meet the general definition of the finance charge in TILA Section 106(a). The

Board also proposes certain conforming amendments to the staff commentary under this provision.

Under the general definition of ``finance charge'' in TILA Section 106(a), a charge is a finance charge if it is (1) ``payable directly or indirectly by the person to whom the credit is extended,'' and (2)

``imposed directly or indirectly by the creditor as an incident to the extension of credit.'' 15 U.S.C. 1605(a). Application of the basic statutory definition as the test for determining which charges are finance charges would result in many third-party charges being treated as finance charges because such third-party charges often are payable directly or indirectly by the consumer and imposed indirectly by the creditor. For instance, because real estate settlements are complex financial and legal transactions, creditors generally require a licensed closing agent (often an attorney) to conduct closings to ensure that the transaction is handled with professional skill and care. These closing agents typically impose fees on the consumer in the course of ensuring that the loan is consummated appropriately. In some cases, the creditor clearly requires the particular third-party service for which a fee is charged, such as where the creditor instructs the closing agent to send documents by overnight courier. In other cases, however, whether the creditor requires the particular service is not clear.

A rule that requires case-by-case factual determinations as to whether a particular third-party fee must be included in the finance charge results in complexity and inconsistent treatment of such fees.

Such inconsistent treatment in turn undermines the utility of the finance charge and APR as comparison shopping tools and introduces uncertainty and litigation risk for creditors. For these reasons, the

Board believes that fees charged by closing agents, both their own and those of other third parties they hire to perform particular services, should be treated uniformly as finance charges. The Board seeks comment on whether any such third-party charges do not fall within the basic test for determining the finance charge and could be excluded from the finance charge without requiring factual determination in each case.

Requiring third-party charges to be included in the finance charge creates some risk that a creditor may understate the finance charge if the creditor does not know that a particular charge was imposed by a third party. This risk is mitigated to some extent by TILA Section 106(f), which provides that a disclosed finance charge is treated as accurate if it does not vary from the actual finance charge by more than $100 or is greater than the amount required to be disclosed. 15

U.S.C. 1605(f). This tolerance has been incorporated into Regulation Z.

See Sec. 226.18(d)(1). The Board requests comment on whether it should increase the finance charge tolerance, for example to $200, in light of its proposal to require more third-party charges to be included in the finance charge. The Board also requests comment on whether the existing or any increased tolerance should be linked to an inflation index, such as the Consumer Price Index.

Excluding fees from the finance charge because they are voluntary or optional also is not consistent with the statutory purpose of disclosing the ``cost of credit,'' which includes charges imposed ``as an incident to the extension of credit.'' \35\ 15 U.S.C. 1605(a). One basis for the current exclusions for voluntary or optional charges is an implicit assumption that they are not ``imposed directly or indirectly by the creditor'' on the consumer. However, charges may be imposed by a creditor even if the services for which the fee is imposed are not specifically required by the creditor. Moreover, a test that depends upon whether a service is ``voluntary'' inherently requires a factual determination. In the current provisions addressing credit insurance, the Board has identified certain objective criteria for determining when the consumer's purchase of such insurance is deemed to be voluntary. However, as discussed below, this approach has many problems and has not proven satisfactory. The Board believes that drawing a bright-line to include in the finance charge both voluntary and required charges that are imposed by the creditor would eliminate the difficulties posed by this type of fact-based analysis and provide a more consistent measure of the cost of credit.

\35\ The Board has consistently interpreted the definition of finance charge as not dependent on whether a charge is voluntary or required. As a practical matter, most voluntary fees are excluded because they coincidentally are payable in a comparable cash transaction, not specifically because they are voluntary. See, e.g., 61 FR 49237, 49239; Sept. 19, 1996 (charges for voluntary debt cancellation agreements).

Another basis for the current exclusions for voluntary or optional charges in connection with the credit transaction is an assumption that creditors cannot know the amounts of such charges at the time the disclosure must be provided to the consumer. The Board presumes that creditors know the amounts of their own voluntary charges, if any. The

Board believes that creditors generally know or can readily determine voluntary third-party charges when providing TILA disclosures three business days before consummation, as proposed Sec. 226.19(a)(2)(ii) would require. As a practical matter, the primary voluntary third-party charge in connection with a mortgage transaction of which the Board is aware (and that is not otherwise excluded from the finance charge) is the premium for voluntary credit insurance, and creditors generally solicit consumers for such insurance. In fact, under existing Sec. 226.4(d)(1)(ii), creditors historically

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have had to disclose the premium for voluntary credit insurance to exclude it from the finance charge. The Board nevertheless solicits comment on whether there are voluntary third-party charges the amounts of which cannot be determined three business days before consummation.

The Board recognizes that creditors may not know what voluntary or optional charges the consumer will incur when providing early TILA disclosures. When providing early TILA disclosures, creditors may rely on reasonable assumptions regarding voluntary or optional charges and label those amounts as estimates. The Board invites comment on whether further guidance is required regarding reasonable assumptions that may be made regarding voluntary or optional charges in early TILA disclosures. 4(b) Examples of Finance Charges

The Board is proposing technical amendments to comment 4(b)-1 to reflect the fact that the exclusions from the finance charge under

Sec. 226.4(c) through (e), other than Sec. Sec. 226.4(c)(2), 226.4(c)(5) and 226.4(d)(2), would not apply to closed-end credit transactions secured by real property or a dwelling. 4(c) Charges Excluded From the Finance Charge

The Board proposes to amend Sec. 226.4(c), which lists miscellaneous exclusions from the finance charge, to provide that Sec. 226.4(c) is limited by proposed new Sec. 226.4(g). Thus, except for late fees and similar default or delinquency charges and seller's points, the exclusions in Sec. 226.4(c) would not apply to closed-end credit transactions secured by real property or a dwelling. The Board also proposes certain conforming amendments to the staff commentary under those provisions. 4(c)(2)

The exclusion of fees for actual unanticipated late payment, exceeding a credit limit, or for delinquency, default, or a similar occurrence in Sec. 226.4(c)(2) would be retained for closed-end credit transactions secured by real property or a dwelling. The Board believes these charges should be excluded because they necessarily occur only after the finance charge is disclosed to consumers. At the time the

TILA disclosures must be provided to consumers, a creditor cannot know whether it will impose such charges or their amounts. 4(c)(5)

The exclusion of seller's points from the finance charge in Sec. 226.4(c)(5) would be retained for closed-end credit transactions secured by real property or a dwelling. Seller's points are not payable by the consumer. Comment 226.4(c)(5)-1 notes that seller's points may be passed on to the buyer in the form of a higher sales price for the property or dwelling. Even then, seller's points are excluded from the finance charge. A different rule would require a fact-specific determination in every transaction involving seller's points regarding whether and to what extent the seller shifted those costs to the borrower. The Board does not believe that such a rule is feasible. The

Board seeks comment on the retention of the seller's points exclusion. 4(c)(7) Real-Estate Related Fees

The Board is proposing to amend Sec. 226.4(c)(7), which currently excludes from the finance charge a number of fees charged in transactions secured by real property or in residential mortgage transactions if those fees are bona fide and reasonable. Under the proposal, the following fees currently excluded would be included in the finance charge for closed-end credit transactions secured by real property or a dwelling: fees for title examination, abstract of title, title insurance, property survey, and similar purposes; fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or settlement documents; notary and credit-report fees; property appraisal fees or fees for inspections to assess the value or condition of the property if the service is performed prior to closing, including fees related to pest-infestation or flood-hazard determinations; and amounts required to be paid into escrow or trustee accounts if the amounts would not otherwise be included in the finance charge. The commentary provisions under Sec. 226.4(c)(7) would also be amended accordingly.

As amended, Sec. 226.4(c)(7) and the commentary provisions under

Sec. 226.4(c)(7) would apply only to open-end credit plans secured by real property and open-end residential mortgage transactions. Thus, for

HELOCs, the fees specified in Sec. 226.4(c)(7) would continue to be excluded from the finance charge. The Board requests comment on whether it should retain Sec. 226.4(c)(7), as proposed to be amended, or delete Sec. 226.4(c)(7) altogether, in light of the proposed changes to the Regulation Z HELOC rules, published today in a separate Federal

Register notice. See the discussion under Sec. 226.4 in that notice. 4(d) Insurance and Debt Cancellation and Debt Suspension Coverage

The Board is proposing technical amendments to comment 4(d)-12 to reflect the fact that the exclusions from the finance charge under

Sec. 226.4(e) would not apply to closed-end transactions secured by real property or a dwelling. 4(d)(1) and (3) Voluntary Credit Insurance Premiums; Voluntary Debt

Cancellation and Debt Suspension Fees

The Board is proposing to amend Sec. Sec. 226.4(d)(1), exclusion for voluntary credit insurance premiums, and 226.4(d)(3), exclusion for voluntary debt cancellation and debt suspension fees, to limit their application consistently with proposed Sec. 226.4(g). Thus, these exclusions would not apply to closed-end transactions secured by real property or a dwelling.

Age or employment eligibility criteria. Under TILA Section 106(a)(5), 15 U.S.C. 1605(a)(5), a premium or other charge for any guarantee or insurance protecting the creditor against the obligor's default or other credit loss is a finance charge. Under Sec. Sec. 226.4(b)(7) and 226.4(b)(10), a premium or charge for credit life, accident, health, or loss-of-income insurance, or debt cancellation or debt suspension coverage is a finance charge if the insurance or coverage is written in connection with a credit transaction. TILA

Section 106(b), 15 U.S.C. 1605(b), allows the creditor to exclude from the finance charge any charge or premium for credit life, accident, or health insurance written in connection with any consumer credit transaction if (1) the coverage is not a factor in the approval by the creditor of the extension of credit, and this fact is clearly disclosed in writing to the consumer; and (2) in order to obtain the insurance, the consumer specifically requests the insurance after getting the disclosures. Under Sec. Sec. 226.4(d)(1) and 226.4(d)(3), the creditor may exclude from the finance charge any premium for credit life, accident, health or loss-of-income insurance; any charge or premium paid for debt cancellation coverage for amounts exceeding the value of the collateral securing the obligation; or any charge or premium for debt cancellation or debt suspension coverage in the event of loss of life, health, or income or in case of accident, whether or not the coverage is insurance, if (1) the insurance or coverage is not required by the creditor and the creditor discloses this fact in writing; (2) the creditor discloses the premium or charge for the initial term of the insurance or coverage,

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(3) the creditor discloses the term of insurance or coverage, if the term is less than the term of the credit transaction, and (4) the consumer signs or initials an affirmative written request for the insurance or coverage after receiving the required disclosures. In addition, under Sec. 226.4(d)(3)(iii), the creditor must disclose for debt suspension coverage the fact that the obligation to pay loan principal and interest is only suspended, and that interest will continue to accrue during the period of suspension.\36\ Under proposed

Sec. 226.4(g), these provisions would not apply to closed-end credit transactions secured by real property or a dwelling.

\36\ The provisions regarding debt suspension coverage were in the December 2008 Open-End Final Rule. See 74 FR 5244, 5400; Jan. 29, 2009. These provisions will take effect on July 1, 2010.

Some creditors offer credit insurance or debt cancellation or debt suspension products with eligibility restrictions, but may not evaluate whether applicants for the products actually meet the eligibility criteria at the time the applicants request the product.\37\ For instance, a consumer who is 70 at the time of enrollment could never receive the benefits of a product with a 65-year-old age limit.\38\

Similarly, a consumer who is self-employed at the time of enrollment would not receive benefits if the product requires the consumer to be employed as a W-2 wage employee.\39\

\37\ See, e.g., Parker et al. v. Protective Life Ins. Co. of

Ohio et al., Nos. 2004-T-0127 and 2004-T-0128, 2006 Ohio App. LEXIS 3983, at *28 (Ohio Ct. App. Aug. 4, 2006) (reversing summary judgment for defendants automobile dealership and insurer because the automobile dealership employee did not evaluate whether the plaintiffs were eligible for credit disability insurance and the plaintiffs were later denied benefits based on eligibility restrictions); Stewart v. Gulf Guaranty Life Ins. Co., No. 2000-CA- 01511-SCT, 2002 Miss. LEXIS 254, at *4 (Miss. Aug. 15, 2002)

(affirming the jury award where the insurer did not require the bank employee to have the consumer fill out a credit life and disability insurance application regarding pre-existing conditions and the insurer later denied coverage based on a pre-existing condition).

\38\ See, e.g., Fed. Trade Comm'n v. Stewart Finance Holdings,

Inc. et al., Civ. Action No. 103CV-2648, Final Judgment and Order at 13 (N.D. Ga. Nov. 9, 2005) (alleging that the finance company sold accidental death and dismemberment insurance to borrowers who were not eligible for the product due to age restrictions).

\39\ See, e.g., In the Matter of Providian Nat'l Bank, OCC

Docket No. 2000-53, Consent Order (June 28, 2000) (alleging that the bank marketed an involuntary unemployment credit protection program but failed to adequately disclose that such protection was unavailable to consumers who were self-employed).

Although age and employment eligibility criteria may be set forth in the product marketing materials and/or enrollment forms, the Board believes few consumers notice this information when they obtain credit and choose to purchase the voluntary credit insurance or debt cancellation or debt suspension coverage. Because the product is sold in connection with a credit transaction that is underwritten by the creditor, the consumer may reasonably believe that the creditor has determined that the consumer is eligible for the product. This may be especially true for age restrictions because that information is typically requested by the creditor on the credit application form. As a result, many consumers may not discover until they file a claim that they were paying for a product for which they were not eligible when they initially purchased it. Consumers that do not submit claims may never discover that they are paying for products that hold no value for them.

To address this problem, the Board proposes to add Sec. Sec. 226.4(d)(1)(iv) and 226.4(d)(3)(v) to permit creditors to exclude a premium or charge from the finance charge only if the creditor determines at the time of enrollment that the consumer meets any applicable age or employment eligibility criteria for the credit insurance or the debt suspension or debt cancellation coverage. These provisions would apply to open-end as well as closed-end (non-real property) credit transactions. Proposed comment 4(d)-14 would state that a premium or charge for credit life, accident, health, or loss-of- income insurance, or debt cancellation or debt suspension coverage is voluntary and can be excluded from the finance charge only if the consumer meets the product's age or employment eligibility criteria at the time of enrollment. The proposed comment would further clarify that to exclude such a premium or charge from the finance charge, the creditor would have to determine at the time of enrollment that the consumer is eligible for the product under the product's age or employment eligibility restrictions.

Proposed comment 4(d)-14 would provide that the creditor could use reasonably reliable evidence of the consumer's age or employment status to satisfy the condition. Reasonably reliable evidence of a consumer's age would include using the date of birth on the consumer's credit application, on the driver's license or other government-issued identification, or on the credit report. Reasonably reliable evidence of a consumer's employment status would include the consumer's information on a credit application, Internal Revenue Service Form W-2, tax returns, payroll receipts, or other evidence such as a letter or e- mail from the consumer or the consumer's employer. A determination of age or employment eligibility at the time of enrollment should not be unduly burdensome because in most cases the creditor would already have information about the consumer's age and employment status as part of the credit underwriting process. The Board seeks comment on whether other examples of reasonably reliable evidence of the consumer's age or employment status should be included.

Proposed comment 4(d)-14 would clarify that, if the consumer does not meet the product's age or employment eligibility criteria, then the premium or charge is not voluntary and must be included in the finance charge. If the creditor offers a bundled product (such as credit life insurance combined with credit involuntary unemployment insurance) and the consumer does not meet the age and/or employment eligibility criteria for all of the bundled products, the proposed commentary would clarify that the creditor must either: (1) treat the entire premium or charge for the bundled product as a finance charge, or (2) offer the consumer the option of selecting only the products for which the consumer is eligible and exclude the premium or charge from the finance charge if the consumer chooses an optional product for which the consumer meets the age and/or employment eligibility criteria at the time of enrollment.

The Board proposes this rule and commentary to address concerns about the voluntary nature of this product. TILA Section 106(b), 15

U.S.C. 1605(b), states that ``[c]harges or premiums for credit life, accident, or health insurance written in connection with any consumer credit transaction shall be included in the finance charge unless (1) the coverage of the debtor by the insurance is not a factor in the approval by the creditor of the extension of credit, and this fact is clearly disclosed in writing to the person applying for or obtaining the extension of credit; and (2) in order to obtain the insurance in connection with the extension of credit, the person to whom the credit is extended must give specific affirmative written indication of his desire to do so after written disclosure to him of the cost thereof.''

Historically, Sec. 226.4(d) has implemented this provision as a

``voluntariness'' standard. For example, in 1981, comment 4(d)-5 was adopted as part of the TILA simplification process. The comment stated that the credit insurance ``must be voluntary in order for the premium to be excluded from the finance charge.'' 46 FR 50288, 50301; Oct. 9, 1981 (emphasis added). In 1996, the Board amended Regulation Z to apply the rules for credit insurance to debt cancellation coverage. In adopting this provision, the Board

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stated: ``The new rule allows creditors to exclude fees for voluntary debt cancellation coverage from the finance charge when specified disclosures are made.'' 61 FR 49237, 49240; Sept. 19, 1996 (emphasis added). In the December 2008 Open-End Final Rule, the Board applied the rules for credit insurance and debt cancellation coverage to debt suspension coverage. In adopting this provision, the Board referred to the May 2007 Open-End Proposed Rule, which stated that the Board

``proposed to revise Sec. 226.4(d)(3) to expressly permit creditors to exclude charges for voluntary debt suspension coverage from the finance charge when, after receiving certain disclosures, the consumer affirmatively requests such as product.'' 74 FR 5244, 5266; Jan. 29, 2009 (emphasis in original). Finally, the model forms currently contain the following statement emphasizing the voluntary nature of the product: ``Credit life insurance and credit disability insurance are not required to obtain credit, and will not be provided unless you sign and agree to pay the additional cost.'' See Appendix H-1 (Credit Sale

Model Form) and Appendix H-2 (Loan Model Form). The Board believes that if the consumer was ineligible for the benefits of credit insurance or debt cancellation or debt suspension coverage at the time of enrollment, then the purchase cannot be voluntary because a reasonable consumer would not knowingly purchase a policy for which he or she can derive no benefit. For these reasons, the Board believes that the requirements of proposed Sec. Sec. 226.4(d)(1)(iv) and 226.4(d)(3)(v) would help ensure that the purchase of credit insurance or debt cancellation or debt suspension coverage would, in fact, be voluntary.

The Board notes that although the proposed rule would require creditors to determine the consumer's age and/or employment eligibility for the product at the time of enrollment, the proposed rule would not affect the creditor's ability to deny coverage if the consumer misrepresented his or her age or employment status at the time of enrollment. Finally, the proposed rule does not require a creditor to determine if a consumer ceases to meet the age or employment eligibility criteria after enrollment. For example, the creditor has complied with the proposal if the consumer becomes ineligible for the policy or coverage after enrollment. State or other law may address these issues. However, the Board solicits comment on whether creditors should be required to determine whether the consumer meets the product's age or employment eligibility criteria after the product is sold (e.g., before renewing an annual premium), or whether creditors should be required to provide notice when the consumer exceeds the age limit of the product after enrollment.

Revised disclosures. As discussed above, TILA Section 106(b), 15

U.S.C. 1605(b), and Sec. Sec. 226.4(d)(1) and 226.4(d)(3) allow a creditor to exclude from the finance charge a credit insurance premium or debt cancellation or debt suspension fee if the creditor provides disclosures that inform the consumer of the voluntary nature and cost of the product. Currently, Regulation Z does not specifically mandate the format of these disclosures, but provides sample language in the model forms. For example, Appendix H-2 (Loan Model Form) contains the following language: ``Credit life insurance and credit disability insurance are not required to obtain credit, and will not be provided unless you sign and agree to pay the additional cost.'' The model form also shows the type of product (e.g., credit life or credit disability); the cost of the premium; and a signature line. The signature area is accompanied by the following language: ``I want credit life insurance.''

Concerns have been raised about whether the current disclosures sufficiently inform consumers of the voluntary nature and costs of the product. To address these concerns, a disclosure was tested that included a charge for credit life insurance and listed the product under the title ``Optional Features.'' Only about half of the participants understood that accepting credit insurance was voluntary and that they could decline the product. Subsequently, a disclosure was tested that stated, ``STOP. You do not have to buy this insurance to get this loan.'' After reading this disclosure, all participants understood the voluntary nature of the product.

In addition, concerns have been raised about the product's cost.

The product may be more costly than, for example, traditional life insurance, but may not provide additional benefits. To address this concern, the Board tested the following language: ``If you have insurance already, this policy may not provide you with any additional benefits. Other types of insurance can give you similar benefits and are often less expensive.'' Participant comprehension of the costs and benefits of the product was significantly increased by these plain- language disclosures.

Concerns have also been raised about eligibility restrictions.

Consumers might not be aware that they may incur a cost for a product that provides no benefit to them if the eligibility criteria are not met at the time of enrollment. Accordingly, the Board tested the following language: ``Even if you pay for this insurance, you may not qualify to receive any benefits in the future.'' Participants were greatly surprised to learn that they might purchase the insurance only to later discover that they were not eligible for benefits. A few participants indicated that they did not understand how they could pay for the coverage and then receive no benefits. To address this issue and to conform to the requirements of proposed Sec. Sec. 226.4(d)(1)(iv) and 226.4(d)(3)(v), the following statement was added to the disclosure: ``Based on our review of your age and/or employment status at this time, you would be eligible to receive benefits.''

However, if there are other eligibility restrictions, such as pre- existing health conditions, the creditor would be required to disclose the following statements: ``Based on our review of your age and/or employment status at this time, you may be eligible to receive benefits. However, you may not qualify to receive any benefits because of other eligibility restrictions.''

Finally, a sentence was added to the disclosure to refer consumers to the Board's Web site to learn more about the product, and the cost disclosure was streamlined to display more clearly the exact cost of the product. Most consumer testing participants indicated they would visit the Board's Web site to learn more about a credit insurance or debt cancellation or debt suspension product.

Based on this consumer testing, the Board proposes to add model clauses and samples that provide clearer information to consumers about the voluntary nature and costs of credit insurance or debt cancellation or debt suspension coverage. These model clauses and samples would apply in open-end or closed-end (not secured by real property) transactions, if the product is voluntary and the consumer qualifies for benefits based on age or employment. For closed-end transactions secured by real property or a dwelling, the model clause or sample would be required whether or not the product is voluntary. Model

Clauses and Samples are proposed at Appendix G-16(C) and G-16(D) and H- 17(C) and H-17(D). These Model Clauses and Samples would be in addition to the Debt Suspension Model Clauses and Samples found at Appendix G- 16(A) and G-16(B) and H-17(A) and H-17(B).

Timing of disclosures. Currently, comment 4(d)-2 states that ``[i]f disclosures are given early, for example

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under Sec. 226.17(f) or Sec. 226.19(a), the creditor need not redisclose if the actual premium is different at the time of consummation. If insurance disclosures are not given at the time of early disclosure and insurance is in fact written in connection with the transaction, the disclosures under Sec. 226.4(d) must be made in order to exclude the premiums from the finance charge.'' The Board proposes to delete the reference to Sec. 226.19(a) to conform to the new timing and redisclosure requirements under proposed Sec. 226.19(a). 4(d)(2) Property Insurance Premiums

The proposal would retain the exclusion from the finance charge of premiums for insurance against loss or damage to property or against liability arising out of the ownership or use of property under TILA

Section 106(c) and Sec. 226.4(d)(2). Consumers typically purchase property and liability insurance to protect against a variety of risks, including loss of or damage to the property, such as damage caused by fire, loss of or damage to personal property kept on the property, such as furniture, and owner liability for injuries incurred by visitors to the property. Although creditors generally require such insurance as a condition of extending closed-end credit secured by real property or a dwelling in order to protect the value of the collateral that is securing the loan, consumers who do not have mortgages regularly purchase this type of insurance to protect themselves from the risks described above. This type of insurance is best viewed as a hybrid product that protects not only the value of the creditor's collateral, but also protects the consumer from loss or impairment of the consumer's equity in the property, loss or impairment of the consumer's personal property, and personal liability if anyone is injured on the property. Consequently, it is impossible to segregate that portion of the insurance (and that portion of the premium) which protects the creditor from that portion which protects only the consumer.

In addition, the Board has not identified significant abuses in connection with the sale or marketing of insurance against loss or damage to property or against liability arising out of the ownership or use of property. The market for these products appears to be competitive. Consumers can purchase this type of insurance from many insurance companies, including companies not associated with mortgage lenders. In addition, policies generally are tailored to the particular risks faced by the consumer. Thus, consumers have choices with regard to how much insurance to purchase to cover various risks and, as a result, have some control over the premiums they pay.

The Board requests comment on the appropriateness of retaining the current exclusion from the finance charge of premiums for insurance against loss or damage to property or against liability arising out of the ownership or use of property. The Board notes that, under current

Sec. 226.4(d)(2), the category of property and liability insurance has been interpreted to include coverage against flood risks; the Board seeks comment on whether the reasons for retaining the exclusion discussed above are applicable to flood insurance specifically and, if not, whether it should be subject to separate treatment under

Regulation Z. In addition, the Board requests comment on whether including such premiums in the finance charge could have adverse or unintended consequences for consumers and for creditors.

TILA Section 106(c) states that charges or premiums for property insurance must be included in the finance charge unless ``a clear and specific statement in writing is furnished by the creditor to the person to whom the credit is extended, setting forth the cost of the insurance if obtained from or through the creditor, and stating that the person to whom the credit is extended may choose the person through which the insurance is to be obtained.'' 15 U.S.C. 1605(c) (emphasis added). Section 226.4(d)(2) permits property insurance premiums to be excluded from the finance charge under the following conditions, among others: ``If the coverage is obtained from or through the creditor, the premium for the initial term of insurance coverage shall be disclosed.

If the term of insurance is less than the term of the transaction, the term of insurance shall also be disclosed.'' (Emphasis added). Comment 4(d)-8 states, in relevant part, that ``[t]he premium or charge must be disclosed only if the consumer elects to purchase the insurance from the creditor; in such a case, the creditor must also disclose the term of the property insurance coverage if it is less than the term of the obligation.'' (Emphasis added.) Currently, the comment does not use the statutory language ``from or through the creditor'' and does not define the phrase. To conform to the statutory and regulatory language, the

Board proposes to amend comment 4(d)-8 to clarify that the premium or charge and term (if less than the term of the obligation) must be disclosed if the consumer elects to purchase the insurance ``from or through the creditor.'' In addition, the proposed comment would clarify that insurance is available ``from or through a creditor'' if it is available from the creditor's ``affiliate,'' as that term is defined under the Bank Holding Company Act, 12 U.S.C. 1841(k). The Bank Holding

Company Act defines an ``affiliate'' as ``any company that controls, is controlled by, or is under common control with another company.'' Thus, if the consumer elects to purchase property insurance from a company that controls, is controlled by, or is under common control with the creditor, then the creditor would be required to disclose the cost of the insurance, and the term, if it is less than the term of the obligation. The Board believes that this proposed rule would clarify for creditors the meaning of ``through the creditor'' and provide consumers with a clearer disclosure of the cost of property insurance. 4(d)(4) Telephone Purchases

Under Sec. Sec. 226.4(d)(1) and 226.4(d)(3), creditors may exclude from the finance charge premiums for credit insurance or fees for debt cancellation or debt suspension coverage, if the creditor provides certain disclosures in writing and the consumer signs or initials an affirmative written request for the insurance or coverage. Over the years, the Board has received industry requests to permit creditors to provide the disclosures and obtain the affirmative consumer request orally in order to facilitate telephone purchases of these products. In addition, the OCC has issued telephone sales guidelines for national banks that sell debt cancellation and debt suspension coverage. 12 CFR 37.6(c)(3), 37.7(b).

In the December 2008 Open-End Final Rule, the Board created an exception to the requirement to provide prior written disclosures and obtain written signatures or initials for telephone purchases of credit insurance and debt cancellation or debt suspension coverage in connection with open-end (not home-secured) plans. 74 FR 5244, 5267;

Jan. 29, 2009. This rule will take effect on July 1, 2010. Under new

Sec. 226.4(d)(4), for telephone purchases a creditor may make the disclosures orally and the consumer may affirmatively request the insurance or coverage orally, provided that the creditor (1) maintains evidence that the consumer, after being provided the disclosures orally, affirmatively elected to purchase the insurance or coverage, and (2) mails the required disclosures within three business days after the telephone purchase. New comment 226.4(d)(4)-1 provides that a creditor does not satisfy

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the requirement to obtain a consumer's affirmative request if the

``request'' was a response to a leading question or negative consent.

The comment also provides an example of an acceptable enrollment question (``Do you want to enroll in this optional debt cancellation plan?'').

The Board promulgated this rule pursuant to its exception and exemption authorities under TILA Section 105. Section 105(a) authorizes the Board to make exceptions to TILA to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms and helping consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a), 1604(a). In addition, the Board considered the exemption factors set forth in TILA Section 105(f)(2), 15 U.S.C. 1604(f)(2), and determined that an exemption for telephone purchases for open-end (not home-secured) plans was appropriate because the rule contained adequate safeguards to ensure that oral purchases are voluntary. 74 FR 5268. The Board emphasized that consumers in open-end

(not home-secured) plans receive monthly statements that clearly disclose fees, including credit insurance and debt cancellation or debt suspension coverage charges. Id. Consumers who are billed for insurance or coverage they did not request can dispute the charge as a billing error. Id. The Board stated that as part of the closed-end review, it would consider whether to expand the telephone purchase rule to this type of credit. 74 FR 5267.

The Board believes that a telephone purchase rule for closed-end credit is not appropriate. Monthly statements are not required for closed-end credit, and it would be difficult for consumers who do not receive monthly statements to detect charges for unwanted coverage.

Moreover, there is no billing error resolution process for closed-end loans.

Finally, the Board noted in the December 2008 Open-End Final Rule that an exception or exemption for the telephone purchase of credit insurance or debt cancellation or debt suspension coverage in connection with closed-end loans may be ``less necessary.'' 74 FR 5267.

For open-end (not home-secured) credit, new comments 4(b)(7) and (8)-2 and 4(b)(10)-2 in the December 2008 Open-End Final Rule clarify that credit insurance and debt cancellation or debt suspension coverage is

``written in connection with a credit transaction'' if the consumer purchases it after the opening of an open-end (not home-secured) plan because the consumer retains the ability to obtain advances of funds. 74 FR 5265. Therefore, in such a transaction, the creditor must comply with the disclosure and consumer request requirements even if the credit insurance and debt cancellation or debt suspension coverage is sold after the opening of the plan. A creditor in an open-end (not home-secured) transaction may be more likely to market the product by telephone after the opening of the plan, and new Sec. 226.4(d)(4) facilitates the telephone purchase. By contrast, a creditor in a closed-end transaction is more likely to have the opportunity to meet the consumer face-to-face at or before consummation to market the product, provide the disclosure, and obtain the consumer request. For these reasons, this proposal does not contain a telephone purchase rule for credit insurance or debt cancellation or debt suspension coverage sold in connection with a closed-end credit transaction. The Board seeks comment on this issue. For a discussion of the application of the telephone purchase rule to HELOCs, see the Board's proposal for such transactions published simultaneously with this proposal. 4(e) Certain Security Interest Charges

The Board proposes to amend Sec. 226.4(e), which provides exclusions from the finance charge for certain government recording and related charges and insurance premiums incurred in lieu of such charges, as limited by proposed Sec. 226.4(g). Thus, the exclusions listed in Sec. 226.4(e) would not apply to closed-end credit transactions secured by real property or a dwelling. The Board also proposes certain conforming amendments to the staff commentary under this provision. 4(g) Special Rule; Closed-End Mortgage Transactions

The Board is proposing to add a new Sec. 226.4(g) as a special rule for closed-end credit transactions secured by real property or a dwelling. Proposed Sec. 226.4(g) would provide that the exclusions from the finance charge enumerated in Sec. Sec. 226.4(a)(2) (closing agent charges), (c) (miscellaneous charges), (d) (premiums for certain insurance and debt cancellation coverage), and (e) (certain security- interest charges) do not apply to closed-end credit transactions secured by real property or a dwelling, except that the exclusions in

Sec. 226.4(c)(2) for late, over-limit, delinquency, default, and similar fees, Sec. 226.4(c)(5) for seller's points, and Sec. 226.4(d)(2) for property and liability insurance would continue to apply to such transactions. As noted above, a cross-reference to the special rule in Sec. 226.4(g) would be added to each of the enumerated sections. With these changes, the following fees that currently are excluded from the finance charge would be included in the finance charge for closed-end mortgage transactions (unless otherwise excluded): Closing agent charges, application fees charged to all applicants for credit (whether or not credit is extended), voluntary credit insurance premiums, voluntary debt-cancellation charges or premiums, taxes or fees required by law and paid to public officials relating to security interests, premiums for insurance obtained in lieu of perfecting a security interest, taxes imposed as a condition of recording the instruments securing the evidence of indebtedness, and various real-estate related fees.

Proposed commentary to Sec. 226.4(g) is included to clarify the rule for mortgage transactions. Proposed comment 4(g)-1 clarifies that the commentary for the exclusions identified above no longer applies to closed-end credit transactions secured by real property or a dwelling.

Proposed comment 4(g)-2 clarifies that third-party charges that meet the definition under Sec. 226.4(a) and are not otherwise excluded generally are finance charges, whether or not the creditor requires the services for which they are imposed. Proposed comment 4(g)-3 clarifies that charges payable in a comparable cash transaction, such as property taxes and fees or taxes imposed to record the deed evidencing transfer of title to the property from the seller to the buyer, are not finance charges because they would have to be paid even if no credit were extended to finance the purchase.

Request for Comment

The Board solicits comment on the benefits and costs of the proposed changes for determining the finance charge for closed-end credit transactions secured by real property or a dwelling. The Board requests comment specifically on whether this approach adequately or appropriately addresses the concerns raised by the ``some fees in, some fees out'' approach in light of the statute's purposes, the need for consumer protection and meaningful disclosures, and industry concerns regarding complexity and burden. The Board also seeks comment on the benefits and costs of the rules for insurance and related products under the proposed amendments to Sec. 226.4(d).

Section 226.17 General Disclosure Requirements

The Board is proposing new rules governing format and content of disclosures for transactions secured by real property or a dwelling under new

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Sec. Sec. 226.37 and 226.38. Accordingly, the Board proposes conforming and technical amendments to current Sec. Sec. 226.17 and 226.18, as discussed more fully below. In addition, in reviewing the rules for closed-end credit, regulatory text and associated commentary have been redesignated, and footnotes moved to the text of the regulation or commentary, as appropriate, to facilitate compliance with the regulation. 17(a) Form of Disclosures 17(a)(1)

The Board proposes special rules in new Sec. 226.37 and associated commentary to govern the format of disclosures required under proposed

Sec. Sec. 226.38 and 226.20(d), and existing Sec. Sec. 226.19(b) and 226.20(c). These new format rules would be in addition to the rules contained in current Sec. 226.17(a)(1). Current Sec. 226.17(a)(1) requires that closed-end credit disclosures be grouped together, segregated from everything else, and not contain any information not directly related to the disclosures. The Board proposes to revise Sec. 226.17(a)(1) to clarify that the general disclosure standards continue to apply to transactions secured by real property or a dwelling, but under the proposal, creditors would also be required to meet the higher standards under proposed Sec. 226.37. In addition, Sec. 226.17(a)(1) would be revised to reflect the requirement of electronic disclosures in certain circumstances, as discussed under Sec. 226.19(d). Under the proposal, the substance of footnotes 37 and 38 would be moved to the regulatory text of Sec. 226.17(a)(1).

Footnotes 37 and 38 currently provide exceptions to the grouped and segregated requirement under Sec. 226.17(a)(1). Footnote 37 allows creditors to include certain information not directly related to the required disclosures, such as the consumer's name, address, and account number. Footnote 38, which implements TILA Section 128(b)(1) in part, allows creditors to exclude certain required disclosures from the grouped and segregated requirement, such as the creditor's identity under Sec. 226.18(a). 15 U.S.C. 1638(b)(1). The Board proposes to revise the substance of footnote 38 to require that the creditor's identity under Sec. 226.18(a) be subject to the grouped together and segregated requirement for all closed-end credit disclosures. (See proposed Sec. 226.37(a)(2), which parallels this approach for transactions secured by real property or a dwelling). The Board proposes to make this adjustment pursuant to its authority under TILA

Section 105(a). 15 U.S.C. 1604(a). Section 105(a) authorizes the Board to make exceptions and adjustments to TILA to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms, and avoiding the uninformed use of credit. 15 U.S.C. 1601(a).

The Board believes requiring the creditor's identity to be grouped together with required disclosures could assist consumers. The Board believes it is important for the disclosures to bear the creditor's identity so that consumers can more easily identify the appropriate entity. As a result, the Board believes the proposal would help serve

TILA's purpose to provide meaningful disclosure of terms.

Commentary to Sec. 226.17(a)(1) provides guidance to creditors regarding the general disclosures standards contained in Sec. 226.17(a)(1). The Board proposes to clarify the applicability of comments 17(a)(1)-2, -5, -6, and -7 to transactions secured by real property or a dwelling.

Current comment 17(a)(1)-2 provides an exception to the grouped and segregated requirement for disclosures on variable rate transactions required under existing Sec. Sec. 226.19(b) and 226.20(c). For the reasons discussed under proposed Sec. 226.37(a)(2), the Board proposes to require that ARM loan program disclosures under proposed Sec. 226.19(b), and ARMs adjustment notices under proposed Sec. 226.20(c), be subject to the grouped and segregated requirement. As a result, the reference made to Sec. Sec. 226.19(b) and 226.20(c) would be removed from comment 17(a)(1)-2.

Current comment 17(a)(1)-5, which addresses information considered directly related to the segregated disclosures, would be revised to clarify that it does not apply to transactions secured by real property or a dwelling, and to cross-reference proposed Sec. 226.37(a)(2).

Under the proposal, cross-references in comments 17(a)(1)-5(viii),

(xi), (xii), and (xvi) would be updated; no substantive change is intended. In addition, as noted below, proposed revisions to Sec. 226.18(f) regarding variable rate transactions, and proposed Sec. 226.38(j)(6) regarding assumption disclosure for transactions secured by real property or a dwelling, render comments 17(a)(1)-5(xiii) and

(xiv) unnecessary and therefore those comments would be deleted.

Finally, comment 17(a)(1)-5(xvi) would be revised to update cross- references.

As discussed under proposed Sec. Sec. 226.37(a)(2) and 226.38, the

Board proposes to require that creditors make disclosures for transactions secured by real property or a dwelling only as applicable.

Current comment 17(a)(1)-6, which permits creditors to design multi- purpose forms for closed-end credit disclosures as long as they are clear and conspicuous, would be revised to clarify that it does not apply to transactions secured by real property or a dwelling, as discussed more fully below under proposed Sec. 226.37(a)(2).

Finally, the Board proposes to clarify in current comment 17(a)(1)- 7 that transactions secured by real property or a dwelling and that have balloon payment financing with leasing characteristics are treated as closed-end credit under TILA and subject to its disclosure requirements. 17(a)(2)

Section 226.17(a)(2), which implements TILA Section 122(a), requires the terms finance charge and annual percentage rate, together with a corresponding amount or percentage rate, to be more conspicuous than any other disclosure, except the creditor's identity under Sec. 226.18(a). The Board proposes new disclosure requirements under proposed Sec. 226.38(e)(5)(ii) for the finance charge (renamed

``interest and settlement charges''), and under proposed Sec. Sec. 226.37(a)(2) and 226.38(b) for the APR. As a result, the Board would revise Sec. 226.17(a)(2) to be inapplicable to transactions secured by real property or a dwelling. 17(b) Time of Disclosures

Section 227.17(b) and comment 17(b)-1 require creditors to make closed-end credit disclosures before consummation of the transaction; special timing requirements apply to dwelling-secured transactions and variable-rate transactions. As discussed more fully under Sec. 226.19, the Board is proposing to require creditors to make pre-consummation disclosures for transactions secured by real property or a dwelling in accordance with special timing requirements. As a result, the Board proposes to revise Sec. 226.17(b) and comment 17(b)-1 to clarify that more specific timing rules would apply to transactions secured by real property or a dwelling. Current comment 17(b)-2, which addresses disclosure requirements for transactions converted from open-end to closed-end, would be revised to clarify that the special timing requirements under Sec. 226.19(b) would apply for adjustable rate transactions secured by real property or a dwelling.

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17(c) Basis of Disclosures and Use of Estimates 17(c)(1) Legal Obligation

Section 226.17(c)(1) requires that disclosures under subpart C reflect the terms of the legal obligation between the parties.

Commentary to Sec. 226.17(c)(1) provides guidance regarding disclosure of specific transaction types and loan features. The Board proposes to add new provisions in Sec. 226.17(c)(1)(i) through (vi) to move certain content from commentary to the regulation, as discussed below.

In addition, the Board would revise certain commentary to Sec. 226.17(c)(1) to reflect the new disclosure regime for mortgages, and redesignate comments as appropriate. Each of these proposed subsections, and accompanying commentary, is discussed below.

Comments 17(c)(1)-1 and 17(c)(1)-2 generally address disclosure of the legal obligation and modification of such obligation. Comment 17(c)(1)-1 would be revised to include the general principle that the consumer is presumed to abide by the terms of the legal obligation. For example, proposed comment 17(c)(1)-1 states that creditors should assume that a consumer will make payments on time and in full. This proposed revision is consistent with existing comment 17(c)(2)(i)-3, which states that creditors may base all disclosures on the assumption that payments will be made on time, disregarding any possible inaccuracies resulting from consumers' payment patterns. Comment 17(c)(2)(i)-3 specifically addresses disclosures for simple-interest transactions that potentially may be affected by late payments. The proposed revisions to comment 17(c)(1)-1 would clarify that disclosures for all transactions subject to Sec. 226.17 should be based on the assumption that the consumer will adhere to the terms of the legal obligation.

Comment 17(c)(1)-2 would be revised to clarify that transactions secured by real property or a dwelling are subject to the special disclosure rules under proposed Sec. 226.38(a)(3) and (c). Under the proposal, preferred-rate loans with a fixed interest rate would not be considered ARMs, and therefore, comment 17(c)(1)-2 also would be revised to remove the cross-reference to Sec. 226.19(b). Comment 17(c)(1)-2 would be redesignated as 17(c)(1)-2(i) through (iii).

Comment 17(c)(1)-16, which addresses disclosure for credit extensions that may be treated as multiple transactions, would be moved and redesignated as comment 17(c)(1)-3; no substantive change is intended.

Comment 17(c)(1)-15 states that where a deposit account is created for the sole purpose of accumulating payments that are applied to satisfy the consumer's credit obligation--a practice used in Morris

Plan transactions--payments to that account are treated the same as loan payments. Under the proposal, comment 17(c)(1)-15 would be removed. As discussed below, Morris Plan transactions are rare. In addition, the Board believes that such deposits clearly constitute loan payments and therefore comment 17(c)(1)-15 is unnecessary.

The remaining commentary to Sec. 226.17(c)(1) would be revised and redesignated as discussed below under proposed subsections 17(c)(1)(i) through (vi). 17(c)(1)(i) Buydowns

Comments 17(c)(1)-3 through 17(c)(1)-5 address third-party buydowns, consumer buydowns, and split buydowns, respectively. The proposed rule would add a new provision in Sec. 226.17(c)(1)(i) that reflects that existing commentary about buydowns. Proposed Sec. 226.17(c)(1)(i) requires creditors to disclose an APR that is a composite rate, based on the rate in effect during the initial period and the rate in effect for the remainder of the loan's term, if the consumer's interest rate or payments are reduced for all or part of the loan term. Proposed Sec. 226.17(c)(1)(i) applies to seller or third- party buydowns if they are reflected in the legal obligation, and to all consumer buydowns.

Comments 17(c)(1)-3 through 17(c)(1)-5 would be redesignated as comments 17(c)(1)(i)-1 through -4 and revised to reflect changes in the terminology used under the proposed rule to describe the finance charge, for transactions secured by real property or a dwelling. 17(c)(1)(ii) Wrap-Around Financing

Comment 17(c)(1)-6 provides guidance on disclosures for transactions that involve wrap-around financing; comment 17(c)(1)-7 provides guidance on disclosures for wrap-around transactions that include a balloon payment. Both comments state that, in transactions that involve wrap-around financing, the amount financed equals the sum of the new funds advanced by the wrap creditor and the remaining principal owed to the original creditor on the pre-existing loan. The proposed rule would incorporate this guidance into proposed Sec. 226.17(c)(1)(ii). Comments 17(c)(1)-6 and 17(c)(1)-7 would be redesignated as comments 17(c)(1)(ii)-1 and 17(c)(1)(ii)-2, respectively; no substantive change is intended. 17(c)(1)(iii) Variable- or Adjustable-Rate Transactions

Comment 17(c)(1)-8 currently provides that creditors should base disclosures for variable- or adjustable-rate transactions on the full term of the transaction and the terms in effect at the time of consummation and should not assume that the rate will increase. The proposed rule would incorporate that guidance into proposed Sec. 226.17(c)(1)(iii). Proposed Sec. 226.17(c)(1)(iii) would require creditors to base disclosures for variable- or adjustable-rate transactions on the full loan term, and on the terms in effect at the time of consummation, except as otherwise provided under proposed

Sec. Sec. 226.17(c)(1)(iii) or 226.38(a)(3) and (c) for transactions secured by real property or a dwelling.

As discussed below under proposed Sec. 226.38(c), creditors would be required to disclose specified rate and payment adjustments for adjustable-rate loans secured by real property or a dwelling. As a result, comment 17(c)(1)-8 would be revised to clarify that creditors must disclose specified rate and payment adjustments for adjustable- rate loans secured by real property or a dwelling in accordance with the requirements under proposed Sec. 226.38(c). Current comment 17(c)(1)-8 would be redesignated as comment 17(c)(1)(iii)-1.

Current comment 17(c)(1)-9, which states that a variable-rate feature does not, by itself, make the disclosures estimates, would be redesignated as comment 17(c)(1)(iii)-2. No substantive change is intended. 17(c)(1)(iii)(A) and (B) Discounted and Premium Rates

Comment 17(c)(1)-10 provides that if the initial interest for a variable-rate transaction is not determined by the index or formula used to make later interest-rate adjustments, disclosures should reflect a composite APR based on the initial interest rate for as long as it is charged and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation. The proposed rule would incorporate that commentary into proposed Sec. 226.17(c)(1)(iii)(B).

Proposed Sec. 226.17(c)(1)(iii) contains two separate disclosure rules; which disclosure rule applies depends on whether or not the initial rate is determined using the same index or formula used to make subsequent rate adjustments. If the initial rate is determined using the same index or

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formula used for subsequent rate adjustments, then the general rule that disclosures must reflect the terms in effect at the time of consummation applies under proposed Sec. 226.17(c)(1)(iii)(A). If the initial rate is set using a different index or formula, however, disclosures must reflect a composite APR under proposed Sec. 226.17(c)(1)(iii)(B). The composite APR would be based on the initial rate for as long as it is charged and, for the remainder of the loan term, the rate that would have applied if such index or formula had been used at the time of consummation. Comments 17(c)(1)-10(i) through

(vi) would be revised to reflect that, under the proposed rule, for transactions secured by real property or a dwelling, new terminology would be used for specified disclosures (for example, the term

``interest and settlement charges'' would be used in place of ``finance charge''), as discussed below. Comments 17(c)(1)-10(i) through (vi) also would be redesignated as comments 17(c)(1)(iii)-3(i) through (vi); no substantive change is intended. Finally, a cross-reference in comment 24(c)-4 would be updated to reflect the redesignation of comment 17(c)(1)-10.

Comment 17(c)(1)-11 provides that variable rate transactions include the following transaction types, even if initially they feature a fixed interest rate: balloon-payment loans where the creditor is unconditionally obligated to renew, but can increase the interest rate at the time of renewal; preferred-rate loans where the interest rate may increase upon some future event; and price-level adjusted mortgages that provide for periodic payment and loan balance adjustments. (But see the discussion under proposed Sec. 226.19(b) on comment 19(b)-5, which clarifies that creditors need not provide the disclosures required by Sec. 226.19(b) for specified balloon-payment, preferred- rate, and price-level adjusted mortgages.) As discussed below, proposed

Sec. 226.38(a)(3), which address disclosure of loan type for transactions secured by real property or a dwelling, would treat each of these transaction types as fixed-rate loans. As a result, comment 17(c)(1)-11 would be revised to clarify that balloon-payment, preferred-rate, and price-level adjusted mortgages secured by real property or a dwelling are considered fixed-rate transactions for the purposes of the loan type disclosure required under proposed Sec. 226.38(a)(3). (See also the discussion under proposed Sec. 226.38(c), which clarifies that the loan type attributed to transactions under proposed Sec. 226.38(a)(3) applies for purposes of interest rate and payment summary disclosures under proposed Sec. 226.38(c).)

Further, certain shared-equity or shared-appreciation mortgages are considered variable-rate transactions under comment 17(c)(1)-11.

However, under the proposal, if a mortgage is secured by real property or a dwelling, the mortgage would not be considered an adjustable-rate loan solely because of a shared-equity or shared-appreciation feature.

As discussed under proposed Sec. Sec. 226.19(b)(2)(ii)(F) and 226.38(d)(2)(vi), the Board would require creditors to disclose shared- equity or shared-appreciation as a loan feature for transactions secured by real property or a dwelling. As a result, guidance in comment 17(c)(1)-11 relating to shared-equity and shared-appreciation mortgages would be deleted.

Comment 17(c)(1)-11 would be redesignated as comment 17(c)(1)(iii)- 4(i) through (iii), except that guidance under current comment 17(c)(1)-11 regarding graduated payment mortgages and step-rate transactions without a variable-rate feature would be redesignated as comment 17(c)(1)(iii)-5. A cross-reference to comment 17(c)(1)-11 in comment 30-1 would be updated accordingly. Comment 17(c)(1)-12, which addresses graduated-payment ARMs, would be redesignated as comment 17(c)(1)(iii)-6(i) through (iii); no substantive change is intended.

Current comment 17(c)(1)-13 states that creditors may base disclosures for growth-equity mortgages (also referred to as ``payment- escalated mortgages'') on estimated payment increases, using the best information reasonably available, or may disclose by analogy to the variable-rate disclosures in Sec. 226.18(f)(1). As discussed below, current Sec. 226.18(f) contains disclosure requirements for variable- rate transactions that differ based on a loan's security interest and term. Under the proposed rule, Sec. 226.18(f) would be revised so that a loan's security interest, not its term, would determine whether the creditor would provide variable- or adjustable-rate disclosures.

Accordingly, under the proposal, the reference made in comment 17(c)(1)-13 to providing disclosures analogous to those under current

Sec. 226.18(f)(1) would be deleted, and comment 17(c)(1)-13 would be revised to require creditors to base disclosures for growth-equity mortgages using estimated payment increases. The reference to graduated-payment mortgages would be removed for clarity. Comment 17(c)(1)-13 would be redesignated as comment 17(c)(1)(iii)-7. 17(c)(1)(iv) Reverse Mortgages

Comment 17(c)(1)-14 provides that if a reverse mortgage has a specified period for disbursements but repayment is due only upon the occurrence of a future event such as the death of the consumer, the creditor must assume that repayment will occur when disbursements end.

The proposed rule would incorporate this commentary into the regulation as proposed Sec. 226.17(c)(1)(vi). Comment 17(c)(1)-14 would be revised to clarify that the disclosure requirements for reverse mortgage under Sec. 226.33 apply only if the consumer's death is one of the conditions of repayment, as provided under Sec. 226.33(a).

Comment 17(c)(1)-14 also would be revised by removing the discussion of shared-equity and shared-appreciation features because under the proposed rule transactions with such features would not be deemed adjustable-rate loans solely because of such features, as discussed above. Further, comment 17(c)(1)-14 would be revised to state that, if a reverse mortgage has an adjustable interest rate and is secured by real property or a dwelling, the creditor must disclose the shared- equity or shared-appreciation feature as required under Sec. Sec. 226.19(b)(2)(ii)(F) and 226.38(d)(2)(vi). Finally, under the proposed rule comment 17(c)(1)-14 would be redesignated as comment 17(c)(1)(iv)- 1(i) through (iii). 17(c)(1)(v) Tax Refund-Anticipation Loans

Comment 17(c)(1)-17 clarifies that if a consumer is required to repay a tax refund-anticipation loan when the consumer receives a tax refund, disclosures are to be based on the creditor's estimate of the time the refund will be delivered. Comment 17(c)(1)-17 further clarifies that the finance charge includes any repayment amount that exceeds the loan amount that is not excluded from the finance charge under Sec. 226.4. The proposed rule would incorporate this guidance into the regulation as proposed Sec. 226.17(c)(1)(v). Comment 17(c)(1)-17 which would be redesignated as comments 17(c)(1)(v)-1(i) and -1(ii) under the proposed rule. No substantive change is intended. 17(c)(1)(vi) Pawn Transactions

For pawn transactions, proposed Sec. 226.17(c)(1)(vi) would require creditors to: (1) Disclose the initial sum provided to the consumer as the amount financed; (2) include the difference between the initial sum provided to the consumer and the price at which the

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item is pledged or sold in the finance charge; and (3) determine the

APR using the redemption date as the end of the loan term. Proposed

Sec. 226.17(c)(1)(vi) is consistent with comment 17(c)(1)-18, which would be redesignated as comment 17(c)(1)(vi)-1. No substantive change is intended. 17(c)(2) Estimates

Under the proposal, Sec. 226.17(c)(2) would be revised to clarify that proposed Sec. 226.19(a) would limit creditors' ability to provide estimated disclosures for transactions secured by real property or a dwelling. As discussed below, proposed Sec. 226.19(a) requires creditors to provide disclosures that consumers must receive no later than three business days before consummation and which may not be estimated disclosures. Comments 17(c)(2)(i)-1 and 17(c)(2)(i)-2, which address the basis and labeling of estimates, respectively, also would be revised to reflect this limitation. In addition, comment 17(c)(2)(i)-3, which states that creditors may base all disclosures on the assumption that consumers will make timely payments, would be revised to clarify that creditors may also assume that consumers would make payments in the amounts required by the terms of the legal obligation. In technical revisions, a heading would be added to Sec. 226.17(c)(2) for clarity; no substantive change is intended. 17(c)(3) Disregarded Effects

In technical revisions, a heading would be added to Sec. 226.17(c)(3) for clarity, and guidance under current comment 17(c)(3)-1 would be redesignated as 17(c)(3)-1(i) and (ii). No substantive change is intended. 17(c)(4) Disregarded Irregularities

Under the proposal, Sec. 226.17(c)(4) would be revised to clarify that creditors may disregard period irregularities when disclosing the payment summary table, as required under proposed Sec. 226.38(c), for transactions secured by real property or a dwelling. No substantive change to the treatment of period irregularities is intended.

In technical revisions, a heading would be added to Sec. 226.17(c)(4) for clarity. Also, comment 17(c)(4)-1 would be redesignated as comment 17(c)(4)-1(i) and (ii), and comment 17(c)(4)-2 would be redesignated as comment 17(c)(4)-2(i) through (iii). No substantive change is intended. 17(c)(5) Demand Obligations

Under the proposal, comment 17(c)(5)-1, which addresses demand obligation disclosures, would be revised to reflect that proposed

Sec. Sec. 226.19(b)(2)(ii)(D) and 226.38(d)(2)(iv) contain requirements for disclosing a demand feature in transactions secured by real property or a dwelling. Comment 17(c)(5)-2, which addresses future events such as the maturity date, would be revised to clarify that certain disclosures for transactions not secured by real property or a dwelling may not contain estimated disclosures, as discussed below under proposed Sec. 226.19(a)(2). Comment 17(c)(5)-3, which addresses demand after a stated period, would be revised to delete obsolete references to specific loan programs and update cross-references.

Comment 17(c)(5)-4, which addresses balloon payment mortgages, would be revised to reflect that creditors must disclose a payment summary table for transactions secured by real property or a dwelling under proposed

Sec. 226.38(c) (rather than a payment schedule, as required for transactions not secured by real property or a dwelling under Sec. 226.18(g)) and to update a cross-reference. In technical revisions, a heading would be added to Sec. 226.17(c)(5) for clarity; no substantive change is intended. 17(c)(6) Multiple Advance Loans

In technical revisions, a heading would be added to Sec. 226.17(c)(6) for clarity; no substantive change is intended. 17(d) Multiple Creditors; Multiple Consumers

Section 226.17(d) addresses transactions that involve multiple creditors and consumers. The Board does not propose any changes to these provisions, except that the guidance contained in current comment 17(d)-1 would be redesignated as comment 17(d)-1(i) through (iii); no substantive change is intended. 17(e) Effect of Subsequent Events

Section 226.17(e) addresses whether a subsequent event makes a disclosure inaccurate or requires a new disclosure. Under proposed

Sec. 226.20(e), if a creditor obtains insurance on behalf of the consumer subsequent to consummation, the creditor would be required to provide notice before charging for such insurance. The Board proposes to revise comment 17(e)-1 to reflect this new requirement. 17(f) Early Disclosures

Under the proposal, in addition to providing early disclosures, creditors would be required to provide additional disclosures that a consumer must receive no later than three business days before consummation for transactions secured by real property or a dwelling.

Accordingly, comments 17(f)-1 through -4 would be revised to clarify that the special disclosure timing requirements under Sec. 226.19(a)(2) would apply to transactions secured by real property or a dwelling. In technical revisions, guidance in current comment 17(f)-1 would be renumbered and headings revised to clarify that some of the current guidance would not apply to transactions secured by real property or a dwelling under the proposed rule. 17(g) Mail or Telephone Orders--Delay in Disclosures

Section 226.17(g) and comment 17(g)-1 permit creditors to delay disclosures for transactions involving mail or telephone orders until the first payment is due if certain information, such as the APR or finance charge, is provided to the consumer in advance of any request.

As discussed under Sec. 226.19(a) and 226.20(c), the Board proposes special timing requirements for disclosures for transactions secured by real property or a dwelling and for adjustable rate transactions. As a result, the Board proposes to revise Sec. 226.17(g) and comment 17(g)- 1 to clarify that they do not apply to transactions secured by real property or a dwelling. 17(h) and 17(i) Series of Sales--Delay in Disclosures; Interim Student

Credit Extensions

Sections 226.17(h) and (i) address delay in disclosures in transactions involving a series of sales and interim student credit extensions. The Board does not propose any substantive changes to these provisions. In technical revisions, a cross-reference is corrected.

Section 226.18 Content of Disclosures

As noted, the Board proposes to require creditors to provide new disclosures for transactions secured by real property or a dwelling under proposed Sec. 226.38. Accordingly, the Board would clarify under

Sec. 226.18 that creditors must provide the new disclosures under

Sec. 226.38 for transactions secured by real property or a dwelling.

In addition, the Board proposes conforming amendments to Sec. 226.18 and associated commentary to reflect the new disclosure regime for mortgages, and would redesignate comments as appropriate. 18(a) Creditor

Currently, Sec. 226.18(a), which implements TILA Section 128(a)(1), requires disclosure of the identity of the creditor making the disclosures. 15

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U.S.C. 1638(a)(1). Comment 18(a)-1 states, in part, that this disclosure may, at the creditor's option, appear apart from the other required disclosures. As discussed above, currently, Sec. 226.17(a)(1) footnote 38, which implements TILA Section 128(b)(1), allows creditors to exclude from the grouped and segregated requirement certain required disclosures, such as the creditor's identity. 15 U.S.C. 1638(b)(1).

However, the Board proposes to revise the substance of footnote 38 to require the creditor's identity under Sec. 226.18(a) to be subject to the grouped together and segregated requirement for all closed-end credit disclosures. Thus, the Board proposes to revise comment 18(a)-1 to reflect this change. 18(b) Amount Financed

Section 226.18(b) addresses the disclosure and calculation of the amount financed. The Board proposes to revise comment 18(b)-2, which provides guidance regarding treatment of rebates and loan premiums for the amount financed calculation required under Sec. 226.18(b). Comment 18(b)-2 primarily addresses credit sales, such as automobile financing, and provides that creditors may choose whether to reflect creditor-paid premiums and seller- or manufacturer-paid rebates in the disclosures required under Sec. 226.18. The Board believes that creditor-paid premiums and seller- or manufacturer-paid rebates are analogous to buydowns. Like buydowns, such premiums and rebates may or may not be funded by the creditor and reduce costs that otherwise would be borne by the consumer. Accordingly, their impact on the amount financed, like that of buydowns, properly depends on whether they are part of the legal obligation. See comments 17(c)(1)-1 through -5. The Board is proposing to revise comment 18(b)-2 to clarify that the disclosures, including the amount financed, must reflect loan premiums and rebates regardless of their source, but only if they are part of the terms of the legal obligation between the creditor and the consumer. As discussed below, proposed comment 38(e)(5)(iii)-2 would parallel this approach for transactions secured by real property or a dwelling.

In addition, the Board proposes to revise comment 18(b)(2)-1, which addresses amounts included in the amount financed calculation that are not otherwise included in the finance charge, to remove reference to real estate settlement charges for the reasons discussed more fully under Sec. 226.4. 18(c) Itemization of Amount Financed

Section 226.18(c) requires a separate disclosure of the itemization of amount financed and provides guidance on the amounts that must be included in such itemization. As discussed below, the Board proposes new Sec. 226.38(e)(5)(iii) to address the calculation and disclosure requirements of the amount financed for transactions secured by real property or a dwelling. Under the proposal, the substance of footnote 40, which permits creditors to substitute good faith estimates required under RESPA for the itemization of the amount financed for dwelling- secured transactions, would be moved to new Sec. 226.38(j)(1)(iii).

Comment 18(c)-2 affords creditors flexibility in the information that may be included in the itemization of amount financed. Under the proposal, the Board would revise comment 18(c)-2(i) to remove references made to escrow items and to the commentary under Sec. 226.18(g) because the proposal renders them unnecessary, and 18(c)- 2(vi) to reflect a technical revision with no intended change in substance or meaning. The Board also proposes to move comment 18(c)-4 regarding the exemption afforded to RESPA transactions, and 18(c)(1)(iv)-2 regarding prepaid mortgage insurance premiums to proposed comments 38(j)(1)(iii)-1 and 38(j)(1)(i)(D)-2, respectively, because they apply only to dwelling-secured transactions. 18(d) Finance Charge

Section 226.18(d) requires disclosure of the finance charge for closed-end credit. As discussed below, the Board proposes new Sec. 226.38(e)(5)(ii) to address disclosure of the finance charge (renamed

``interest and settlement charges'') for transactions secured by real property or a dwelling. As a result, reference to the finance charge tolerances for mortgage loans would be moved from Sec. 226.18(d) to proposed Sec. 226.38(e)(5)(ii); no substantive change is intended.

Technical amendments to comment 18(d)(2) would reflect this revision. 18(e) Annual Percentage Rate

Section 226.18(e) requires disclosure of the annual percentage rate, using that term. The substance of footnote 42 would be moved to the regulatory text of Sec. 226.18(e). Technical amendments to comment 18(e)-2 would reflect this revision; no substantive change is intended. 18(f) Variable Rate

Section 226.18(f)(1) contains disclosure requirements for variable- rate transactions not secured by a consumer's principal dwelling and variable-rate transactions secured by a consumer's principal dwelling if the loan term is one year or less. Section 226.18(f)(1) requires creditors to make the following disclosures within three business days after receiving the consumer's application: (1) Circumstances under which the APR may increase; (2) any limitations on the increase; (3) the effect of an increase; and (4) an example of the payment terms that would result from an increase. Section 226.18(f)(2) applies to variable-rate transactions secured by a consumer's principal dwelling with a loan term greater than one year, and requires creditors to disclose that the loan has a variable-rate feature together with a statement that variable-rate program disclosures (required by current

Sec. 226.19(b)) have been provided earlier.

The Board adopted Sec. 226.18(f)(2) in 1987, at the same time that it adopted Sec. 226.19(b) (disclosures for variable-rate mortgages with terms greater than one year). The Board adopted those provisions based on recommendations by the Federal Financial Institutions

Examination Council (FFIEC). 52 FR 48665; Dec. 24, 1987. However, the

Board applied the requirements of those provisions only to loans secured by a principal dwelling with a term greater than one year.

Loans secured by a principal dwelling with a term of one year or less, and loans not secured by a principal dwelling remained subject to rules in Sec. 226.18(f)(1). The Board did not apply the new variable-rate loan disclosure requirements to such loans because public comments expressed concern about potential compliance problems for creditors making short-term loans. 52 FR at 48666.

Proposed Sec. Sec. 226.19(b) and 226.38(c) contain disclosure requirements for closed-end adjustable-rate loans secured by real property or a dwelling, and would apply the same rules to loans with a term of one year or less as for loans with a term greater than one year. Disclosures required by those provisions are discussed below. As a result, Sec. 226.18(f)(2) and comment 18(f)(2)-1, which address requirements and guidance for closed-end adjustable-rate loans secured by real property or a dwelling, are unnecessary and would be deleted.

The substance of footnote 43, which permits creditors to substitute information required under Sec. 226.18(f)(2) and 226.19(b) for the disclosures required by Sec. 226.18(f)(1), would also be deleted.

Section 226.18(f)(1)(i) through (iv) would be redesignated as Sec. 226.18(f)(1) through

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(4), and references in comment 18(f)-1 would be updated.

As discussed below, proposed Sec. Sec. 226.19(b)(3)(iii) and 226.38(d)(2)(iii) regarding disclosure of shared-equity or shared- appreciation loan features would render guidance about shared-equity or shared-appreciation mortgages in comment 18(f)-1 unnecessary, and therefore that comment would be deleted. Comment 18(f)(1)-1 regarding terms used in disclosures, and comment 18(f)(1)(i)-2 regarding conversion features would be redesignated as comments 18(f)-2 and -3, respectively. Finally, comments 18(f)(1)(i)-1, 18(f)(1)(ii)-1, 18(f)(1)(iii)-1, and 18(f)(1)(iv)-1 would be redesignated as comments 18(f)(1)-1, 18(f)(2)-1, 18(f)(3)-1, and 18(f)(4)-1, respectively. 18(g) Payment Schedule

Section 226.18(g) and associated commentary address the disclosure of the payment schedule for all closed-end credit. As discussed under proposed Sec. 226.38(c), the Board would require creditors to provide disclosures regarding interest rates and monthly payments in a tabular format for transactions secured by real property or a dwelling. As a result, creditors would not need to comply with the disclosure requirements of Sec. 226.18(g) for such transactions. However, as discussed under proposed Sec. 226.38(e)(5)(i), creditors would be required to disclose the number and total amount of payments that the consumer would make over the full term of the loan for transactions secured by real property or a dwelling. Proposed comment 18(e)(5)(i)-1 would require creditors to calculate the total payments following the rules under Sec. 226.18(g) and associated commentary. As a result, the

Board proposes to revise comment 18(g)-3 to require creditors to disclose the total number of payments for all payment levels as a single figure for transactions secured by real property or a dwelling, and to cross-reference proposed Sec. 226.38(e)(5)(i). 18(h) Total of Payments

In a technical revision, the substance of footnote 44 would be moved to the regulation text of Sec. 226.18(e); technical amendments to comment 18(h)-3 would reflect this revision. 18(i) Demand Feature

Section 226.18(i) and associated commentary address the following for all closed-end credit: disclosure of a demand feature; the type of demand features covered; and the relationship to payment schedule disclosures. The Board does not propose any change to this provision, except that comments 18(i)-2 and -3 would be updated to cross-reference proposed Sec. Sec. 226.38(d)(2)(iv) and 226.38(c), which address the disclosure requirements for a demand feature and payment schedule, respectively, for transactions secured by real property or a dwelling.

No substantive change is intended. 18(k) Prepayment

Section 226.18(k)(1) provides that, when an obligation includes a finance charge computed from time to time by application of a rate to the unpaid principal balance, the creditor must disclose a statement that indicates whether or not a penalty may be imposed if the obligation is prepaid in full. Comment 18(k)(1)-1 provides examples of charges considered penalties under Sec. 226.18(k)(1). One such example is ``interest charges for any period after prepayment in full is made.'' When the loan is prepaid in full, there is no balance to which the creditor may apply the interest rate. Accordingly, the proposed rule would revise this example for clarity; no substantive change is intended. Proposed Sec. 226.38(a)(5) contains requirements for disclosing prepayment penalties for transactions secured by real property or a dwelling. As discussed below, commentary on proposed

Sec. 226.38(a)(5) is consistent with the commentary on Sec. 226.18(k), as proposed to be revised. 18(j) Through 18(m) Total Sale Price; Prepayment; Late Payment;

Security Interest

Sections 226.18(j), (k), (l), and (m) address, respectively, disclosures regarding: total sale price; prepayment; late payment; and security interest. The Board does not propose any changes to these provisions, except for a minor technical amendment to comment 18(k)(1)- 1, as discussed above. However, as noted below, the Board proposes new disclosure requirements under Sec. Sec. 226.38(a)(5) and 226.38(d)(1)(iii) regarding prepayment penalties, Sec. 226.38(j)(3) regarding late payment, and Sec. 226.38(f)(2) regarding security interest, for transactions secured by real property or a dwelling. 18(n) Insurance and Debt Cancellation

Section 226.18(n) requires disclosure of insurance and debt cancellation in accordance with the requirements under Sec. 226.4(d) to exclude such fees from the finance charge. For the reasons discussed under Sec. 226.4(d), the Board proposes to revise Sec. 226.18(n) and comment 18(n)-2 to clarify that this disclosure requirement also applies to debt suspension policies. 18(o) and 18(p) Certain Security-Interest Charges; Contract Reference

Sections 226.18(o) and (p) address, respectively, disclosures regarding certain security-interest charges and contract reference. The

Board does not propose any changes to these provisions. However, as noted below, the Board would require creditors to provide parallel contract references for transactions secured by real property or a dwelling under proposed Sec. 226.38(j)(5). No parallel disclosure for security-interest charges is proposed for transactions secured by real property or a dwelling because such disclosures would not apply to those transactions under the Board's proposed revisions to Sec. 226.4, discussed above. 18(q) Assumption Policy

Section 226.18(q) and associated commentary require disclosure of assumption policies for residential mortgage transactions. Under the proposal, the Board proposes to move Sec. 226.18(q) and comments 18(q)-1 and -2 to proposed Sec. 226.38(j)(6) and comments 38(j)(6)-1 and -2, respectively, because assumption policies apply only to transactions secured by real property or a dwelling. No substantive change is intended. 18(r) Required Deposit

Section 226.18(r) addresses disclosure requirements when creditors require consumers to maintain deposits as a condition to the specific transaction. Footnote 45 provides additional guidance on such required deposits and includes a reference to payments made under Morris Plans.

Although at least one Morris Plan bank remains active, Morris Plans essentially are obsolete today. Accordingly, the Board proposes to move the substance of footnote 45 to the regulation text but delete the reference to Morris Plans. Comments 18(r)-1, -3, and -5 would also be similarly revised. In addition, under the proposal, comment 18(r)-2 on pledged-account mortgages would be moved to comment 38(i)-2 because it applies only to transactions secured by real property. (See also comment 17(c)(1)-15 on Morris Plans, which the Board proposes to delete as unnecessary.) Comment 18(r)-6 would be redesignated as comment 18(r)-6(i) through (vii).

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Section 226.19 Early Disclosures and Adjustable-Rate Disclosures for

Transactions Secured by Real Property or a Dwelling

Section 226.19(a) currently contains timing requirements for providing disclosures for closed-end transactions secured by a dwelling and subject to RESPA. Section 226.19(b) contains disclosure timing and content requirements for variable-rate loans secured by a consumer's principal dwelling. The Board proposes to revise Sec. 226.19(a) and

(b) to apply the disclosures to any closed-end transaction secured by real property or a dwelling, for reasons discussed below. Section 226.19(a) also would be revised to require creditors to provide new disclosures that a consumer must receive at least three business days before consummation, in addition to the existing requirement to provide early disclosures within three business days of application. The Board also proposes to revise the content of disclosures for ARMs required under Sec. 226.19(b), require new disclosures about risky loan features in proposed Sec. 226.19(c), and to include existing rules about disclosures provided through an intermediary agent or broker, or by telephone or electronic communication, in proposed Sec. 226.19(d). 19(a) Good Faith Estimates of Mortgage Transaction Terms and New

Disclosures

TILA Section 128(b)(2), 15 U.S.C. 1638(b)(2), requires creditors to mail or deliver to consumers good faith estimates of disclosures required by TILA Section 128(a), 15 U.S.C. 1638(a) (early disclosures), for a transaction secured by a dwelling and subject to RESPA. As amended by the MDIA, TILA Section 128(b)(2) requires creditors to deliver or mail the early disclosures at least seven business days before consummation. Further, TILA Section 128(b)(2), as amended by the

MDIA, requires that the creditor provide corrected disclosures if the disclosed APR changes in excess of a specified tolerance. The consumer must receive the corrected disclosures no later than three business days before consummation. The Board implemented these MDIA requirements in Sec. 226.19(a) through a final rule effective July 30, 2009 (MDIA

Final Rule). 74 FR 23289; May 19, 2009.

The Board proposes to expand the coverage of Sec. 226.19(a) so that the timing provisions would apply to closed-end mortgage transactions secured by real property or a dwelling, and would not be limited to RESPA-covered transactions. Thus, proposed Sec. 226.19(a) would apply to transactions secured by real property that does not include a dwelling, such as vacant land, and transactions that are not subject to RESPA, such as construction loans.

The Board also proposes to revise Sec. 226.19(a) so that, in addition to the early disclosures, the creditor must provide final disclosures that the consumer must receive no later than three business days before consummation. Under existing Sec. 226.19(a), by contrast, a consumer must receive new disclosures at least three business days before consummation only if changes to the previously disclosed APR exceed a specified tolerance. The Board is proposing two alternative provisions to address circumstances where terms change after the consumer has received the final disclosures. 19(a)(1)(i) Time of Good Faith Estimates of Disclosures

TILA Section 128(b)(2), 15 U.S.C. 1638(b)(2), as amended by the

MDIA, requires creditors to provide early disclosures if a transaction is secured by a dwelling and subject to RESPA. However, TILA's early disclosure requirements do not apply to mortgage transactions for personal, family, or household purposes if they are secured by real property that is not a dwelling, for example a consumer's business property. Creditors need not provide early disclosures for transactions secured by property of 25 acres or more, temporary financing (such as a construction loan), or transactions secured by vacant land because

RESPA does not apply to such transactions. 24 CFR 3500.5(b)(1), (3), and (4).

The Board proposes to expand Sec. 226.19(a) to cover transactions secured by real property, even if the property is not a dwelling and even if the transaction is not subject to RESPA. (Transactions secured by a consumer's interest in a timeshare plan would be treated differently, as discussed under Sec. 226.19(a)(5) below.) Under TILA

Section 128(b)(2), 15 U.S.C. 1638(b)(2), if the transaction is not secured by a dwelling, or is not covered by RESPA, the creditor is only required to provide disclosures before consummation. The Board proposes to require creditors to provide early disclosures under TILA for all closed-end transactions secured by real property or a dwelling to facilitate compliance.

Section 226.18 currently contains requirements for the content of transaction-specific disclosures secured by real property or a dwelling, whether or not creditors are required to provide that content in early disclosures. Although under the proposed rule Sec. 226.38 rather than Sec. 226.18 would contain requirements for disclosure content for transactions secured by real property or a dwelling, the content required in early disclosures is the same as the content of disclosures provided in cases where early disclosures are not required.

Applying the requirement to provide early disclosures to all transactions secured by real property or a dwelling would simplify creditors' determination of the time by which creditors must make the disclosures required by Sec. 226.38. The Board requests comment about operational or other issues involved in providing early disclosures for temporary loans, however. The Board also solicits comment on whether there are other types of loans exempt from RESPA to which it is not appropriate to apply proposed Sec. 226.19(a).

Proposed new comment 19-1 states that proposed Sec. 226.19 applies to transactions secured by real property or a dwelling even if such transactions are not subject to RESPA. The proposed comment clarifies that TILA does not apply to transactions that are primarily for business, commercial, or agricultural purposes, however. (Proposed comment 19-1 addresses the introductory text to proposed Sec. 226.19, which provides that all of Sec. 226.19, not only Sec. 226.19(a), applies to closed-end transactions secured by real property or a dwelling.)

Comment 19(a)(1)(i)-1, which discusses the coverage of Sec. 226.19(a), would be removed because proposed comment 19-1 would discuss the coverage of all of proposed Sec. 226.19. Comment 19(a)(1)(i)-2 would be revised to clarify that under the proposed rule disclosures required by proposed Sec. 226.19(a)(2) may not contain estimated disclosures, with limited exceptions. The comment also would be revised to reflect that proposed Sec. 226.37 contains requirements for disclosure of estimates and contingencies, as discussed below. Comment 19(a)(1)(i)-3 would be revised to reflect that creditors may rely on

RESPA and Regulation X to determine when an application is received, even for transactions not subject to RESPA. Comment 19(a)(1)(i)-5 would be revised to refer to the itemization of the amount financed disclosures in proposed Sec. 226.38(j) rather than in Sec. 226.18(c), as currently referenced. Finally, comments 19(a)(1)(i)-2 through -5 would be redesignated as comments 19(a)(1)(i)-1 through -4. 19(a)(1)(ii) Imposition of Fees

On July 30, 2008, the Board published the 2008 HOEPA Final Rule amending Regulation Z, which implements TILA

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and HOEPA. The July 2008 final rule requires creditors to give transaction-specific cost disclosures no later than three business days after receiving a consumer's application, for closed-end mortgage transactions secured by a consumer's principal dwelling, under Sec. 226.19(a)(1)(i). Further, the 2008 HOEPA Final Rule prohibits creditors and other persons from imposing a fee on the consumer, other than a fee for obtaining the consumer's credit history, before the consumer receives the early disclosures, under Sec. 226.19(a)(1)(ii) and (iii).

Section 226.19(a)(1)(ii) provides that if the early disclosures are mailed to the consumer, the consumer is considered to have received them three business days after they are mailed. 73 FR 44522, 44600- 44601.

The proposed rule would revise Sec. 226.19(a)(1)(ii) to conform to the presumption of receipt provision the Board subsequently adopted in the MDIA Final Rule in Sec. 226.19(a)(2)(ii).\40\ Under the proposed rule Sec. 226.19(a)(1)(ii) would be revised to provide that if the early disclosures are mailed to the consumer or delivered to the consumer by means other than delivery in person, the consumer is deemed to have received the corrected disclosures three business days after they are mailed or delivered. This is consistent with comment 19(a)(1)(ii)-1, which provides that creditors may impose a fee any time after midnight following the third business day after the creditor delivers or mails the early disclosures in all cases, regardless of the method the creditor uses to provide the early disclosures. The Board does not intend to make substantive changes by conforming the presumption of receipt provisions under Sec. Sec. 226.19(a)(1)(ii) and 226.19(a)(2)(ii).

\40\ On the same day the July 2008 final rule was published, the

Congress passed the MDIA. Under the MDIA, if the APR stated in the early disclosures changes in excess of a specified tolerance, the creditor must provide corrected disclosures that the consumer must receive no later than three business days before consummation. The

MDIA provides that if the creditor mails the corrected disclosures, the consumer is considered to have received them three business days after they are mailed. These early disclosure rules are contained in

TILA Section 128(b)(2)(E) (to be codified at 15 U.S.C. 1638(b)(2)(E)). Section 226.19(a)(2)(ii) implements these rules.

The Board also proposes to revise comment 19(a)(1)(ii)-1 to clarify that the three-business-day presumption of receipt applies in all cases, including where a creditor uses electronic mail or a courier to provide the early disclosures. Proposed comment 19(a)(1)(ii)-1 provides that creditors that use electronic mail or a courier other than the postal service may use the three-business-day presumption of receipt.

This comment is consistent with existing comment 19(a)(2)(ii)-3 adopted through the MDIA Final Rule. (Comment 19(a)(2)(ii)-3 would be redesignated as comment 19(a)(2)(v)-1 and conforming edits would be made in connection with the proposed requirement that creditors provide final disclosures that the consumer must receive no later than three business days before consummation, as discussed below.)

An additional change would be made to comment 19(a)(1)(ii)-1 under the proposed rule. Currently, comment 19(a)(1)(ii)-1 provides that if the creditor places the early disclosures in the mail, the creditor may impose a fee in all cases ``after midnight on the third business day following mailing of the disclosures.'' The Board recognizes that the phrase ``after midnight on the third business day'' may be construed to mean either that the creditor may impose a fee at the beginning of the third business day after the creditor receives the consumer's application, or at the beginning of the fourth business day after the creditor receives the consumer's application. Thus, the Board proposes to revise comment 19(a)(1)(ii)-1 to provide that the creditor may impose a fee after the consumer receives the early disclosures or, in all cases, after midnight following the third business day after mailing the early disclosures. For example, proposed comment 19(a)(1)(ii)-1 provides that (assuming that there are no intervening legal public holidays) a creditor that receives the consumer's written application on Monday and mails the early mortgage loan disclosure on

Tuesday may impose a fee on the consumer on Saturday. 19(a)(2)(ii) Three-Business-Day Waiting Period

Under Sec. 226.19(a), as revised by the MDIA Final Rule, if changes to the APR disclosed for a closed-end transaction secured by a dwelling and subject to RESPA exceed a specified tolerance, creditors must provide corrected disclosures. The consumer must receive the corrected disclosures no later than three business days before consummation. The tolerance specified for closed-end ``regular transactions'' (those that do not involve multiple advances, irregular payment periods, or irregular payment amounts) is \1/8\ of 1 percentage point and for closed-end ``irregular transactions'' (those that involve multiple advances, irregular payment periods, or irregular payment amounts, such as an ARM with a discounted initial interest rate) is \1/ 4\ of 1 percentage point. See Sec. 226.22(a) and footnote 46; comment 17(c)(1)-10(iv).

Currently, if an APR stated in early disclosures for a closed-end transaction not subject to Sec. 226.19(a) remains accurate but other terms that were not labeled as estimates change, the creditor must disclose those changed terms before consummation under Sec. 226.17(f).

Creditors also must provide corrected disclosures if a variable-rate feature is added to a closed-end transaction under Sec. 226.17(f), whether or not the transaction is subject to Sec. 226.19(a). See comment 17(f)-2. In practice, most creditors provide ``final'' disclosures to a consumer on the day of consummation, whether or not the loan terms stated in the early disclosures have changed.

Under the proposed rule, after providing early disclosures for a closed-end transaction secured by real property or a dwelling, creditors would provide a second set of disclosures in all cases, under

Sec. 226.19(a)(2)(ii). The consumer would have to receive these final disclosures no later than three business days before consummation.

Proposed Sec. 226.19(a)(2)(ii) is designed to address long-standing concerns that consumers may find out about different loan terms or increased settlement costs only at consummation. Members of the Board's

Consumer Advisory Council and commenters on prior Board rulemakings have expressed concern about consumers not learning of changes to credit terms until consummation. Further, several participants in the

Board's consumer testing stated that they had been surprised at closing by important changes in loan terms. For example, some participants said that they had been told at closing that a loan would have an adjustable rate even though previously they had been told they would receive a fixed-rate loan. Participants said that they closed despite unfavorable changes in loan terms because they lacked alternatives, especially in the case of a loan financing a home purchase. Some participants stated that they accepted changed terms because the loan originator advised them that they could easily obtain a refinance loan with better terms in the near future.

Terms or costs may change after early disclosures are given for a variety of reasons, including that the consumer did not lock the interest rate at application or an appraisal report developed after early disclosures are provided shows a different property value than the creditor assumed when providing the early disclosure. Regardless of the reason for the changed terms, a consumer who receives notice

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of changed loan terms at consummation that differ from those originally disclosed does not have a meaningful opportunity to make an informed credit decision.

To address concerns about changes to loan terms, proposed Sec. 226.19(a)(2)(ii) requires creditors to provide final disclosures that a consumer would have to receive no later than the third business day before consummation. Under proposed Sec. 226.38(a)(4), the early disclosures and final disclosures would contain total estimated settlement costs disclosed under RESPA and HUD's Regulation X, which implements RESPA. Regulation X permits final settlement charges to be disclosed at consummation; the consumer may request that final settlement charges be disclosed twenty-four hours in advance, however. 24 CFR 3500.10(a) and (b). Thus, under RESPA, creditors, settlement agents, and settlement service providers have until the day of consummation to determine the amounts of the various settlement costs.

Effective January 1, 2010, Regulation X provides that the sum of most lender-required third party settlement costs may vary no more than 10 percent from the same costs disclosed on the good faith estimate (GFE) delivered earlier. Certain other changes, such as the lender's origination fee, cannot vary, unless the consumer did not lock the interest rate.

The Board believes that proposed Sec. 226.19(a)(2) would not conflict with tolerance and timing rules under Regulation X--that is, creditors could comply with both Regulation Z and Regulation X.

However, the Board's proposal would require creditors to finalize settlement costs earlier than RESPA does: At least three business days before consummation, and as much as a week before consummation if the creditor mails the disclosures to the consumer.\41\ The Board recognizes that requiring that loan terms and costs be finalized several days before consummation would require significant changes to current settlement practices. These changes would generate costs that creditors and third-party service providers would pass on to consumers.

The Board solicits comment on the operational and other practical effects of requiring that consumers receive final TILA disclosures for closed-end loans secured by real property or a dwelling no later than three business days before consummation.

\41\ Under existing and proposed Sec. 226.19(a)(2), a consumer is deemed to receive corrected disclosures three business days after a creditor mails them. Under existing and proposed Sec. 226.19(a)(2), creditors may but need not rely on the presumption of receipt to determine when the three-business-day waiting period begins, whether creditors mail TILA disclosures using the postal service, use a courier other than the postal service, or provide disclosures electronically. Alternatively, creditors may rely on evidence of receipt. 74 FR at 23293; 73 FR 44522, 44593; July 30, 2008.

Proposed comment 19(a)(2)(ii)-1 provides that creditors must provide final disclosures even if the terms disclosed have not changed since the creditor provided the early disclosures. Proposed comment 19(a)(2)(ii)-2 provides that disclosures made under Sec. 226.19(a)(2)(ii) must contain each of the applicable disclosures required by Sec. 226.38.

If escrows for taxes and insurance will be required, creditors may disclose periodic payments of taxes and insurance as estimates under

Sec. 226.38(c). If the creditor includes escrowed amounts when calculating the total of payments under Sec. 226.38(e)(5)(i), then the total of payments also would be disclosed as estimated disclosures, as discussed in comment 38(e)(5)-1. Periodic payment disclosures that include escrowed amounts must be estimated disclosures because the creditor cannot know with certainty the amounts for property taxes and insurance after the first year of the loan. Proposed comment 19(a)(2)(ii)-3 clarifies that other disclosures may not be estimated under proposed Sec. 226.19(a)(2)(ii). Finally, comment 19(a)(2)(ii)-4 provides an example that illustrates when consummation may occur after the consumer receives the final disclosures. 19(a)(2)(iii) Additional Three-Business-Day Waiting Period

The Board is proposing two alternative requirements for creditors to provide corrected disclosures after making the final disclosures required by Sec. 226.19(a)(2)(ii), to be designated as Sec. 226.19(a)(2)(iii). Consumers would have to receive the corrected disclosures required by proposed Sec. 226.19(a)(2)(iii) no later than the third business day before consummation. Under both Alternative 1 and Alternative 2, comment 19(a)(2)-2 would be revised to reflect that there is more than one three-business-day waiting period under Sec. 226.19(a).

Alternative 1. The first alternative would require that a creditor provide corrected disclosures if any terms stated in the final disclosures required by proposed Sec. 226.19(a)(2)(ii) change. This would ensure that consumers are aware of the final loan terms and costs at least three business days before consummation. The consumer would have to receive the corrected disclosures no later than the third business day before consummation.

Under Alternative 1, proposed comment 19(a)(2)(iii)-1 clarifies that a disclosed APR is accurate for purposes of Sec. 226.19(a)(2)(iii) if the disclosure is accurate under proposed Sec. 226.19(a)(2)(iv). (Under proposed Sec. 226.19(a)(2)(iv), an APR disclosed under proposed Sec. 226.19(a)(2)(ii) or (iii) is considered accurate as provided by Sec. 226.22, except that in certain circumstances the APR is considered accurate if the APR decreases from the APR disclosed previously, as discussed below.) Proposed comment 19(a)(2)(iii)-2 states that disclosures made under Sec. 226.19(a)(2)(ii) must contain each of the disclosures required by Sec. 226.38. Proposed comment 19(a)(2)(iii)-3 clarifies that creditors may rely on proposed comment 19(a)(2)(ii)-3 in determining which of the disclosures required by Sec. 226.19(a)(2)(iii) may be estimated disclosures. Proposed comment 19(a)(2)(iii)-4 provides an example that shows when consummation may occur after the consumer receives corrected disclosures. Existing comments 19(a)(2)(ii)-1 through -4 would be removed under Alternative 1.

Alternative 2. It is not clear that it is always in a consumer's interest to delay consummation until three business days after the consumer receives corrected disclosures if any terms or costs change.

Thus, the Board proposes an alternative Sec. 226.19(a)(2)(iii) that incorporates the existing tolerance for APR changes under Sec. 226.22 and incorporates an additional tolerance discussed under Sec. 226.19(a)(iv). If the APR changes beyond the specified tolerances, creditors would be required to provide corrected disclosures that the consumer must receive no later than three business days before consummation.

Under the second alternative, after the creditor provides the final disclosures, only APR changes beyond the specified tolerances or the addition of a variable-rate feature to the loan would trigger a requirement that consumers receive corrected disclosures no later than three business days before consummation. In other cases, the creditor would have to disclose changed terms no later than the day of consummation, under existing Sec. 226.17(f). Under this alternative, a consumer would be alerted to significant increases in loan costs and would have three business days to investigate the reason for the change or to consider other options. Smaller APR increases or other changes to loan terms would not trigger a three-day delay in consummation, however. This alternative is designed to prevent

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relatively minor changes in loan terms from repeatedly delaying consummation.

Under Alternative 2, comment 19(a)(2)(ii)-1 would be redesignated as comment 19(a)(2)(iii)-1 and revised to clarify that creditors must provide corrected disclosures if the APR disclosed pursuant to Sec. 226.19(a)(ii) becomes inaccurate under proposed Sec. 226.19(a)(2)(iv), which incorporates existing tolerances under Sec. 226.22, or an adjustable-rate feature is added. Comment 19(a)(2)(ii)-2 would be redesignated as comment 19(a)(2)(iii)-2 and revised to: (1) Reflect that corrected disclosures must comply with the format requirements of proposed Sec. 226.37 as well as those of Sec. 226.17(a); (2) reflect that a different APR will almost always result in changes in ``interest and settlement charges'' and the ``payment summary'' (currently designated as the finance charge and payment schedule, respectively);

(3) clarify that the addition of an adjustable-rate feature triggers the requirement to provide corrected disclosures, by moving a cross- reference to comment 17(f)-2; and (4) remove guidance on the timing and conditions of new disclosures from guidance on disclosure content, for clarity. Proposed comment 19(a)(2)(iii)-3 clarifies that creditors may rely on proposed comment 19(a)(2)(ii)-3 in determining which of the disclosures required by Sec. 226.19(a)(2)(iii) creditors may estimate.

Under the proposed rule, comment 19(a)(2)(iii)-4 would be revised to update a cross-reference consistent with the proposed rule and reflect that consumers must receive disclosures under Sec. 226.19(a)(2)(ii) whether or not the disclosures correct the early disclosures.

The Board solicits comment on whether, under Alternative 2, changes other than APR changes in excess of the specified tolerance or the addition of an adjustable-rate feature after the creditor makes the new disclosures should trigger an additional three-business-day waiting period. For example, should the addition of a prepayment penalty, negative amortization, interest-only, or balloon payment feature trigger a waiting period requirement?

Proposed Sec. 226.19(a)(2)(iii) (under Alternative 2) would require corrected disclosures and a new three-business-day waiting period if the previously disclosed APR has become inaccurate. Under current rules, a disclosed APR is considered accurate and does not trigger corrected disclosures if it results from a disclosed finance charge that is greater than the finance charge required to be disclosed

(i.e., the finance charge is ``overstated''). See Sec. Sec. 226.22(a)(4) and 226.18(d)(1)(ii). In some transactions, the finance charge at consummation might be lower than the amount previously disclosed, for example, if the parties agree to a smaller principal loan amount after early disclosures were made. In the same transaction, the APR might increase because of an increase in the interest rate after the early disclosures were made. In this transaction, at consummation the previously disclosed finance charge would be overstated and the previously disclosed APR understated. In such a case, the question has been raised as to whether the previously disclosed APR, which was derived from the overstated finance charge, should be deemed accurate even though it is understated at consummation. The Board believes the APR in this case is not accurate.

The Board believes an APR ``results from'' an overstated finance charge only if the APR also is overstated. The Board solicits comment on whether, should Alternative 2 be adopted, the Board also should adopt commentary under Sec. 226.22(a)(4) to clarify this interpretation.

Proposed Sec. 226.19(a)(2)(iv) contains APR tolerances, and proposed Sec. 226.38(e)(5)(ii) contains tolerances for interest and settlement charges (as the finance charge would be referred to under the proposed rule), for transactions secured by real property or a dwelling. The Board solicits comment on whether, under Sec. 226.38(e)(5)(ii), tolerances would be appropriate for numerical disclosures other than the APR and interest and settlement charges. For example, would dollar tolerances for overstatements of periodic payment disclosures required by Sec. 226.38(c) be appropriate? What standards should be used to prevent overstated disclosures from undermining the integrity of the early disclosures and their usefulness as a shopping tool? 19(a)(2)(iv) Annual Percentage Rate Accuracy

Under proposed Sec. 226.19(a)(2)(iv), an APR disclosed under proposed Sec. 226.19(a)(2)(ii) or (iii) is considered accurate as provided by Sec. 226.22, except that the APR also is considered accurate if the APR decreases due to a discount (1) the creditor gives the consumer to induce periodic payments by automated debit from a consumer's deposit account or (2) the title insurer gives the consumer on owner's title insurance. Thus, such APR changes would not trigger a new three-business-day waiting period. Comment 19(a)(2)(iv)-1 clarifies that if a change occurs that does not render the APR inaccurate under

Sec. 226.19(a)(iv), the creditor must disclose the changed terms before consummation, consistent with Sec. 226.17(f). The Board solicits comment on whether a disclosed APR that is higher than the actual APR at consummation should be considered accurate in other circumstances. 19(a)(2)(v) Timing of Receipt

As adopted by the MDIA Final Rule, Sec. 226.19(a)(2)(ii) provides that consumers must receive corrected disclosures, if required, no later than three business days before consummation. Further, Sec. 226.19(a)(2)(ii) provides that if the corrected disclosures are mailed to the consumer or delivered to the consumer by means other than delivery in person, the consumer is deemed to have received the disclosures three business days after they are mailed or delivered. The proposed rule applies this presumption for purposes of both the waiting period under proposed Sec. 226.19(a)(2)(ii) and the waiting period under proposed Sec. 226.19(a)(2)(iii). The presumption would be moved to Sec. 226.19(a)(2)(v) under the proposed rule.

Proposed comment 19(a)(2)(v)-1 states that whether the creditor provides disclosures by delivery, postal service, electronic mail, or courier other than the postal service, consumers are deemed to receive the disclosures three business days after the creditor so provides them, for purposes of determining when a three-business-day waiting period required by Sec. 226.19(a)(2)(ii) or (iii) begins. Further, proposed comment 19(a)(2)(v)-1 clarifies that creditors may rely on evidence of earlier receipt, regardless of how the creditor provides disclosures to the consumer. This commentary is consistent with the

Board's discussion of delivery and mailing under the MDIA Final Rule and the 2008 HOEPA Final Rule. See 74 FR at 23292-23293; 73 FR at 44593. 19(a)(3) Consumer's Waiver of Waiting Period

Section 226.19(a)(3) and comment 19(a)(3)-1 would be revised to reflect that under the proposed rule the disclosures required for transactions secured by real property or a dwelling are contained in

Sec. 226.38 rather than in Sec. 226.18. Section 226.19(a)(3) also would be revised to reflect that there is more than one three-business- day waiting period under proposed Sec. 226.19(a)(2); comment 19(a)(3)- 1 would be revised to clarify that a separate waiver is required for each waiting period to be waived.

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Section 226.19(a)(2)(ii) currently requires creditors to provide corrected disclosures to a consumer if changes to the disclosed APR exceed the specified tolerance (APR correction disclosures). The consumer must receive APR correction disclosures no later than three business days before consummation. Comment 19(a)(3)-2 provides examples that show whether or not the three-business-day waiting period would need to be waived to allow consummation to occur during the seven- business-day waiting period required by Sec. 226.19(a)(2)(i), in the event of a bona fide personal financial emergency. This example would be removed because proposed Sec. 226.19(a)(2)(ii) provides that, after the creditor provides the early disclosures, consumers must receive final disclosures no later than three business days before consummation in all cases. Comment 19(a)(3)-3 provides examples illustrating whether or not, after the seven-business-day waiting period required by Sec. 226.19(a)(2)(i), the three-business-day waiting period triggered by APR correction disclosures would need to be waived to allow consummation to occur, in the event of a bona fide personal financial emergency.

Comment 19(a)(3)-3 would be revised to reflect that in all cases consumers would have to receive final disclosures after the creditor provides the early disclosures under the proposed rule and that under proposed Sec. 226.19(a)(2)(iv) a disclosed APR that is overstated is considered accurate in specified circumstances. Comment 19(a)(3)-3 would be redesignated as comment 19(a)(3)-2 under the proposed rule. 19(a)(4) Notice

Section 226.19(a)(4) currently requires creditors to disclose that a consumer need not enter into a loan agreement because the consumer has received disclosures or signed a loan application. This requirement would be moved to Sec. 226.38(f)(1) under the proposed rule. Proposed

Sec. 226.38 contains all content requirements for disclosures for transactions secured by real property or a dwelling. 19(a)(5) Timeshare Transactions

Section 226.19(a)(5) excludes transactions secured by a consumer's interest in a timeshare plan described in 11 U.S.C. 101(53(D))

(timeshare transactions) from Sec. 226.19(a)(1) through (a)(4), which address the following: (1) The period within which the creditor must provide the early disclosures and the fact that creditors and other persons cannot collect fees from the consumer before the consumer receives the early disclosures; (2) waiting periods after the creditor provides the early disclosures and after the consumer receives corrected disclosures (if any) and before consummation; (3) waiver of waiting periods; and (4) the requirement to disclose a statement that the consumer is not required to consummate a transaction merely because the consumer has received disclosures or signed a loan application.

Section 226.19(a)(5)(ii) contains timing requirements for early disclosures, and Sec. 226.19(a)(5)(iii) contains timing requirements for corrected disclosures, for timeshare transactions. Waiting periods are not required for timeshare transactions, so Sec. 226.19(a)(5) does not contain requirements similar to the requirements in Sec. 226.19(a)(3) for waiving waiting periods for non-timeshare transactions. Section 226.19(a)(5) also does not contain a requirement similar to that in Sec. 226.19(a)(4) that disclosures contain a statement that a consumer need not consummate a transaction simply because the consumer receives disclosures or signs a loan application.

Section 226.19(a)(4) would be removed under the proposed rule, and a substantially similar requirement would apply under proposed Sec. 226.38(f)(1). Proposed Sec. 226.38(f)(1) requires creditors to disclose a statement that a consumer is not obligated to consummate a loan and that the consumer's signature only confirms receipt of a disclosure statement.

Proposed Sec. 226.38(f)(1) applies to timeshare transactions. The

MDIA exempts timeshare transactions from the requirements of TILA

Section 128(b)(2)(C), which existing Sec. 226.19(a)(4) implements.

However, the Board does not believe that the Congress intended to exempt timeshare transactions from any requirement to disclose to a consumer that the consumer is not obligated to consummate a loan. Thus, the proposed rule does not exempt timeshare transactions from Sec. 226.38(f)(1).

Section 226.19(a)(5) would be redesignated as Sec. 226.19(a)(4) and cross-references adjusted accordingly under the proposed rule because Sec. 226.19(a)(4) would be removed, as discussed above.

Comment 19(a)(5)(ii)-1 would be revised to reflect that the coverage of

Sec. 226.19 has been expanded to include transactions not subject to

RESPA, as discussed above. Comment 19(a)(5)(iii)-1 would be revised to clarify that timeshare transactions are subject to the general requirement to disclose changed terms under Sec. 226.17(f). Further, comment 19(a)(5)(iii)-1 would be revised to reflect that cross- referenced commentary on variable- or adjustable- rate transactions would be incorporated into proposed Sec. 226.17(c)(1)(iii). Finally, commentary on Sec. 226.19(a)(5)(ii) and (iii) would be redesignated as commentary on Sec. 226.19(a)(4)(ii) and (iii), respectively. 19(b) Adjustable-Rate Loan Program Disclosures

Section 226.19(b) currently requires creditors to provide detailed disclosures about adjustable-rate loan programs and a CHARM booklet if a consumer expresses an interest in ARMs. Section 226.19(b) applies to closed-end transactions secured by a consumer's principal dwelling with a term greater than one year. Creditors must provide these disclosures at the time an application form is provided or before the consumer pays a non-refundable fee, whichever is earlier. Creditors need not provide these disclosures, however, if a loan is secured by a dwelling other than a principal dwelling (such as a second home) or real property that is not a dwelling (such as vacant land) or with a term of one year or less. For such transactions, creditors instead must provide the less detailed variable-rate disclosures required by Sec. 226.18(f)(1) within three business days after receiving the consumer's application, as discussed above.

The Board proposes to require creditors to provide ARM loan program disclosures, and additional disclosures discussed below, at the time an application form is provided, for all closed-end transactions secured by real property or a dwelling, regardless of the length of the loan's term. The ARM disclosures and the new disclosures are intended to alert consumers to certain risks before they apply for a loan. The Board believes that consumers should receive this information, even where the loan would be secured by a second home or unimproved real property, and where the loan term is one year or less. In these circumstances, the transaction likely involves a significant asset and consumers should receive information about risks, so that they can decide whether the program or loan feature is appropriate. The Board solicits comment on whether loan program disclosures should be given at the time an application form is provided to a consumer or before the consumer pays a non-refundable fee, whichever is earlier, for transactions other than

ARMs.

The Board proposes to require creditors to provide the following disclosures at the time an application is provided:

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The ARM loan program disclosure, for each program in which the consumer expresses an interest (proposed Sec. 226.19(b));

The ``Key Questions about Risk'' document published by the

Board (proposed Sec. 226.19(c)); and

The ``Fixed vs. Adjustable-Rate Mortgages'' document published by the Board (proposed Sec. 226.19(c)).

Creditors no longer would be required to provide the CHARM booklet, as discussed under Sec. 226.19(c).

Current content of ARM loan program disclosures. For adjustable- rate mortgage transactions secured by a consumer's principal dwelling with a term greater than one year, Sec. 226.19(b)(2) requires the creditor to provide disclosures to consumers at the time an application form is provided or before the consumer pays a nonrefundable fee, whichever is earlier. Section 226.19(b)(2) requires creditors to provide the following disclosures, as applicable, for each adjustable- rate loan program in which the consumer expresses an interest: (1) The fact that interest rate, payment, or term of the loan can change, (2) the index or formula used in making adjustments, and a source of information about the index or formula, (3) an explanation of how the interest rate and payment will be determined, including an explanation of how the index is adjusted, such as by the addition of a margin, (4) a statement that the consumer should ask about the current margin value and current interest rate, (5) the fact that the interest rate will be discounted, and a statement that the consumer should ask about the amount of the interest rate discount, (6) the frequency of interest rate and payment changes, (7) any rules relating to changes in the index, interest rate, payment amount, and outstanding loan balance, (8) pursuant to TILA Section 128(a)(14), 15 U.S.C. 1638(a)(14), either (a) an historical example based on a $10,000 loan amount that illustrates how interest rate changes implemented according to the terms of the loan program would have affected payments and the loan balance over the past fifteen years or (b) the maximum interest rate and payment for a

$10,000 loan originated at an initial interest rate in effect as of an identified month and year and a statement that the periodic payments may increase or decrease substantially, (9) an explanation of how the consumer may calculate the payments for the loan, (10) the fact that the loan program contains a demand feature, (11) the type of information that will be provided in notices of adjustments and the timing of such notices, and (12) a statement that the disclosure forms are available for the creditor's other variable-rate loan programs.

Amendments to maximum rate and historical example disclosures. TILA

Section 128(a)(14), 15 U.S.C. 1638(a)(14), requires creditors to disclose at application (a) a statement that the periodic payments may increase or decrease substantially and the maximum interest rate and payment for a $10,000 loan originated at a recent interest rate, assuming the maximum periodic increases in rates and payments under the program or (b) an historical example illustrating the effects of interest rate changes implemented according to the loan program.

Section 226.19(b)(2)(viii) implements TILA Section 128(a)(14). For the reasons discussed below, the Board proposes not to require creditors to provide either the historical example or the maximum interest rate and payment based on a $10,000 loan.

The Board proposes to eliminate the disclosure of the historical example or the maximum interest rate and payment based on a $10,000 loan pursuant to the Board's exception and exemption authorities in

TILA Section 105. Section 105(a) authorizes the Board to make exceptions to TILA to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms and helping consumers avoid the uniformed use of credit. See 15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to exempt any class of transactions from coverage under any part of TILA if the Board determines that coverage under that part does not provide a meaningful benefit to consumers in the form of useful information or protection.

See 15 U.S.C. 1604(f)(1). The Board must make this determination in light of specific factors. See 15 U.S.C. 1604(f)(2). These factors are

(1) the amount of the loan and whether the disclosure provides a benefit to consumers who are parties to the transaction involving a loan of such amount; (2) the extent to which the requirement complicates, hinders, or makes more expensive the credit process; (3) the status of the borrower, including any related financial arrangements of the borrower, the financial sophistication of the borrower relative to the type of transaction, and the importance to the borrower of the credit, related supporting property, and coverage under

TILA; (4) whether the loan is secured by the principal residence of the borrower; and (5) whether the exemption would undermine the goal of consumer protection.

The Board has considered each of these factors carefully and based on that review believes that the proposed exemption is appropriate.

Consumer testing conducted by the Board showed that examples based on hypothetical loan amounts and interest rates may be confusing to consumers and may not provide meaningful benefit. Several participants thought the historical example showed payments and rates that actually would apply if the participant chose the loan program described in the disclosure. Some participants mistakenly thought that the disclosures described an ARM with a fifteen-year term because the disclosure showed fifteen years' worth of index changes under an ARM program. Some consumer testing participants said that disclosures based on a hypothetical $10,000 loan amount are not useful to them; these consumers said they wanted to see information about rates and terms that would actually apply in the context of their own loan amount.

The Board's exception and exemption authority under Sections 105(a) and (f) does not apply in the case of a mortgage referred to in Section 103(aa), which are high-cost mortgages generally referred to as ``HOEPA loans.'' The Board does not believe that this limitation restricts its ability to apply the proposed changes to all mortgage loans, including

HOEPA loans. This limitation on the Board's general exception and exemption authority is a necessary corollary to the decision of the

Congress, as reflected in TILA Section 129(l)(1), to grant the Board more limited authority to exempt HOEPA loans from the prohibitions applicable only to HOEPA loans in Section 129(c) through (i) of TILA.

See 15 U.S.C. 1639(l)(1). Here, the Board is not proposing any exemptions from the HOEPA prohibitions. This limitation does raise a question as to whether the Board could use its exception and exemption authority under Sections 105(a) and (f) to except or exempt HOEPA loans, but not other types of mortgage loans, from other, generally applicable TILA provisions. That question, however, is not implicated by this proposal.

Here, the Board is proposing to apply its general exception and exemption authority to eliminate information from the ARM loan program disclosure that consumers find confusing or not useful, for all loans secured by real property or a dwelling, including both HOEPA and non-

HOEPA loans, in order to fulfill the statute's purpose of facilitating consumers' ability to compare credit terms and helping consumers avoid the uninformed use of credit. It would not be consistent with the statute or with

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Congressional intent to interpret the Board's authority under Sections 105(a) and (f) in such a way that the proposed revisions could apply only to mortgage loans that are not subject to HOEPA. Reading the statute in a way that would deprive HOEPA borrowers of improved ARM loan program disclosures is not a reasonable construction of the statute and contravenes the Congress's goal of ensuring ``that enhanced protections are provided to consumers who are most vulnerable to abuse.'' \42\

\42\ H.R. Conf. Rept. 103-652 at 159 (Aug. 2, 1994).

The Board notes that proposed Sec. 226.38(c) would require creditors to provide consumers with the maximum possible interest rate and payment within three business days after the consumer applies for an ARM or a loan in which payments may vary. See discussion of Sec. 226.38(c). Consumer testing indicated that consumers find this information very useful when provided in the context of an actual loan offer, in contrast to the information for a hypothetical loan amount in relation to an historical interest rate or the interest rate or for a recently originated loan, as required by TILA Section 128(a)(14).

In addition to removing Sec. 226.19(b)(2)(viii), the proposed rule would remove the related requirement under Sec. 226.19(b)(2)(ix) that creditors explain how a consumer may calculate payments for the consumer's loan amount based on either the initial interest rate used to calculate the maximum interest rate and payment disclosure or the most recent payment shown in the historical example. The proposed rule also would eliminate commentary on Sec. 226.19(b)(2)(viii) and (ix).

Further, the proposed rule would eliminate comment 19(b)(2)-2(i)(I), which provides that if a loan feature must be taken into account in preparing the historical example of payment and loan balance movements required by Sec. 226.19(b)(2)(viii), variable-rate loans that differ as to that feature constitute separate loan programs under Sec. 226.19(b)(2).

Amendments to other regulations and comments. Comment 19(b)-1 currently provides that in an assumption of an adjustable-rate mortgage transaction secured by the consumer's principal dwelling with a term greater than one year, disclosures need not be provided under

Sec. Sec. 226.18(f)(2)(ii) or 226.19(b). Comment 19(b)-2(iv) currently provides that in cases where an open-end credit account will convert to a closed-end transaction subject to Sec. 226.19(b), the creditor must provide the disclosures required by Sec. 226.19(b). The proposed rule would integrate the foregoing commentary into Sec. 226.19(b). Proposed

Sec. 226.19(b) would apply to all closed-end mortgage transactions secured by real property or a dwelling regardless of loan security or term, however, as discussed above.

The proposed rule would not require program disclosures to contain an explanation of how payments will be determined, a disclosure that creditors must make under existing Sec. 226.19(b)(2)(iii). In general, consumer testing participants preferred to receive specific information about the amount of the payments they would have to make, which generally is not available at the time the consumer submits a loan application. Most participants found model loan program disclosures based on current requirements to be confusing because they contained complex terminology. Participants responded much more positively to revised model disclosures, which did not discuss technical issues about how payments are determined. If a creditor chooses to include an explanation of how payments will be determined, the explanation must be disclosed apart from the segregated disclosures that proposed Sec. 226.19(b) requires, as a general rule under proposed Sec. 226.37(a)(2), discussed below.

Footnote 45a to Sec. 226.19(b) currently states that creditors may substitute information provided in accordance with variable-rate regulations of other federal agencies for the disclosures required by

Sec. 226.19(b). The proposed rule would remove and reserve that footnote and comment 19(b)-4. The footnote was designed to account for the fact that disclosure rules for variable-rate loans issued by HUD, the Federal Home Loan Bank Board, and the Office of the Comptroller of the Currency (OCC) were in effect when the Board adopted Sec. 226.19(b). No comprehensive disclosure requirements for variable-rate loans currently are in effect under the rules of HUD, the OCC, or the

Office of Thrift Supervision (OTS), the successor agency to the FHLBB.

No such requirements are in effect under the rules of the Federal

Deposit Insurance Corporation (FDIC) or the National Credit Union

Administration (NCUA) either. Moreover, HUD and the OTS have incorporated the disclosure requirements for variable-rate loans under

TILA and Regulation Z into their own regulations by cross- reference.\43\ Accordingly, footnote 45a no longer appears to be necessary. The Board requests comment, however, on whether there are potential inconsistencies between any ARM loan disclosures required by other federal financial institution supervisory agencies that

Regulation Z should specifically address.

\43\ See 24 CFR 203.49(g) (HUD); 12 CFR 560.210 (OTS). Some of those agencies have issued regulations that apply to adjustable rate mortgages. See, e.g., 12 CFR 34.22 (OCC) (requiring that an index specified in a national bank's loan documents for an ARM subject to

Sec. 226.19(b) be readily available to and verifiable by a borrower and beyond the bank's control). Those requirements do not establish comprehensive disclosure requirements, however.

Comment 19(b)-5 currently states that creditors must provide disclosures under Sec. 226.19(b) for certain renewable balloon- payment, preferred-rate, and price-level adjusted mortgages with a fixed interest rate, if they are secured by a dwelling and have a term greater than one year. However, such mortgages lack most of the adjustable interest rate and payment features required to be disclosed under proposed Sec. 226.19(b)(1). For example, the frequency of rate and payment changes for a preferred-rate loan with a fixed interest rate likely cannot be known because the loss of the preferred rate is based on factors other than a formula or a change in the value of an index. Accordingly, under the proposed rule creditors would not be required to provide ARM loan program disclosures under Sec. 226.19(b) for such mortgages. Creditors would be required to provide ARM loan program disclosures for such mortgages if their interest rate is adjustable, however. Cross-references in comment 19(b)-5 would be updated and the comment would be redesignated as comment 19(b)-3 under the proposed rule.

Existing comment 19(b)(2)-2(i) provides examples of particular loan features that distinguish separate loan programs. That commentary would be redesignated as comment 19(b)-5(i) but generally would be unchanged under the proposal, with one exception. Differences among rules relating to loan balance changes would be removed as an example of a particular loan feature that distinguishes separate loan programs.

However, differences in the possibility of negative amortization would continue to distinguish separate loan programs, as discussed above.

Also, existing comment 19(b)(2)(vii)-2(i) on disclosing a negative amortization feature would be redesignated as comment 19(b)-5 under the proposal.

The requirement to provide loan program disclosures for each loan program in which a consumer expresses an interest generally would remain unchanged. However, comment 19(b)(2)-4 would be revised to state that a creditor ``must describe''--rather than

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``must fully describe''--an ARM loan program. The proposal would reduce some of the material that creditors must disclose about ARM loan programs to highlight information that is most important to consumers, as discussed above.

Use of term ``Adjustable-Rate Mortgage'' or ``ARM.'' Proposed Sec. 226.19(b) requires the creditor to disclose the heading ``Adjustable-

Rate Mortgage'' or ``ARM.'' Participants in the Board's consumer testing showed greater familiarity with the term ``adjustable-rate mortgage'' than with ``variable-rate mortgage.'' Format requirements in proposed Sec. 226.19(b)(4)(iii) state that the statement must be more conspicuous than, and must precede, the other disclosures required by

Sec. 226.19(b) and must be located outside of the tables required by proposed Sec. 226.19(b)(4)(iv). Finally, proposed Sec. 226.19(b)(4)(iii) states that creditors may make the ``Adjustable-Rate

Mortgage'' or ``ARM'' disclosure in a heading that states the name of the creditor and the name of the loan program, such as ``ABC Bank 3/1

Adjustable Rate Mortgage.'' 19(b)(1) Interest Rate and Payment Disclosures

Proposed Sec. 226.19(b)(1) requires the creditor to disclose the following information, as applicable, grouped together under the heading ``Interest Rate and Payment,'' using that term: (1) The introductory period, (2) the frequency of the rate and payment change,

(3) the index, (4) the limit on rate changes, (5) the conversion feature, and (6) the preferred rate.

Introductory period. Proposed Sec. 226.19(b)(1)(i) requires the creditor to disclose the period during which the interest rate or payment remains fixed and a statement that the interest rate may vary or the payment may increase after that period. This disclosure is similar to that required under existing Sec. 226.19(b)(2)(i). Proposed

Sec. 226.19(b)(1)(i) also requires the creditor to provide an explanation of the effect on the interest rate of having an initial interest rate that is not determined using the index or formula that applies for interest rate adjustments, that is, of having a discounted or premium interest rate. This disclosure requirement is similar to that required under existing Sec. 226.19(b)(2)(v). However, the proposed rule would eliminate the requirement that ARM loan program disclosures state that the consumer should ask about the amount of the interest rate discount.

Frequency of rate and payment change. Proposed Sec. 226.19(b)(1)(ii) requires the creditor to disclose the frequency of interest rate and payment changes, as currently is required under Sec. 226.19(b)(2)(vi).

Index. Proposed Sec. 226.19(b)(1)(iii) requires the creditor to disclose the index or formula used in making adjustments and a source of information about the index or formula. Proposed Sec. 226.19(b)(1)(iii) also requires the creditor to provide an explanation of how the interest rate will be determined, including an explanation of how the index is adjusted, such as by the addition of a margin.

Those requirements are contained in existing Sec. 226.19(b)(2)(ii) and

(iii). However, the proposed rule eliminates Sec. 226.19(b)(2)(iv), which requires the creditor to disclose that the consumer should ask about the current margin value and current interest rate.

Limit on rate changes. Currently, requirements for disclosing interest rate or payment limitations and carryover are contained in existing Sec. 226.19(b)(2)(vii). The proposed rule would retain these requirements, under proposed Sec. 226.19(b)(1)(iv). (Existing Sec. 226.19(b)(2)(vii) also contains a requirement to disclose negative amortization. The proposed rule would retain that requirement as proposed Sec. 226.19(b)(2)(ii)(B), as discussed below.)

Conversion feature. Existing comment 19(b)(2)(vii)-3 provides that if a loan program permits consumers to convert a variable-rate loan to a fixed-rate loan, the creditor must disclose that the fixed interest rate after conversion may be higher than the adjustable interest rate before conversion. Comment 19(b)(2)(vii)-3 further provides that the creditor must disclose any limitations on the period during which the loan may be converted, a statement that conversion fees may be charged, and any interest rate and payment limitations that apply if the consumer exercises the conversion option. The proposed rule would integrate this commentary into proposed Sec. 226.19(b)(1)(v).

Preferred rate. Currently, if the variable-rate mortgage transaction is a preferred-rate loan, the creditor must disclose any event that would allow the creditor to increase the interest rate, for example, upon the termination of the consumer's employment with the creditor, whether voluntary or involuntary. See comment 19(b)(2)(vii)- 4. The creditor also must disclose that fees may be charged when the preferred rate no longer is in effect, if applicable. The Board proposes to retain these requirements in proposed Sec. 226.19(b)(1)(vi). 19(b)(2) Key Questions About Risk

Currently, TILA Section 128(a)(14), 15 U.S.C. 1638(a)(14), and

Sec. 226.19(b)(2), require the creditor to disclose only certain information about certain adjustable-rate mortgage features early in the mortgage application process. The Board believes, however, that the consumer should be aware early in the process of other risky features, in addition to adjustable-rate features. For this reason, the Board proposes to require ``Key Question'' disclosures several times during the process to allow consumers to become aware of and track potentially risky features of their loan. Consumer testing and document design principles suggest that keeping language and design elements consistent between forms improves consumers' ability to identify and track any changes in the information being disclosed. As discussed more fully below, proposed Sec. 226.19(c)(1) would require the creditor to provide a Board publication entitled ``Key Questions to Ask about Your

Mortgage'' at the time an application form is provided to the consumer or before the consumer pays a non-refundable fee, whichever is earlier.

The content of this disclosure would be published by the Board and would address important terms related to any type of mortgage, whether fixed-rate or adjustable-rate. At the same time, if the consumer expresses an interest in an ARM loan program, proposed Sec. 226.19(b)(2) would require the creditor to disclose the ``Key Questions about Risk'' as part of the ARM loan program disclosure. These ``Key

Questions'' would be tailored to the specific ARM loan program in which the consumer has expressed an interest. Subsequently, within three days of the creditor receiving the consumer's application for a specific loan program, proposed Sec. 226.38(d) would require the creditor to make a similar disclosure of ``Key Questions about Risk'' in the transaction-specific TILA disclosure. The list of the ``Key Questions about Risk'' for the transaction-specific TILA disclosure required under proposed Sec. 226.38(d) would be the same as that required for the ARM loan program disclosure under proposed Sec. 226.19(b)(2), but the information in the TILA disclosure would be specific to the loan program for which the consumer applied and would apply to fixed-rate or adjustable-rate loan programs. The Board believes that consistently using the ``Key Questions'' terminology would enhance consumers' ability to identify, review, and understand the disclosed terms across all disclosures, and,

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therefore, avoid the uninformed use of credit.

Key questions about risk. As discussed above, current Sec. 226.19(b)(2) requires the creditor to disclose over 12 loan features.

Consumer testing showed that the current format for these disclosures was very difficult for participants to understand. In addition, because the content was so general, participants felt the current disclosure would not help them shop for a mortgage. Therefore, the Board proposes to replace existing Sec. 226.19(b)(2) with a new streamlined ARM loan program disclosure that would contain key information specific to that loan program. The proposed rule would require creditors to disclose certain information grouped together under the heading ``Key Questions about Risk,'' using that term, to draw the consumer's attention to information about the potential adverse impact that certain loan features could have on the consumer's ability to repay the loan.

Proposed Sec. 226.19(b)(2)(i) requires the creditor to always disclose information about the following three terms: (1) Rate increases, (2) payment increases, and (3) prepayment penalties. Proposed Sec. 226.19(b)(2)(ii) would require the creditor to disclose information about the following six terms, but only if they are applicable to the loan program: (1) Interest-only payments, (2) negative amortization,

(3) balloon payment, (4) demand feature, (5) no-documentation or low- documentation loans, and (6) shared-equity or shared-appreciation. The

``Key Questions about Risk'' disclosure would be subject to special format requirements, including a tabular format and a question and answer format, as described under proposed Sec. 226.19(b)(4). The

Board believes it is critical that consumers be alerted to certain risk factors before they have applied for an ARM, so that they can decide whether they want a loan with those terms. The Board solicits comment on whether there are other risk factors that loan program disclosures or publications should identify.

Required disclosures. As noted above, proposed Sec. 226.19(b)(2)(i) requires the creditor to disclose information about the following three terms: (1) Rate increases, (2) payment increases, and

(3) prepayment penalties. The Board believes that these three factors should always be disclosed. Rate and payment increases pose the most direct risk of payment shock. In addition, consumer testing showed that interest rate and monthly payment were by far the two most common terms that participants used to shop for a mortgage. The Board also believes that the prepayment penalty is a key risk factor because it is critical to the consumer's ability sell the home or to refinance the loan to obtain a lower rate and payments. While the other risk factors are important, those factors are only required to be disclosed as applicable to avoid information overload.

Rate and payment increases. With respect to rate increases, proposed Sec. 226.19(b)(2)(i)(A) would require the creditor to disclose a statement that the interest rate on the loan may increase, along with a statement indicating when the first rate increase may occur and the frequency with which the interest rate may increase. With respect to payment increases, proposed Sec. 226.19(b)(2)(i)(B) would require the creditor to disclose a statement indicating whether or not the periodic payment on the loan may increase. If the periodic payment on the loan may increase, then the creditor would disclose a statement indicating when the first payment may increase. For payment option loans, if the periodic payment may increase, the creditor would disclose a statement indicating when the first minimum payment would increase. Proposed comment 19(b)(2)(i)-1 would clarify that the requirement to disclose when the first rate or payment increase may occur refers to the time period in which the increase may occur, not the exact calendar date. For example, the disclosure may state, ``Your interest rate may increase at the end of the 3-year introductory period.''

Prepayment penalties. If the obligation includes a finance charge computed from time to time by application of a rate to the unpaid principal balance, proposed Sec. 226.19(b)(2)(i)(C) would require the creditor to disclose a statement indicating whether or not a penalty could be imposed if the obligation is prepaid in full. If the creditor could impose a prepayment penalty, the creditor would disclose the circumstances under which and the period in which the creditor could impose the penalty. Because of the importance of prepayment penalties, the proposed rule would also require disclosure of this feature under proposed Sec. 226.38(a)(5). To avoid duplication, proposed comments 19(b)(2)(i)(C)-1 to -3 cross-reference proposed comments 38(a)(5)-1 to

-3 for information about whether there is a prepayment penalty and examples of charges that are or are not prepayment penalties.

Some consumers take out ARM loans planning to refinance or sell the home securing the loan before the rate or payment increases. Consumer testing showed that while most participants understood the general meaning of the phrase ``prepayment penalty,'' they did not realize that the penalty would apply if they refinanced their loan or sold their home. The Board believes it is important for consumers to understand that a prepayment penalty may be imposed in various circumstances, including paying off the loan, refinancing, or selling the home early.

Additional disclosures. As noted above, proposed Sec. 226.19(b)(2)(ii) requires the creditor to disclose information about the following six terms, as applicable: (1) Interest-only payments, (2) negative amortization, (3) balloon payment, (4) demand feature, (5) no- documentation or low-documentation loans, and (6) shared-equity or shared-appreciation. The Board proposes to require these disclosures only when the feature is present, in contrast to the required disclosures of proposed Sec. 226.19(b)(2)(i). Proposed comment 19(b)(2)(ii)-1 would clarify that ``as applicable'' means that any disclosure not relevant to a particular ARM loan program may be omitted. Although consumer testing showed that some participants felt reassured by seeing all of the risk factors whether they were a feature of the loan or not, the Board is concerned about the potential for information overload if the entire list is included on every ARM loan program disclosure.

Interest-only payments. Proposed Sec. 226.19(b)(2)(ii)(A) requires the creditor to disclose a statement that periodic payments will be applied only toward interest on the loan. The creditor would also disclose a statement of any limitation on the number of periodic payments that will be applied only toward interest on the loan and not towards the principal, that such payments will cover the interest owed each month, but none of the principal, and that making these periodic payments means the loan amount will stay the same and the consumer will not have paid any of the loan amount. For payment option loans, the creditor would disclose a statement that the loan gives the consumer the choice to make periodic payments that cover the interest owed each month, but none of the principal, and that making these periodic payments means the loan amount will stay the same and the consumer will not have paid any of the loan amount. Consumer testing showed that many participants did not understand that there are loans where the periodic payments do not pay down the mortgage principal. The Board believes it is important to alert

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consumers to this feature in order to avoid payment shock when the principal becomes due or the periodic payment increases.

Negative amortization. Proposed Sec. 226.19(b)(2)(ii)(B) would require the creditor to disclose a statement that the loan balance may increase even if the consumer makes the required periodic payments. In addition, the creditor would disclose a statement that the minimum payment covers only a part of the interest the consumer owes each period and none of the principal, that the unpaid interest will be added to the consumer's loan amount, and that over time this will increase the total amount the consumer is borrowing and cause the consumer to lose equity in the home. The proposed requirement would replace existing Sec. 226.19(b)(2)(vii), which requires the creditor to disclose any rules relating to changes in the outstanding loan balance, including an explanation of negative amortization. The Board believes that information regarding negative amortization should be disclosed because it is a complicated feature that significantly impacts a consumer's ability to repay the loan. Consumer testing showed that participants were generally unfamiliar with the term or concept.

However, participants generally understood the revised transaction- specific plain-language explanation of negative amortization's causes and effects when disclosed in the ``Key Questions'' format.

Balloon payment. Proposed Sec. 226.19(b)(2)(ii)(C) requires the creditor to disclose a statement that the consumer will owe a balloon payment, along with a statement of when it will be due. Proposed comment 19(b)(2)(ii)(C)-1 would clarify that the creditor must make this disclosure if the loan program includes a payment schedule with regular periodic payments that when aggregated do not fully amortize the outstanding principal balance. Proposed comment 19(b)(2)(ii)(C)-2 would clarify that the requirement to disclose when the balloon payment is due refers to the time period when it is due, not the exact calendar date. For example, the disclosure may state, ``You would owe a balloon payment due in seven years.'' The Board believes it is important for the consumer to be aware early in the process of any potential payment shock.

Demand feature. Proposed Sec. 226.19(b)(2)(ii)(D) would require the creditor to disclose a statement that the creditor may demand full repayment of the loan, along with a statement of the timing of any advance notice the creditor will give the consumer before the creditor exercises such right. Proposed comment Sec. 226.19(b)(2)(ii)(D)-1 would clarify that this requirement would apply not only to transactions payable on demand from the outset, but also to transactions that convert to a demand status after a stated period.

Proposed comments Sec. 226.19(b)(2)(ii)(D)-2 and -3 cross-reference comment 18(i)-2 regarding covered demand features and comment 18(i)-3 regarding the relationship to the payment schedule disclosures. The proposed rule replaces existing Sec. 226.19(b)(2)(x). The Board believes that demand features are rare in consumer mortgage transactions, but pose a considerable risk when present and, therefore, should be brought to the consumer's attention. Consumer testing showed that participants understood the revised language regarding a demand feature and thought it was important information.

No-documentation or low-documentation loans. Proposed Sec. 226.19(b)(2)(ii)(E) would require the creditor to disclose a statement that the consumer's loan could have a higher rate or fees if the consumer does not document employment, income, or other assets. In addition, the creditor would disclose a statement that if the consumer provides more documentation, the consumer could decrease the interest rate or fees. The Board is concerned that consumers who obtain loans with such features may not understand that they may pay a higher price for this feature.

Shared-equity or shared-appreciation. Proposed Sec. 226.19(b)(2)(ii)(F) requires the creditor to disclose a statement that any future equity or appreciation in the real property or dwelling that secures the loan must be shared, along with a statement of the percentage of future equity or appreciation to which the creditor is entitled, and the events that may trigger such an obligation. The Board is aware that a number of shared-equity and shared-appreciation programs are being offered to consumers, including low- and moderate- income borrowers, on various terms. Consumer testing showed that participants were generally unfamiliar with the concept of shared- equity or shared-appreciation. However, to the extent that a shared- equity or a shared-appreciation feature is being offered as one of the loan terms, participants stated that they would want it disclosed clearly and prominently. 19(b)(3) Additional Information and Web Site

Currently, Sec. 226.19(b)(2)(iv) and (v) require the creditor to disclose a statement that consumers should ask the creditor about the current margin value and current interest rate or the amount of any interest rate discount. Existing Sec. 226.19(b)(2)(xii) requires a notice that disclosure forms are available for the creditor's other variable-rate programs. Consumer testing indicated that many consumers skim disclosures quickly and become frustrated if they cannot quickly locate the key information they seek. Reducing the number of non- specific notices in the loan program disclosures would increase the likelihood that consumers will read and understand specific disclosures. Under proposed Sec. 226.19(b)(3), the creditor would be required to disclose that the consumer may visit the Web site of the

Federal Reserve Board for more information about adjustable-rate mortgages and for a list of licensed housing counselors in the consumer's area that can help the consumer understand the risks and benefits of the loan. The Board believes that streamlining the notice will reduce information overload. 19(b)(4) Format Requirements

Proposed Sec. 226.19(b)(4) contains format requirements for ARM loan program disclosures. As discussed more fully in proposed Sec. 226.37, consumer testing showed that the location and order in which information was presented affected consumers' ability to locate and comprehend the information disclosed. Based on these findings, the

Board proposes, under Sec. 226.19(b)(4)(i), to require that creditors disclose the ``Key Questions about Risk'' using the format requirements for similar disclosures required by Sec. 226.38, except as otherwise provided in proposed Sec. 226.19(b)(4). Proposed Sec. 226.19(b)(4)(ii) would require that the disclosures required by paragraphs (b)(1) through (b)(3) be grouped together and placed in a prominent location. Proposed Sec. 226.19(b)(4)(iii) would require that the heading ``Adjustable Rate Mortgage'' or ``ARM'' required under

Sec. 226.19(b) be more conspicuous than and precede the other disclosures. The heading would be required to be outside the tables required under this paragraph. The creditor would be permitted to use a heading with the name of the loan program and the name of the creditor, such as ``XXX Bank 3/1 ARM.'' Proposed Sec. 226.19(b)(4)(viii) would require the disclosure of the Board's Web site and list of licensed housing counselors to be disclosed outside of the required tables described below.

Proposed Sec. 226.19(b)(4)(iv) to (vii) would require the following special formats for the ARM loan program

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disclosure: tabular format, question and answer format, highlighted answers, and special order of disclosures. Proposed Sec. 226.19(b)(4)(iv) would require the creditor to provide the interest rate disclosure required under Sec. 226.19(b)(1) and the ``Key

Questions about Risk'' disclosure required under Sec. 226.19(b)(2) in the form of two tables with headings, content and format substantially similar to Model Form H-4(B) in Appendix H. Consumer testing showed that using a tabular format improved participants' ability to readily identify and understand key information. Only the information required or permitted by paragraphs (b)(1) and (b)(2) would be in this table. In addition, under Sec. 226.19(b)(4)(v), the ``Key Questions about Risk'' disclosures would be required to be grouped together and presented in the format of a question and answer in a manner substantially similar to Model Form H-4(B) in Appendix H. The table with interest rate information would precede the table with the ``Key Questions about

Risk.'' Consumer testing showed that using a question and answer format improved participants' ability to recognize and understand potentially risky or costly features of a loan. Proposed Sec. 226.19(b)(4)(vi) would require the creditor to disclose each affirmative answer in bold text and in all capitalized letters to highlight the fact that a risky feature is present in the loan. Negative answers (required under proposed Sec. 226.19(b)(2)(i) but not under proposed Sec. 226.(b)(2)(ii)) would be disclosed in non-bold text. Finally, proposed

Sec. 226.19(b)(4)(vii) would require the creditor to make the disclosures, as applicable, in the following order: Rate increases under Sec. 226.19(b)(2)(i)(A), payment increases under Sec. 226.19(b)(2)(i)(B), interest-only payments under Sec. 226.19(b)(2)(ii)(A), negative amortization under Sec. 226.19(b)(2)(ii)(B), balloon payments under Sec. 226.19(b)(2)(ii)(C), prepayment penalties under Sec. 226.19(b)(2)(i)(C), demand feature under Sec. 226.19(b)(2)(ii)(D), no-documentation or low-documentation loans under Sec. 226.19(b)(2)(ii)(E), and shared-equity or shared- appreciation under Sec. 226.19(b)(2)(ii)(F). This order would ensure that consumers receive critical information about their payments first.

Model Clauses and Samples are proposed at Appendix H-4(C) through H- 4(F). 19(c) Publications for Transactions Secured by Real Property or a

Dwelling

Based on the results of consumer testing, under the proposal creditors would be required to provide to consumers two Board publications for closed-end transactions secured by real property or a dwelling. The first publication, entitled ``Key Questions to Ask about

Your Mortgage,'' discusses loan terms and conditions that are important for consumers to consider when selecting a closed-end mortgage loan.

The second publication, entitled ``Fixed vs. Adjustable Rate

Mortgages,'' discusses the respective costs and benefits of fixed-rate mortgages and ARMs.

Under existing Sec. 226.19(b)(1), the creditor must provide to the consumer a copy of the CHARM booklet published by the Board, or a suitable substitute. The Board consumer tested the CHARM booklet and a sample current loan program disclosure. Few of the consumer testing participants who had obtained an ARM recalled having seen the CHARM booklet. Although many participants thought that the information in the

CHARM booklet is useful, particularly the descriptions of ``payment shock,'' prepayment penalties, and negative amortization, most participants thought that the CHARM booklet is too long and that they likely would not read it.

The proposed rule would eliminate the requirement under Sec. 226.19(b)(1) for creditors to provide the CHARM booklet to consumers who express interest in an ARM transaction, and instead, under proposed

Sec. 226.38(c)(2) require a brief Board publication showing the principal differences between a fixed-rate loan and an ARM. Comment 19(b)(1)- and -2 on the CHARM booklet would be removed accordingly.

Also, proposed Sec. 226.38(c)(1) would require creditors to provide to all consumers--regardless of whether they express interest in an ARM-- two new single-page Board publications. These new disclosure forms would contain a notice stating where consumers may obtain additional information about ARMs. The Board believes that requiring that creditors provide the ``Key Questions to Ask about Your Mortgage'' publication and the ``Fixed versus Adjustable Rate Mortgages'' publication without modifications would promote consistency in the information consumers receive about ARMs. Accordingly, proposed Sec. 226.19(c) would require creditors to provide this information ``as published.''

The Board proposes to require creditors to provide these publications at the time a consumer is given an application form or pays a non-refundable fee, whichever is earlier, for fixed-rate mortgage loans as well as variable-rate mortgage loans. Special rules for when a consumer accesses an application form electronically and when the creditor receives a consumer's application from an intermediary agent or broker are discussed below. The Board solicits comment on whether there are other loan types for which loan program publications should be given at the time an application form is provided to a consumer or before the consumer pays a non-refundable fee, whichever is earlier. 19(d) Timing of Disclosures

Proposed comment 19(c)-1 states that creditors are not required to provide disclosures under proposed Sec. 226.19(c) in cases where an open-end credit account will convert to a closed-end transaction. The

``Key Questions to Ask About Your Mortgage'' disclosure and the ``Fixed vs. Adjustable Rate Mortgages'' disclosure would not be helpful at that time, because the creditor and consumer already will have entered into a written agreement. By contrast, transaction-specific disclosures are required in such cases under Sec. 226.19(b), both as in effect (see comment 19(b)-2(iv)) and as proposed (see proposed Sec. 226.19(b) and comment 19(b)-2).

Existing Sec. 226.19(b) requires that creditors provide variable- rate loan program disclosures at the time an application form is provided to a consumer or before the consumer pays a non-refundable fee, whichever is earlier. Comment 19(b)-2 currently discusses when a creditor should provide such disclosures in cases where the creditor receives a consumer's application through an intermediary agent or broker or a consumer requests an application by telephone. The comment also clarifies that if the creditor solicits applications by mailing application forms, the creditor must send the ARM loan program disclosures with the application form. Existing Sec. 226.19(c) contains requirements for providing variable-rate loan program disclosures when a consumer accesses an application form electronically. (Section 226.17(a)(1) currently permits creditors to provide the ARM loan program disclosures electronically, without regard to the consumer-consent or other provisions of the Electronic

Signatures in Global and National Commerce Act, 15 U.S.C. 7001 et seq.

(E-Sign Act)).

Under the Board's proposal, timing requirements for ARM loan program disclosures would be consolidated in proposed Sec. 226.19(d).

These timing requirements also would apply to the provision of the proposed new ``Key Questions to Ask About Your Mortgage'' and ``Fixed vs. Adjustable Rate

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Mortgages'' disclosures. Proposed Sec. 226.19(d)(1) contains the general requirement to provide ARM loan program disclosures (if a consumer expresses interest in ARMs) at the time an application form is provided or before the consumer pays a non-refundable fee, whichever is earlier. Proposed Sec. 226.19(d)(1) also specifies that creditors must provide ARM loan program disclosures before charging a fee for obtaining a consumer's credit report.

Proposed Sec. 226.19(d)(2) states that if a consumer accesses an

ARM loan application electronically, a creditor must provide the disclosures in electronic form, except as provided in Sec. 226.19(d)(2). Proposed Sec. 226.19(d)(2), in turn, states that if a consumer who is physically present in a creditor's office accesses an

ARM loan application electronically, the creditor may provide disclosures in either electronic or paper form. These provisions are consistent with existing comment 19(c)-1(i) and (ii). Comment 19(c)-1 on the form of electronic disclosures would be redesignated as comment 19(d)(2)(i)-1. Commentary on the timing of electronic disclosures, currently contained in comment 19(b)-2(v), would be redesignated as comments 19(d)(2)(i)-2 and 19(d)(2)(ii)-1. Further, under the proposed rule existing Sec. 226.17(a) would be revised to include the proposed new Key Questions to Ask About Your Mortgage'' and ``Fixed vs.

Adjustable Rate Mortgages'' disclosures among the disclosures creditors may provide without regard to the consumer-consent or other provisions of the E-Sign Act.

Proposed Sec. 226.19(d)(3) contains rules for applications made by telephone or through an intermediary. These rules are consistent with existing comment 19(b)-2. Existing comments 19(b)-2(i) through -2(iii) are redesignated as comments 19(d)(3)-1 through 19(d)(3)-3. Existing comment 19(b)-2(iii) states that the creditor must include the disclosures required by Sec. 226.19(b) with any application form the creditor sends by mail to solicit consumers. This comment is redesignated as proposed comment 19(d)(3)-3 and revised to cover the

Key Questions and Fixed versus Adjustable Rate Mortgages disclosures required by proposed Sec. 226.19(c).

Proposed Sec. 226.19(d)(4) provides that, where a consumer does not express interest in an ARM until after receiving or accessing an application form or paying a non-refundable fee, the creditor must provide an ARM loan program disclosure(s) within three business days after the consumer expresses such interest to the creditor or the creditor receives notice from an intermediary broker or agent that the consumer has expressed interest in an ARM. This is consistent with existing footnote 45b. Existing comment 19(b)-3 is redesignated as comments 19(d)(3)-1 through 19(d)(3)-3 under the proposed rule.

Proposed Sec. 226.19(d)(5) provides that if the consumer expresses an interest in negotiating loan terms that are not generally offered, the creditor need not provide the disclosures required by Sec. 226.19(b) before an application form is provided. Proposed Sec. 226.19(d)(5) requires that the creditor provide such disclosures as soon as reasonably possible after the terms to be disclosed have been determined and not later than the time the consumer pays a non- refundable fee. Further, proposed Sec. 226.19(d)(5) provides that in all cases the creditor must provide the disclosures required by Sec. 226.19(c) of this section at the time an application form is provided or before the consumer pays a non-refundable fee, including a fee for obtaining a consumer's credit history, whichever is earlier.

Comment 19(b)(2)-1 currently provides that, if ARM loan program disclosures cannot be provided because a consumer expresses an interest in individually negotiating loan terms that the creditor generally does not offer, the creditor may provide disclosures reflecting those terms as soon as reasonably possible after the terms have been decided upon, but not later than the time the consumer pays a non-refundable fee.

Proposed Sec. 226.19(d)(5) incorporates that guidance into the regulation. Further, comment 19(b)(2)-1 provides that if, after an application form is provided or the consumer pays a non-refundable fee, a consumer expresses an interest in an adjustable-mortgage loan program for which the creditor has not provided the ARM loan program disclosures, the creditor must provide such disclosures as soon as reasonably possible. Proposed Sec. 226.19(d)(6) incorporates that guidance into the regulation. The foregoing guidance is removed from comment 19(b)(2)-1 (which the proposed rule would redesignate as comment 19(b)-4) because under the proposed rule timing rules for ARM loan program disclosures are contained in Sec. 226.19(d) rather than

Sec. 226.19(b).

Section 226.20 Subsequent Disclosure Requirements 20(b) Assumptions

Section 226.20(b) currently requires post-consummation disclosures if the creditor expressly agrees in writing with a subsequent consumer to accept that consumer as a primary obligator on an existing residential mortgage transaction. The Board proposes technical changes to Sec. 226.20(b) and associated commentary to reflect the new format and content disclosure requirements for transactions secured by real property or a dwelling under Sec. Sec. 226.37 and 226.38. 20(c) Rate Adjustments

For ARM transactions subject to Sec. 226.19(b), Sec. 226.20(c) currently requires creditors to mail or deliver to consumers a notice of interest rate adjustment at least 25, but no more than 120, calendar days before a payment at a new level is due. Section 226.20(c) also requires creditors to mail or deliver to consumers an adjustment notice at least once each year during which an interest rate adjustment is implemented without an accompanying payment change.

Those adjustment notices must state: (1) The current and prior interest rates for the loan; (2) the index values upon which the current and prior interest rates are based; (3) the extent to which the creditor has foregone any increase in the interest rate; (4) the contractual effects of the adjustment, including the payment due after the adjustment is made, and a statement of the loan balance; and (5) the payment, if different from the payment due after adjustment, that would be required to fully amortize the loan at the new interest rate over the remainder of the loan term. Model clauses in Appendix H-4(H) illustrate how creditors may comply with the requirements of Sec. 226.20(c).

Discussion

The Board adopted the requirements for post-consummation disclosures (subsequent disclosures) in 1987. The minimum advance notice of a rate adjustment was set at 25 days to track the rules of the Office of the Comptroller of the Currency (OCC) and to provide creditors with flexibility in giving adjustment notices for a variety of ARMs. See 52 FR 48665, 48668; Dec. 24, 1987. Since 1987, ARMs have grown in popularity, especially from 2003 to 2007. Beginning in 2007,

ARM growth began to slow as consumers experienced difficulty repaying such loans and concerns grew about the risk of payment shock ARMs pose.

Because ARMs pose the risk of payment shock, it is critical that consumers receive notice of ARM payment changes so they can prepare to make higher payments if necessary. If

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the new payments are unaffordable, borrowers need time to seek a refinance loan with lower payments or make other arrangements. Even if a consumer can afford a higher payment, the consumer may want to refinance into a fixed-rate loan for payment certainty or into another

ARM loan with lower payments. It is particularly important that consumers with subprime loans receive adequate notice before a payment increase, as these borrowers tend to be more vulnerable to payment shock.

The Board believes the current 25-day notice is insufficient to allow many consumers to refinance into a loan with affordable payments or to make other arrangements. In the ``Subprime Mortgage Guidance'' issued in 2007, the Board, the OCC, FDIC, OTS, and NCUA stated that consumers should be given at least 60 days before an ARM adjustment in which to refinance without paying a prepayment penalty. Several consumer advocates who commented on the Board's 2008 HOEPA Final Rule stated that consumers with subprime ARMs may need significant time in which to seek out a refinancing, in some cases as much as 6 months.

The Board's Proposal

The Board proposes to require creditors to mail or deliver a notice of an interest rate adjustment at least 60 days before payment at a new level is due, instead of the current 25-day provision. Creditors would provide notice annually where interest rate changes are made without accompanying payment changes under the proposed. Proposed Sec. 226.20(c)(1)(i) contains timing requirements for circumstances where a payment change accompanies an interest rate adjustment, and proposed

Sec. 226.20(c)(ii) contains timing requirements for circumstances where no payment change accompanies interest rate changes made during a year.

Proposed Sec. 226.20(c)(2) contains content requirements for disclosures required where a payment change accompanies an interest rate adjustment. Proposed Sec. 226.20(c)(3) contains content requirements for disclosures required once each year where no payment change accompanies an interest rate change. Whether or not a payment change is made, under proposed Sec. 226.20(c)(4) creditors would disclose the following information: (1) The date until which the creditor may impose a prepayment penalty if the consumer prepays the obligation in full, if applicable; (2) a phone number the consumer may call to obtain additional information about the loan; and (3) a telephone number and Internet Web site for HUD-licensed housing counselors. Proposed Sec. 226.20(c)(5) contains formatting requirements for discloses required by proposed Sec. 226.20(c).

Section 226.20(c) currently provides that an adjustment to the interest rate with or without a corresponding adjustment to the payment in an adjustable-rate mortgage subject to Sec. 226.19(b) is an event requiring new disclosures to the consumer. The proposed rule would retain this provision. Comment 20(c)-1 provides that the requirements of Sec. 226.20(c) apply where the interest rate and payment change due to the conversion of an adjustable-rate mortgage subject to Sec. 226.19(b) to a fixed-rate mortgage. The proposed rule would incorporate this guidance into proposed Sec. 226.20(c). Further, the proposed rule would revise comment 20(c)-1 for clarity and to remove commentary on timing requirements, because timing requirements are contained in proposed Sec. 226.20(c)(1).

The proposed rule would revise comment 20(c)-2 to clarify that price-level adjusted mortgages and similar mortgages are not subject to the disclosure requirements of Sec. 226.20(c) because they are not subject to the disclosure timing requirements of Sec. 226.19(b), as discussed above. The proposed rule would remove the commentary stating that ``shared-equity'' and ``shared-appreciation'' mortgages are not subject to the disclosure requirements of Sec. 226.20(c) to conform with the removal of reference to such mortgages as examples of variable-rate transactions from comment 17(c)(1)-11 (redesignated as proposed comment 17(c)(1)(iii)-4), as discussed above. Under the proposed rule, whether or not creditors must provide ARM adjustment notices for a shared-equity or shared-appreciation mortgage depends on whether such mortgage has an adjustable rate or a fixed rate. Shared- equity and shared-appreciation mortgages with a fixed rate would not be considered adjustable-rate mortgages under the proposed rule. 20(c)(1) Timing of Disclosures

The Board proposes to require creditors to mail or deliver a notice of an interest rate adjustment for a closed-end ARM at least 60, but no more than 120, days before payment at a new level is due. This proposal is designed to provide borrowers with enough advance notice about an impending rate and payment change to enable them to refinance the loan if they cannot afford the adjusted payment. Even if consumers do not need or want to refinance a loan, they may need time to adjust other spending in order to afford higher mortgage loan payments.

The Board issued the current rule requiring 25 days' notice before a payment at a new level is due in 1987. Home Mortgage Disclosure Act

(HMDA) data for the years 2004 through 2007 suggest that a requirement to provide ARM adjustment 60, rather than 25, days before payment at a new level is due more closely reflects the time needed for consumers to refinance a loan.\44\ In each of those years, for first-lien refinance loans, the period between loan application and origination was 25 days or less for 50 percent of the loans originated, 45 days or less for 75 percent of the loans originated, and 65 days or less for 90 percent of the loans originated. (These data do not include time needed to compare available refinance loans.) Requiring creditors to provide an ARM adjustment notice at least 60 days before payment at a new level is due would better enable consumers to arrange to make a higher payment (if applicable) without missing a payment or paying less than the amount due.

\44\ HMDA data consist of information reported by about 8,600 home lenders, including all of the nation's largest mortgage originators. Reported loans are estimated to represent about 80 percent of all home lending nationwide. Accordingly, HMDA data likely provide a broadly representative view of U.S. home lending.

Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner, The 2007

HMDA Data, 94 Fed. Reserve Bulletin A107 (Dec. 23, 2008).

The Board believes that a 60-day minimum notice requirement is consistent with many existing ARM agreements. For most ARMs, creditors base the calculation of interest rate changes on the value of an index 30 or 45 days prior to the effective date of a rate change (calculation date). Creditors generally refer to the period from the calculation date to the effective date of the interest rate change as the ``look- back period.'' (Interest rate change dates tend to be the first of a month to correspond with payment due dates.) In turn, payment in the new amount is due on the first day of the month following the month in which interest accrued at the new rate.

Thus, for most ARM loans creditors know what the new interest rate and payment will be well before payment at a new level is due, even assuming a week-long lag between publication of an index's level and the creditor's verification of that level. In fact, many creditors mail or deliver notice of an interest rate and payment change 60 or more days before payment at a new level is due.

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However, some ARM agreements may provide for shorter look-back periods. For example, the calculation date for some ARM products is the first business day of the month that precedes the effective date of the interest rate change. The first day of that month may not be a business day, in which case the look-back period would be fewer than 30 days. In addition, it takes time for index levels to be reported and for creditors to confirm the index level and prepare disclosures for delivery or mailing.

Proposed Sec. 226.20(c)(1) requires creditors to provide advance notice of an adjustment at least 60, but no more than 120, days before payment at a new level is due, not before the interest rate changes.

Comment 20(c)-1 would be revised to reflect the increase in the required advance notice of a payment adjustment. Proposed comment 20(c)(1)-1 provides that if an adjustable-rate feature is added when an open-end credit account is converted to an adjustable-rate transaction, creditors must provide disclosures under Sec. 226.20(c)(1) where payments change due to conversion of a transaction subject to Sec. 226.19(b) to a fixed-rate transaction. Because relevant payment changes under existing and proposed Sec. 226.20(c) are those due to interest changes, proposed comment 20(c)(1)-2 clarifies that payment changes due to adjustments in property tax obligations or premiums for mortgage- related insurance do not trigger requirements to disclose interest rate and payment adjustments.

The Board solicits comment on the operational changes creditors and servicers would need to make to provide disclosures at least 60 days before payment at a new level is due. Are there indices that are published at times that would make compliance with such a rule difficult? Are reported levels for particular indices difficult to confirm within a few days? The Board requests comment on whether requiring creditors to provide 45, rather than 60, days' advance notice of a payment change better balance concerns about providing sufficient notice to consumers and sufficient time for creditors to verify reported indices and prepare disclosures.

A look-back period of 45 days likely provides ample time for a creditor to determine a loan's new interest rate and provide disclosures at least 60 days before payment at a new level is due, as discussed above. Are there reasons why a look-back period of forty-five days is not feasible for certain loan types for which a shorter look- back period is common, for example, subordinate-lien loans? Also, where an interest rate and payment adjustment is due to the conversion of an adjustable-rate mortgage to a fixed-rate mortgage under a written agreement, should creditors continue to be required to provide an adjustment notice at least 25, rather than at least 60, days before payment at a new level is due?

Coverage. Section 226.20(c) currently applies to transactions subject to Sec. 226.19(b), which applies to closed-end ARMs secured by a consumer's principal dwelling with a term greater than one year. The

Board is proposing to apply Sec. 226.19(b) to all closed-end ARMs secured by real property or a dwelling, as discussed above. Proposed

Sec. 226.20(c) would apply to the same category of transactions.

The Board recognizes that currently creditors need not provide ARM adjustment notices under existing Sec. 226.20(c) for a short-term transaction, such as a construction loan, with an adjustable rate. The

Board solicits comment on whether a 60-day notice period is appropriate for such loans and if not, what period would be appropriate and still provide consumers sufficient notice of a payment change.

Existing ARM loan agreements. The Board is aware that some ARM loan agreements may provide for a look-back period that is too short for the creditor to be able to provide an adjustment notice at least 60 days before payment at a new level is due. The Board seeks comment on the number or proportion of existing ARM loan agreements under which creditors or servicers could not comply with a minimum 60-day advance notice requirement. 20(c)(2)(i)

Where a payment change accompanies an interest rate change, proposed Sec. 226.20(c)(2)(i) requires creditors to disclose a statement that changes are being made to the interest rate and the date such change is effective. Proposed Sec. 226.20(c)(2)(i) also requires creditors to state that more detailed information is available in the loan agreements. Proposed Sec. 226.20(c)(5)(ii) requires that these disclosures appear before the other required disclosures, as discussed below. 20(c)(2)(ii)

Proposed Sec. 226.20(c)(2)(ii) requires creditors to provide the following disclosures for covered loans in the form of a table: (1) The current and new interest rates; (2) if payments are interest-only or negatively amortizing, the amount of the current and new payment allocated to pay interest, principal, and property taxes and mortgage- related insurance, as applicable; and (3) the current and new periodic payment amounts and the due date for the first new payment. This content is substantially similar to the content of the ``Payment

Summary'' table in the TILA disclosures provided before consummation for most types of ARMs. (Under proposed Sec. 226.38, the ``Payment

Summary'' table for negatively amortizing ARMs differs from the

``Payment Summary'' table for other ARMs, as discussed below.) Under proposed Sec. 226.20(c)(5)(iii), this table would have to contain headings, content, and format substantially similar to those in

Appendix H-4(G), as discussed below.

Currently, ARM adjustment notices need not state how payments are allocated among principal, interest, and escrow accounts. The Board believes that a table showing payment allocations would benefit consumers with interest-only or negatively amortizing loans.

Participants in the Board's consumer testing generally understood a sample form with a table showing the transition from interest-only payments to payments of both principal and interest. Further, all participants correctly identified the new payment and the due date of the first payment at the new level shown in the table. Almost all participants recognized the increase in the interest rate and amounts escrowed for taxes and property-related insurance and that part of the new payment would be allocated to pay principal.

Comment 20(c)(1)-1 on disclosing ``current'' and ``prior'' interest rates would be revised for clarity to refer instead to ``current'' and

``new'' interest rates. Under the proposed rule, Sec. 226.20(c)(3) contains content requirements for annual notice disclosures and Sec. 226.20(c)(2) contains content requirements for payment change notices.

Accordingly, commentary on disclosure where no payment change has occurred during a year would be removed from comment 20(c)(1)-1. 20(c)(2)(iii)

Creditors currently must disclose the index values upon which the prior and new interest rates are based, under existing Sec. 226.19(c)(2). Some consumer testing participants had difficulty understanding the relationship among an index, a margin, and an interest rate. Accordingly, proposed Sec. 226.20(c)(2)(iii) substitutes a requirement that disclosures contain a description of the change in the index or formula for the disclosure required under existing Sec. 226.20(c)(2). For example, rather than

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disclose that payments previously were based on a 1-year LIBOR rate of 3.75 and now would be based on a new rate of 5.75, a creditor might disclose the following: ``Your interest rate will change due to an increase in the 1-year LIBOR index.'' Further, proposed Sec. 226.20(c)(2)(iii) requires creditors to disclose any application of previously foregone increases together with the description of the change in the index or formula.

A simple statement of the occurrence that caused the interest rate and payment to change likely conveys a level of information suitable for most consumers' needs. In consumer testing conducted for the Board, participants indicated that they found explanations of interest rates difficult to follow. Thus, providing more information would likely result in information overload. Consumers who prefer more information can review the loan agreement to determine the interaction between the interest rate and the index and margin or to learn more about the formula used to determine the interest rate. The loan agreement also will contain information about how the creditor may apply previously foregone interest. For these reasons, proposed Sec. 226.20(c)(2)(ii) does not require creditors to disclose the current and prior index values. Comment 20(c)(2)-1 would be removed accordingly.

Comment 20(c)(4)-1, which discusses the types of contractual effects Sec. 226.20(c) requires creditors to disclose--for example, effects on the loan term and balance--also would be removed under the proposed rule. Proposed comments 20(c)(2)(vi)-2, 20(c)(2)(vii)-1, and 20(c)(3)(v)-1 reflect the removed commentary, however. 20(c)(2)(iv)

Existing Sec. 226.20(c)(3) requires that a creditor disclose the extent to which the creditor has foregone any increase in the interest rate. This requirement would be redesignated as proposed Sec. 226.20(c)(2)(iv). Further, proposed Sec. 226.20(c)(iv) would require creditors to disclose the earliest date a creditor may apply foregone interest to future adjustments, subject to any rate caps. Proposed comment 20(c)(3)(iv)-1 states that creditors may rely on proposed comment 20(c)(2)(iv)-1 in determining to which transactions the requirement to disclose foregone interest applies and how to disclose such increases. Proposed comment 20(c)(3)(iv)-1 clarifies that creditors need not disclose the earliest date the creditor may apply foregone interest in notices provided annually when no payment change occurs during a year. 20(c)(2)(v)

Proposed Sec. 226.20(c)(2)(v) would require creditors to disclose limits on interest rate or payment increases at each adjustment, if any, and the maximum interest rate or payment over the life of the loan. This is consistent with the disclosure of rate change limits in the ``More Information about Your Payments'' section of the disclosures provided within three business days of application. See proposed Sec. 226.38(e). 20(c)(2)(vi)

Currently, where the required loan payment is different from the payment disclosed under Sec. 226.20(c)(4), Sec. 226.20(c)(5) requires a creditor to disclose the payment required to fully amortize the loan over the remainder of the loan term. This requirement would be redesignated as proposed Sec. 226.20(c)(2)(vi). Further, in all cases creditors would disclose a statement regarding whether or not part of the new payment will be allocated to pay the loan principal. This is consistent with the focus on the impact of loan payments on loan principal in the proposed new ``Key Questions'' disclosure in Sec. 226.19(c) and the ``Key Questions about Risk'' section of the disclosure creditors provide within three business days of application in proposed Sec. 226.38(d).

Existing comment 20(c)(5)-1, on fully amortizing payments, would be redesignated as comment 20(c)(2)(vi)-1. The comment also would be revised for clarity and to update cross-references. Consistent with existing comment 20(c)(4)-1, proposed comment 20(c)(2)(vi)-2 clarifies that the creditor must disclose any change in the term or maturity of the loan if the change resulted from the rate adjustment. 20(c)(2)(vii)

Existing Sec. 226.20(c)(4) requires creditors to disclose the loan balance. This requirement would be redesignated as proposed Sec. 226.20(c)(2)(vii) and would require creditors to disclose the loan balance as of the effective date of the interest rate adjustment.

Proposed comment 20(c)(2)(vii)-1 clarifies that the balance required to be disclosed is the balance on which the new adjusted payment is based.

This is consistent with existing comment 20(c)(4)-1. 20(c)(3) Content of Annual Interest Rate Notice

Existing Sec. 226.20(c) requires creditors to provide ARM adjustment notices at least once each year during which an interest rate adjustment is implemented without an accompanying payment change.

This requirement would be redesignated as proposed Sec. 226.20(c)(3).

Currently, Sec. 226.20(c) contains a single list of required disclosures creditors must provide as applicable, in a payment change notice and an annual notice of interest rate changes without payment changes. Proposed Sec. 226.20(c)(3) specifies the disclosures that are applicable for purposes of annual notices. 20(c)(3)(i)

Under proposed Sec. 226.20(c)(3)(i), where no payment adjustment has been made during a year, the creditor must disclose that the interest rate on the loan has changed without changing the payments the consumer must make. Further, proposed Sec. 226.20(c)(3)(i) requires creditors to disclose the specific time period for which the annual notice discloses interest rates that were not accompanied by payment changes. Proposed Sec. 226.20(c)(5)(ii) requires that this disclosure appear before the other required disclosures, as discussed below. 20(c)(3)(ii)

Under proposed Sec. 226.20(c)(3)(ii), a creditor must disclose the highest and lowest interest rates applied during the year in which no payment change has accompanied interest rate changes. Creditors would not disclose all interest rates applied to a transaction if the payment has not changed. By contrast, existing comment 20(c)-1 provides that creditors either may disclose all interest rates that applied or the highest and lowest rates. The Board believes that a simple and clear disclosure of the highest and lowest interest rates applied better conveys to consumers the impact of interest rate changes than does a list of all of the interest rates applied. This is especially true where interest rates change more frequently than monthly. 20(c)(3)(iii)

Creditors disclose the extent to which the creditor has foregone any increase in the interest rate under existing Sec. 226.20(c)(3).

This requirement would be contained in proposed Sec. 226.20(c)(3)(iii) for notices where payment changes do not accompany interest rate changes made during a year. 20(c)(3)(iv)

Proposed Sec. 226.20(c)(3)(iv) requires creditors to disclose the maximum interest rate that may apply over the life of the loan. This is consistent with the disclosure of rate change limits in the ``More

Information about Your Payments'' section of the disclosures

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provided within three business days of application in proposed Sec. 226.38(e). 20(c)(3)(v)

Existing Sec. 226.20(c)(4) requires creditors to disclose the loan balance. Under the proposal, this requirement would be contained in proposed Sec. 226.20(c)(3)(v) for purposes of annual notices where payment changes do not accompany interest rate changes. Creditors would disclose the loan balance as of the last date of the year covered by the disclosure. Proposed comment 20(c)(3)(v)-1 clarifies that the balance required to be disclosed is the balance on which the new adjusted payment is based. This is consistent with existing comment 20(c)(4)-1. 20(c)(4) Additional Information

Proposed Sec. 226.20(c)(4) requires that ARM adjustment notices creditors provide information about prepayment penalties, contacting the creditor, and locating housing counseling resources. Proposed Sec. 226.20(c)(5)(ii) requires that these additional disclosures be located directly below the required interest rate disclosures, as discussed below. 20(c)(4)(i)

Proposed Sec. 226.20(c)(4)(i) requires creditors to disclose the last date the creditor may impose a penalty if the consumer prepays the obligation in full and the amount of the maximum penalty possible before that date, if applicable. Under proposed Sec. 226.20(c)(4)(i), if an ARM has a prepayment penalty, the creditor must disclose the required information whether or not a payment change accompanies the interest rate change. The Board believes that disclosures regarding a prepayment penalty would assist consumers in determining when to seek a refinance loan. When presented with a sample ARM adjustment notice for a loan with a prepayment penalty, almost all consumer testing participants recognized that a prepayment penalty would apply if they obtained a refinance loan before a specified date.

Proposed Sec. 226.20(c)(4)(i) provides that the creditor shall disclose the maximum prepayment penalty possible if the consumer prepays in full between the date the creditor delivers or mails the ARM adjustment notice and the last day the creditor may impose the penalty.

The Board requests comment on whether creditors should determine the maximum prepayment penalty during some other period, for example between the date the creditor prepares the ARM adjustment notice and the last day the creditor may impose the penalty. 20(c)(4)(ii)

Proposed Sec. 226.20(c)(4)(ii) requires creditors to disclose a phone number to call for additional information about the consumer's loan. Creditors must provide this information whether or not a payment change accompanies an interest rate change, under the proposed rule.

Most consumer testing participants responded positively to tested disclosures stating how to contact their lender with questions and stated that they would call their lender if they realized they were unable to afford higher payments on an ARM. 20(c)(4)(iii)

Proposed Sec. 226.20(c)(4)(iii) requires creditors to disclose a phone number and an Internet Web site consumers may use to obtain a list of HUD-licensed housing counselors. The proposed rule requires creditors to provide this disclosure whether or not a payment change accompanies an interest rate change. Most consumer testing participants thought that information about how to locate a HUD-licensed housing counselor would be useful to consumers. Some said that they would use the information themselves if they had difficulty affording payments. 20(c)(5) Format of Disclosures 20(c)(5)(i)

Proposed Sec. 226.20(c)(5)(i) requires that the heading, content, and format of the disclosures required by Sec. 226.20(c) be substantially similar to the heading, content, and format of the model form in Appendix H-4(G), where an interest rate adjustment is accompanied by a payment change, or the model form in Appendix H-4(K), where a creditor provides an annual notice of interest rate adjustments without an accompanying payment change. Proposed Sec. 226.20(c)(5)(i) also requires that the disclosures required by Sec. 226.20(c) be placed in a prominent location. (Comment 37(d)-1 states that disclosures meet the prominent location standard if they are located on the first page and on the front side of the disclosure statement.)

Further, under proposed Sec. 226.20(c)(5)(i) the interest rate disclosures required by Sec. 226.20(c)(2) (where a payment change accompanies an interest rate change) or Sec. 226.20(c)(3) (where no payment change occurs during a year) must be grouped together with the additional disclosures on prepayment penalties, contacting the creditor or servicer for loan information, and locating housing counseling resources required by proposed Sec. 226.20(c)(4). These grouped disclosures must be segregated from everything else. 20(c)(5)(ii)

Under proposed Sec. 226.20(c)(5)(ii), the statement that changes are being made to the interest rate and payments (under proposed Sec. 226.20(c)(2)(i)) or that the interest rate has changed without accompanying payments changes (under proposed Sec. 226.20(c)(3)(i)) must precede the other required disclosures. The additional disclosures on information on prepayment penalties, contacting the creditor, and housing counseling resources required by proposed Sec. 226.20(c)(4) must follow the interest rate disclosures, under proposed Sec. 226.20(c)(5)(ii). 20(c)(5)(iii)

Under proposed Sec. 226.20(c)(5)(iii), where a payment change accompanies an interest rate adjustment, the interest rate and payment change disclosures required by proposed Sec. 226.20(c)(2)(ii) must contain headings, content, and format substantially similar to those in the table contained in Appendix H-4(G). The textual disclosures required by proposed Sec. 226.20(c)(2)(iii) through (vii) must be located directly below the table. Further, the format requirements in

Sec. 226.37 apply to ARM adjustment notices, as discussed below.

Regulations of other agencies. Footnote 45c to Sec. 226.20(c) currently states that creditors may substitute information provided in accordance with variable-rate subsequent disclosure regulations of other federal agencies for the disclosure required by Sec. 226.20(c).

The Board adopted footnote 45c in 1987, a time when OCC, FHLBB, and HUD regulations contained subsequent disclosure requirements for ARMs. See 52 FR 48665, 48671; Dec. 24, 1987. The proposed rule would remove footnote 45c. No comprehensive disclosure requirements for variable- rate mortgage transactions presently are in effect under the regulations of the other Federal financial institution supervisory agencies, as discussed above. 20(d) Periodic Statement for Negative Amortization Loans

The Board proposes to require creditors to provide periodic statements for payment option ARMs with a negative amortization feature that are secured by real property or a dwelling. Such ARMs permit consumers to choose the amount paid (above a specified minimum) each period. In 2006, the Board, the OCC, the OTS, the FDIC, and the NCUA expressed concerns about

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consumer understanding of how such loans function and of the effect of negative amortization on a loan's balance in the Interagency Guidance on Nontraditional Mortgage Product Risks issued in 2006. 71 FR 58609;

October 4, 2006. The agencies issued related sample illustrations that include a payment summary table showing the impact of various payment options on the loan balance that creditors may include with periodic statements for payment option ARMs. 72 FR 31825, 31831; Jun. 8, 2007.

The illustrations were not consumer-tested. The Board's proposed model table showing payment options is similar to the summary table the agencies issued but has been revised based on consumer testing.

Payment option ARMs are complex products. Most participants in the

Board's consumer testing were unfamiliar with such loans and with negative amortization generally. These loans present consumers with choices each month, and how the consumer exercises his or her choice may result in negative amortization and much higher payments when the consumer must begin to make fully amortizing payments or a balloon payment. The Board believes that consumers should be informed of the consequences of making minimum payments on such a loan. Thus, the Board proposes to require creditors to provide a periodic statement that describes a consumer's payment options and the effects of making payments in those amounts.\45\

\45\ The Federal financial institution supervisory agencies (the

Board, the OCC, the OTS, the FDIC, and the NCUA (collectively, the agencies)) expressed concerns about consumer understanding of how such loans function and of the effect of negative amortization on a loan's balance in the Interagency Guidance on Nontraditional

Mortgage Product Risks issued in 2006. 71 FR 58609; October 4, 2006.

The agencies issued related sample illustrations that include a payment summary table showing the impact of various payment options on the loan balance that creditors may include with periodic statements for payment option ARMs. 72 FR 31825, 31831; Jun. 8, 2007. Proposed Sec. 226.20(d) requires creditors to provide periodic statements that disclose payment options in the form of a table. The proposed model table is similar to the summary table the agencies issued but has been revised based on consumer testing.

20(d)(1) Timing and Content of Disclosures

For closed-end transactions secured by real property or a dwelling that permit the consumer to select among multiple payment options that include an option that results in negative amortization, proposed Sec. 226.20(d) requires creditors to provide a periodic statement that discloses payment options not later than fifteen business days before a payment is due. Where payment at a new level is due, however, proposed

Sec. 226.20(c) requires creditors to provide an ARM adjustment notice no later than 60 days beforehand, as discussed above. 20(d)(1)(i) Payment

Proposed Sec. 226.20(d)(1)(i) would require creditors to disclose, based on the interest rate in effect at the time the disclosure is made, the payment amount required to: (1) Pay off the loan balance in full by the end of the term through regular periodic payments, without a balloon payment; (2) prevent negative amortization, if the legal obligation explicitly permits the consumer to elect to pay interest only without paying principal; and (3) pay the minimum payment required under the legal obligation. Under the proposed rule, creditors would provide each disclosure as applicable. For example, if the terms of the loan obligation did not provide the option for consumers to make interest-only payments, creditors would disclose only the required minimum payment and the fully amortizing payment.

In consumer testing conducted for the Board, participants generally understood the options presented in the table. Most were able to understand that making the minimum required payment would cause their loan balance to grow. They also understood that making a fully amortizing payment would be a safe choice and would pay their loan balance off over time.

Proposed comment 20(d)(1)-1 clarifies that creditors must provide a summary table under Sec. 226.20(d) for covered loans that allow a consumer to choose to make a payment that results in negative amortization even if the initial payments required do not negatively amortize the loan. Proposed comment 20(d)(1)-1 states that a payment summary table need only contain those disclosures that apply to payment options available to a consumer, however. For example, the proposed comment states that if a negatively amortizing loan recasts and a consumer must begin to make fully amortizing payments, the payment summary table need not disclose payments other than the fully amortizing payment.

Proposed comment 20(d)(1)-2 states that creditors may base all disclosures on the assumption that payments will be made on time and in the amounts required by the terms of the legal obligation, disregarding any possible inaccuracies resulting from consumers' payment patterns.

This is consistent with existing comment 17(c)(2)(i)-3 and proposed revisions to comment 17(c)(1)-1, discussed above. Proposed comment 20(d)(1)-2 clarifies, however, that creditors may not base disclosures for loans with a negatively amortizing feature on the fully amortizing, interest-only, or other payment unless that payment is the amount the consumer is required to pay under the legal obligation. Finally, proposed comment 20(d)(1)(i)-1 states that creditors may rely on comment 38(c)(5)-1 to determine whether a payment is a regular periodic payment or a balloon payment. 20(d)(1)(ii) Effects

Proposed Sec. 226.20(d)(1)(ii) requires creditors to disclose the effects of making payments in the amounts required to be disclosed under proposed Sec. 226.20(d). Appendix H-4(L) contains a proposed model form with accessible language on fully amortizing payments, interest-only payments, and negatively amortizing minimum payments.

First, the model form states that a fully amortizing payment will cover all the interest owed in a particular payment plus some principal and decrease the loan balance and that if the consumer regularly makes the fully amortizing payment the consumer will pay off the loan on schedule. Second, the model form states that an interest-only payment will cover all the interest owed in a particular payment but none of the principal, that the consumer's balance will remain the same, and that if the consumer regularly makes interest-only payments the consumer will have to make larger payments as early as a specified date. Third, the model form states that a minimum payment will cover only part of the interest owed in a particular payment and result in a specified amount of unpaid interest being added to the loan balance and that if the consumer makes a minimum payment the consumer in effect will be borrowing more money and will lose home equity. Further, the model form states that if a consumer regularly makes minimum payments the consumer will have to make significantly larger payments as early as a specified date.

Proposed comment 20(d)(1)(ii)-1 states that the disclosures required by Sec. 226.20(d) must be consistent with the terms of the legal obligation. For example, the proposed comment clarifies that disclosures may not state that making fully amortizing payments on an interest-only loan will reduce a consumer's loan balance if the creditor will not apply payments that exceed the interest-only payment to principal.

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20(d)(1)(iii) Unpaid Interest

Proposed Sec. 226.20(d)(1)(iii) requires creditors to disclose the amount that will be added to the loan balance due to unpaid interest, if the consumer elects to make a payment that results in negative amortization. 20(d)(2) Format of Disclosures

Proposed Sec. 226.20(d)(2)(i) requires that periodic statements for loans with a negative amortization feature contain payment disclosures with content substantially similar to the content of Form

H-4(L) in Appendix H. Further, the proposed provision requires creditors to make payment disclosures in a payment summary table with headings, content, and format substantially similar to Form H-4(L).

Proposed Sec. 226.20(d)(2)(ii) requires that disclosures be placed in a prominent location (that is, located on the first page and on the front side of the disclosure statement, as clarified by proposed comment 37(d)(1)-1), with one exception. Under proposed Sec. 226.20(d)(2)(ii), if the payment disclosures required by Sec. 226.20(d) are made together with the ARM adjustment disclosures required by Sec. 226.20(c), the payment disclosures must be located directly below the ARM adjustment disclosures.

Proposed Sec. 226.20(d)(2)(iii) requires that the table required by Sec. 226.20(d)(2)(i) contain only the information required by Sec. 226.20(d)(1). Other information may be presented with the table under the proposed rule, provided that such information appears outside of the required table.

Alternatives not proposed. The Board is proposing to apply the requirement to provide periodic statements that contain a payment summary table, for payment option ARMs with a negative amortization feature that are secured by real property or a dwelling. The Board considered requiring periodic statements for all loans secured by real property or a dwelling. The Board is not proposing such a requirement, however. It is not clear that a monthly statement on a fixed-rate mortgage or an ARM without payment options would provide sufficient benefits to consumers to offset the costs of providing statements. For these loans, the consumer cannot exercise any choice in payments.

Moreover, creditors must give borrowers advance notice each time the required payment for a variable-rate transaction adjusts, under Sec. 226.20(c), as discussed above. Servicers send borrowers with escrow accounts annual statements under RESPA. Some servicers send additional escrow notices more frequently, for example quarterly. Those statements assist consumers in monitoring account changes related to changes in taxes or property insurance costs. 20(e) Creditor-Placed Property Insurance

Creditor-placed property insurance requirements. The security instrument or promissory note typically contains a requirement that the consumer maintain insurance on the property securing the loan, such as the consumer's dwelling or automobile. If the consumer fails to maintain the insurance or the insurance is cancelled, the credit agreement typically authorizes the creditor to obtain such insurance at the consumer's expense. The premium becomes additional debt of the consumer. This practice is known as ``creditor-placed property insurance.''

Industry reports indicate that the volume of creditor-placed property insurance premiums has increased significantly in the past few years.\46\ Consumers struggling financially may fail to pay required property insurance premiums unaware that the creditor has the right to obtain such insurance on their behalf and add the premiums to the outstanding loan balance.\47\ In some instances, creditors have improperly obtained property insurance when they arguably knew or should have known that the consumer already had insurance.\48\

Generally, creditor-placed insurance is more costly and provides less coverage than insurance that a consumer purchases through an insurance agent.\49\

\46\ See, e.g., Consumer Credit Industry Association, Fact Book of Credit-Related Insurance at 1 (2007) (finding that the 2007 volume of creditor-placed property insurance premiums was over twice the 2002 amount).

\47\ See State of Wisconsin, Office of the Commissioner of

Insurance, ``Force-Placed'' Insurance Surprises Those Who Let

Policies Lapse (May 30, 2002) available at http://oci.wi.gov/ pressrel/0502home.htm (``Many people don't realize that if they let that [homeowner's] insurance lapse, banks and other lenders can legally re-insure their home loan by buying insurance to replace it and making the homebuyer pay for it.'').

\48\ See, e.g., United States of America v. Fairbanks Capital

Corp., Civ. Action No. 03-12219-DPW, Complaint at ] 17 (D. Mass.

Nov. 12, 2003) (finding that Fairbanks improperly obtained property insurance when it knew or should have known that borrowers already had insurance); Ocwen Federal Bank FSB, OTS Docket No. 04592,

Supervisory Agreement, OTS Docket No. 04592 (Apr. 19, 2004)

(requiring the bank to take reasonable actions to determine whether appropriate hazard insurance is already in place before it obtained creditor-placed property insurance).

\49\ See, e.g., Webb, et al. v. Chase Manhattan Mortgage Corp.,

No. 2:05-CV-0548, 2008 U.S. Dist. LEXIS 42559, at *15 (S.D. Ohio May 28, 2008) (finding that the creditor-placed property insurance premium was four times higher than the plaintiff's original premium and did not cover personal property or provide coverage for personal liability or medical payments to others).

Currently, there is no provision in Regulation Z or federal law that requires the creditor to provide notice of the cost to the consumer before charging the consumer for creditor-placed property insurance. It appears that only a few states require creditors to provide notice, and these requirements differ. Under Michigan law, for example, a creditor may not impose charges on a debtor for creditor- placed property insurance unless the creditor provides two notices and allows the borrower a total of 30 days to provide evidence of insurance.\50\ New Mexico law, on the other hand, simply requires the insurer to provide notice to the debtor within 15 days after the placement or renewal of creditor-placed property insurance.\51\ The majority of states have no notice requirement. The servicing guidelines of Fannie Mae and Freddie Mac also vary greatly. Fannie Mae's guidelines state that the servicer ``should'' provide the borrower with at least one written notice and a total of at least 60 days to provide evidence of insurance before charging for creditor-placed property insurance.\52\ Freddie Mac's guidelines do not require the servicer to provide notice to the borrower.\53\

\50\ Mich. Comp. Laws Sec. 500.1625 (2009).

\51\ N.M. Admin. Code Sec. 13.18.3.17 (2009).

\52\ Fannie Mae Single-Family Servicing Guide, Part II, Ch. 6

Lender-Placed Property Insurance (2005).

\53\ Freddie Mac Single-Family Seller/Servicer Guide, Vol. 2,

Sec. 58.9 Special Insurance Requirements and Changes in Insurance

Requirements (2007).

In order to ensure that consumers are informed of the cost of creditor-placed property insurance, the Board proposes to use its authority under TILA Section 105(a), 15 U.S.C. 1604(a), to add Sec. 226.20(e) to require the creditor to provide notice of the cost and coverage of creditor-placed property insurance before charging the consumer for such insurance. In addition, proposed Sec. 226.20(e)(4) would require the creditor to provide the consumer with evidence of creditor-placed property insurance within 15 days of imposing a charge for such insurance. Proposed Sec. 226.20(e)(1) would define

``creditor-placed property insurance'' as ``property insurance coverage obtained by the creditor when the property insurance required by the credit agreement has lapsed.'' Section 226.20(e) would apply to secured closed-end loans, including mortgage and automobile loans. The Board solicits comment as to whether this rule should also apply to HELOCs.

Proposed Sec. 226.20(e)(2) contains three conditions for charging for creditor-

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placed property insurance. First, proposed Sec. 226.20(e)(2)(i) would require the creditor to make a reasonable determination that the required property insurance had lapsed. Second, proposed Sec. 226.20(e)(2)(ii) would require the creditor to mail or deliver to the consumer a written notice containing the information required by the proposed rule at least 45 days before a charge is imposed on the consumer for the creditor-placed property insurance. Finally, proposed

Sec. 226.20(e)(2)(iii) would permit the creditor to charge the consumer if, during the 45-day notice period, the consumer did not provide the creditor with evidence of adequate property insurance.

Notice period timing and charges. Under the proposed rule, the creditor would have to mail or deliver to the consumer the required written notice at least 45 days before charging the consumer for the cost of creditor-placed property insurance. This 45-day notice period is consistent with the 45-day notice period required by the Flood

Disaster Protection Act of 1973 Section 102(e), 42 U.S.C. 4012a(e), and represents the midpoint between State law 30-day notice periods \54\ and the 60-day Fannie Mae Servicing Guide recommendation.\55\ The Board notes that the provision in the Fannie Mae Servicing Guide is stated as a recommendation, but not a requirement. The Board believes that a 45- day notice period would allow the consumer reasonable time to shop for and provide evidence of insurance. The Board recognizes that it may take several days for the consumer to receive a notice sent by mail, but the consumer would still have at least one calendar month in which to shop for and purchase property insurance. Comment is solicited, however, on whether a different time period would better serve the needs of consumers and creditors.

\54\ See Ark. Code Ann. Sec. 23-101-113 (2008); Mich. Comp.

Laws Sec. 500.1625 (2009); Miss. Code Ann. Sec. 83-54-25 (2008);

Tenn. Code Ann. Sec. 56-49-113 (2009).

\55\ Fannie Mae Single-Family Servicing Guide, Part II, Ch. 6

Lender-Placed Property Insurance (2005).

Proposed comment 20(e)-1 would make clear that if the creditor complies with Sec. 226.20(e), the creditor could charge the consumer for creditor-placed insurance as of the 46th day after sending the notice to the consumer. For example, a creditor that mails the required notice on January 2, 2011, may begin to charge the consumer for the cost of the creditor-placed property insurance on February 18, 2011.

Proposed comment 20(e)-1 would also clarify that the creditor may charge the consumer for the cost of any required property insurance obtained during the 45-day notice period if such charge is not prohibited by applicable State or other law.

Content and format of notice. Proposed Sec. 226.20(e)(3) would require the creditor to provide the written notice clearly and conspicuously. Proposed Sec. 226.20(e)(3)(i) would require that the notice contain the creditor's name and contact information, the loan number, and the address or description of the property securing the credit transaction. The Board solicits comment as to whether the creditor should be required to establish a local or toll-free telephone number for the consumer to contact the creditor.

Under proposed Sec. 226.20(e)(ii)-(viii), the notice would also need to contain the following statements: (1) That the consumer is obligated to maintain insurance on the property securing the credit transaction; (2) that the required property insurance has lapsed; (3) that the creditor is authorized to obtain the property insurance on the consumer's behalf; (4) the date the creditor can charge the consumer for the cost of the creditor-placed property insurance; (5) how the consumer may provide evidence of property insurance; (6) the cost of the creditor-placed property insurance stated as an annual premium, and that this premium is likely significantly higher than a premium for property insurance purchased by the consumer; and (7) that the creditor-placed insurance may not provide as much coverage as homeowner's insurance. The Board solicits comment on whether the notice should also contain statements, if applicable, that the creditor will receive compensation for obtaining creditor-placed property insurance and that the creditor will establish an escrow account to pay for the creditor-placed insurance premium. Although such statements would be informative, the Board is concerned that providing these additional disclosures could result in information overload for the consumer. A

Model Clause is proposed at Appendix H-18.

The Board proposes to use its authority under TILA Section 105(a), 15 U.S.C. 1604(a), to add Sec. 226.20(e) to require the creditor to provide notice before charging the consumer for the cost of creditor- placed property insurance. TILA Section 105(a), 15 U.S.C. 1604(a), authorizes the Board to prescribe regulations to carry out the purposes of the act. TILA's purpose includes promoting ``the informed use of credit,'' which ``results from an awareness of the cost thereof by consumers.'' TILA Section 102(a), 15 U.S.C. 1601(a). Currently, few consumers are aware of the cost or coverage of creditor-placed property insurance, or that the premiums become additional debt of the consumer.

The Board believes that this proposed rule would inform consumers of the cost and coverage of the creditor-placed property insurance and avoid the uninformed use of credit. In addition, this proposed rule would not prohibit the creditor from charging for creditor-placed property insurance, but would simply delay the charge until the consumer has been provided sufficient notice of the cost and sufficient time to shop for his or her own homeowner's insurance.

Section 226.25 Record Retention 25(a) General Rule

Section 226.25(a) provides that creditors must retain records to evidence compliance with Regulation Z for two years. As discussed in detail below, the Board is proposing to add a new comment to Sec. 226.25(a) to provide guidance on record retention requirements relating to proposed Sec. 226.36(d)(1), which would prohibit any person from paying compensation to a loan originator based on any of the terms or conditions of the transaction. Proposed comment 25(a)-5 would provide that, to evidence compliance with proposed Sec. 226.36(d)(1), a creditor must retain for each covered transaction a record of the agreement between it and the loan originator that governs the originator's compensation and a record of the amount of compensation actually paid to the originator in connection with the transaction.

Section 226.27 Language of Disclosures

Currently, Sec. 226.27, permits TILA disclosures in a language other than English as long as the disclosures are provided in English upon the consumer's request. Many consumers do not speak English or speak English as a second language. According to the 2000 Census, at least 18% of the population (47 million people) speak a language other than English at home.\56\ To protect non-native English speakers from fraud and discrimination in credit transactions, recent enforcement actions have required that creditors or mortgage brokers provide translations of presentations, disclosures, or documents.\57\ Moreover, several states

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have enacted laws to require credit disclosures or documents in Spanish or other foreign languages.\58\ In 2006, Fannie Mae and Freddie Mac announced the availability of non-executable Spanish translations of the Fannie Mae/Freddie Mac Uniform Instrument to help the residential mortgage industry better serve Spanish-speaking consumers.\59\ Finally,

Congress recently asked the General Accounting Office to conduct a study examining the relationship between fluency in English and financial literacy, and the extent, if any, to which individuals whose native language is not English are impeded in the conduct of their financial affairs.\60\

\56\ U.S. Census Bureau, Language Use and English-Speaking

Ability: 2000 at 2 (Oct. 2003), available at http://www.census.gov/ prod/2003pubs/c2kbr-29.pdf.

\57\ See, e.g., In the Matter of First Mariner Bank, Baltimore,

Maryland, FDIC-07-285b, FDIC-08-358k, Consent Agreement at 5 (April 22, 2009) (alleging that the bank discriminated against Hispanics,

African-Americans, and women by charging them higher prices for residential mortgage loans and requiring the bank to provide financial literacy courses in English and Spanish); Fed. Trade

Comm'n v. MortgagesParaHispanos.com and Daniel Moises Goldberg, Civ.

Action No. 4:06cv19, Final Judgment and Order at 5 (E.D. Tex. Sept. 27, 2006) (alleging that the mortgage broker misrepresented the mortgage terms to Spanish-speaking consumers and requiring the broker to provide a disclosure and consumer education brochure in

Spanish to any consumer if they have reason to believe that the consumer's primary language is Spanish); In re Ameriquest Mortgage

Co., et al., Settlement Agreement at 17-18 (Jan. 23, 2006)

(requiring documents and disclosures to be translated to Spanish or to any language in which Ameriquest advertises).

\58\ Ariz. Rev. Stat. Sec. 6-631 (requiring a consumer loan lender to provide a notice in English and Spanish that the consumer may request the TILA disclosure in Spanish); Cal. Civ. Code Sec. 1632 (requiring any person engaged in a trade or business who negotiates certain transactions primarily in Spanish, Chinese,

Tagalog, Vietnamese, or Korean to deliver a translation of the contract in the language in which the contract was negotiated); DC

Code Ann. Sec. 26-1113 (requiring a post-application mortgage disclosure to be provided in the language of the mortgage lender's presentation to the borrower); 815 Ill. Comp. Stat. Ann. 122/2-20

(requiring payday lenders to provide consumers with a written disclosure in English and in the language in which the loan was negotiated); Tex. Fin. Code Ann. Sec. 341.502 (requiring that the

TILA disclosure be provided in Spanish if the terms for the consumer loan, retail installment transaction, or home equity loan were negotiated in Spanish).

\59\ News Release, Fannie Mae and Freddie Mac Offer Mortgage

Documents in Spanish to Aid Lenders and Industry Partners with

Helping More Hispanics Become Homeowners; Collaborative Effort Aimed at Helping Close the Hispanic and Overall Minority Homeownership

Gaps (Sept. 25, 2006), available at http://www.fanniemae.com/ newsreleases/2006/3803.jhtml?p=Media&s=News+Releases.

\60\ Credit CARD Act of 2009, Public Law 111-24, Sec. 513, 123

Stat. 1734, 1765 (2009).

Consumer advocates are concerned that consumers who do not speak

English or speak English as a second language may be more susceptible to abusive credit practices or offered less favorable credit terms or products because they are not provided with disclosures they can understand. Industry representatives, on the other hand, raise concerns about the cost and burden of translating documents into multiple foreign languages and the potential liability for inaccurate translations. Both consumer advocates and industry representatives question whether consumers who speak minority languages will still have access to credit if creditors have to bear the cost and liability for translating documents into little-known languages. Creditors may be reluctant to engage in outreach to consumers who speak those languages.

The Board solicits comment on whether it should use its rulemaking authority to require creditors to provide translations of credit disclosures. Comment is requested on whether the failure to provide credit disclosure translations is unfair or deceptive, or impedes the informed use of credit. Comment is also requested on potential litigation issues, such as whether a translation would be admissible into evidence or whether an inaccurate translation would toll TILA's statute of limitations or extend the right of rescission. Finally, comment is requested on the effectiveness of State laws that require translations of disclosures or documents and whether the Board should adopt similar regulations.

The Board requests comment on the following translation issues:

What is the scope of the problem? That is, approximately how many consumers do not understand TILA disclosures because of language barriers?

Should creditors be required to provide consumers with translations of required TILA disclosures? If such translations were required, what should be the trigger for such disclosures (e.g., the language of the negotiation, the language of the creditor's presentation, the language of the creditor's advertisement, a consumer request)?

Should there be an exception for consumers who are accompanied by an interpreter?

Would a translation requirement negatively affect consumers and the type and terms of credit offered because creditors would be reluctant to risk liability for engaging in transactions in a language other than English?

Finally, the Board solicits comment on the following coverage issues:

Should a translation requirement apply only to mortgages loans, or also to other types of credit products, such as auto loans or credit cards?

Should a translation requirement apply only to the TILA disclosures provided before or at consummation, or to any credit disclosures or documents provided before, at, or subsequent to consummation?

Should a translation requirement apply to Web sites that provide early TILA disclosures?

Should a translation requirement apply only to one or a few languages, or should it apply to any foreign language?

Section 226.32 Requirements for Certain Closed-End Mortgages 32(b) Definitions 32(b)(1)

Section 226.32(b)(1) defines the ``point and fees'' used to determine whether a loan is a HOEPA loan. That definition consists of four elements: (i) All items required to be disclosed under Sec. 226.4(a) and 226.4(b), except interest or the time-price differential;

(ii) All compensation paid to mortgage brokers; (iii) All items listed in Sec. 226.4(c)(7) (other than amounts held for future payment of taxes) unless the charge is reasonable, the creditor receives no direct or indirect compensation in connection with the charge, and the charge is not paid to an affiliate of the creditor; and (iv) Premiums or other charges for credit life, accident, health, or loss-of-income insurance, or debt-cancellation coverage (whether or not the debt-cancellation coverage is insurance under applicable law) that provides for cancellation of all or part of the consumer's liability in the event of the loss of life, health, or income or in the case of accident, written in connection with the credit transaction. In light of the changes to the finance charge under proposed Sec. 226.4, discussed above, the

Board is proposing technical amendments to this provision.

The reference to ``items required to be disclosed under Sec. 226.4(a) and 226.4(b), except interest or the time-price differential'' in Sec. 226.32(b)(1)(i) implements TILA Section 103(aa)(4)(A). That provision includes in points and fees ``all items included in the finance charge, except interest or the time-price differential.'' 15

U.S.C. 1602(aa)(4)(A). Thus, ``items required to be disclosed under

Sec. 226.4(a) and 226.4(b)'' is intended to capture the finance charge. Section 226.32(b)(1)(ii) and (iii) parallel the additional elements in TILA Section 103(aa)(4)(B) and (C). See 15 U.S.C. 1602(aa)(4)(B) and (C). Finally, TILA Section 103(aa)(4)(D) provides for the inclusion of such other charges as the Board determines to be appropriate. 15 U.S.C. 1602(aa)(4)(D). Pursuant to that authority, in

Sec. 226.32(b)(1)(iv), the Board included credit insurance premiums and debt cancellation coverage fees. Thus, the statutory definition reflects Congress's intent to

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include in points and fees mortgage broker compensation, certain real- estate related fees, and the insurance charges added by the Board, even if those items would be excluded from the finance charge under other applicable rules.

Under TILA Section 103(aa)(1), HOEPA applies to certain transactions that are secured by a consumer's principal dwelling. 15

U.S.C. 1602(aa)(1). Proposed Sec. 226.4(g), and therefore the more inclusive definition of finance charge it would create, would apply to any transaction secured by real property or a dwelling. Consequently, all loans that are potentially subject to HOEPA would be subject to the proposed ``but for'' finance charge definition. Under that definition, the items included under the points and fees definition in addition to the finance charge (other than interest or the time-price differential) would never be excluded from the finance charge for transactions secured by real property or a dwelling.

The Board believes that proposed Sec. 226.4 would render Sec. 226.32(b)(1)(ii) through (iv) unnecessary because all items included in points and fees under those provisions already would be included as part of the finance charge. To eliminate unnecessary complexity, the

Board proposes to streamline Sec. 226.32(b)(1) by deleting those additional elements. The Board also proposes to revise Sec. 226.32(b)(1) to provide that points and fees means all items included in the finance charge pursuant to Sec. 226.4, except interest or the time-price differential, instead of Sec. 226.32(b)(1)(i)'s reference to ``items required to be disclosed under Sec. 226.4(a) and 226.4(b).'' This change would reflect the language of TILA more closely and is not meant to effect any substantive change to HOEPA's coverage. 32(c) Disclosures 32(c)(1) Notices

For HOEPA loans, TILA Sections 129(a)(1)(A) and (B), 15 U.S.C. 1639(a)(1)(A) and (B), and Sec. 226.32(c)(1), require the creditor to provide the following disclosures in conspicuous type size: ``You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.'' The first sentence is a ``no obligation'' statement to inform the consumer that the space for the consumer's signature that may be on the credit application does not obligate the consumer to accept the terms of the loan. The next two sentences are ``security interest'' disclosures to inform the consumer of the potential consequences when the creditor takes a security interest in the consumer's home. Comment 32(c)(1)-1 states that these disclosures need not be in a particular format or part of the note or mortgage document. A Model Clause is currently provided at Appendix H- 16.

As discussed more fully in Sec. 226.38(f)(1), the MDIA amended

TILA Section 128(b)(2), 15 U.S.C. 1638(b)(2), to require the creditor to provide the following ``no obligation'' statement on the TILA disclosure: ``You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.'' Based on consumer testing, the Board proposes to use its adjustments and exception authority under TILA Section 105(a), 15

U.S.C. 1604(a), to modify the specific wording on the disclosure.

Proposed Sec. 226.38(f)(1) would require the creditor to provide a statement that the consumer has no obligation to accept the loan, and, if the creditor provides space for a consumer's signature, a statement that a signature by the consumer only confirms receipt of the disclosure statement. During consumer testing, participants' comprehension improved when they reviewed the plain-language version of the clause.

Similarly, based on consumer testing, the Board proposes to use its adjustments and exception authority under TILA Section 105(a), 15

U.S.C. 1604(a), to require the creditor under proposed Sec. 226.32(c)(1) to provide the following ``no obligation'' statement in connection with a HOEPA loan: ``You have no obligation to accept this loan. Your signature below only confirms that you have received this form.'' TILA Section 105(a), 15 U.S.C. 1604(a), states that the Board

``may provide for such adjustments * * * as in the judgment of the

Board are necessary or proper to effectuate the purposes of [TILA]''.

One of the purposes of TILA is to promote the informed use of credit.

TILA Section 102(a), 15 U.S.C. 1601(a). Consumer testing showed that the ``no obligation'' language improved participants' understanding of the key point that signing or accepting a disclosure did not obligate the consumer to accept the terms of the loan.

In addition, the Board proposes to use its adjustments and exception authority under TILA Section 105(a), 15 U.S.C. 1604(a), to require the creditor under proposed Sec. 226.32(c)(1) to provide the following ``security interest'' statement in connection with a HOEPA loan: ``If you are unable to make the payments on this loan, you could lose your home.'' As discussed more fully in Sec. 226.38(f)(2), consumer testing showed that participant comprehension of this disclosure improved when the plain-language version of the ``security interest'' disclosure was used. The Board believes that the plain- language versions of the ``no obligation'' and ``security interest'' disclosures will better inform consumers who are considering obtaining

HOEPA loans.

The proposal would delete comment 32(c)(1)-1 and require these statements to be in bold text and a minimum 10-point font, consistent with proposed Sec. Sec. 226.37 and 226.38. A revised Model Clause is proposed at Appendix H-16. 32(c)(5) Amount Borrowed

For HOEPA mortgage refinancing loans, Sec. 226.32(c)(5) requires the creditor to disclose the amount borrowed, and states that ``where the amount borrowed includes premiums or other charges for optional credit insurance or debt-cancellation coverage, that fact shall be stated, grouped together with the disclosure of the amount borrowed.''

In the December 2008 Open-End Final Rule, the existing rules for credit insurance and debt cancellation coverage were applied to debt suspension coverage for purposes of excluding a charge for debt suspension coverage from the finance charge. See 74 FR 5244, 5255; Jan. 29, 2009. In the final rule, the Board stated that ``[d]ebt cancellation coverage and debt suspension coverage are fundamentally similar to the extent they offer a consumer the ability to pay in advance for the right to reduce the consumer's obligations under the plan on the occurrence of specified events that could impair the consumer's ability to satisfy those obligations.'' 74 FR 5266. The

Board also noted that the two products are different because debt cancellation coverage cancels the debt while debt suspension merely suspends payment of the debt. Id. Despite this difference, the Board adopted a final rule treating the two products the same for purposes of the finance charge, but adding a special disclosure warning consumers of the risks of debt suspension coverage. Id. Consistent with this approach, the Board proposes to treat debt suspension coverage in the same manner as debt cancellation coverage for purposes of the disclosing the amount borrowed for a HOEPA mortgage refinancing loan.

The Board proposes to revise Sec. 226.32(c)(5) to clarify that where the amount borrowed

Page 43279

includes charges for debt suspension coverage, that fact should be stated, grouped together with the disclosure of the amount borrowed.

Proposed comment 32(c)(5)-1 would also be revised to include a reference to debt suspension coverage. Comment is solicited on this approach.

Section 226.35 Prohibited Acts or Practices in Connection With Higher-

Priced Mortgage Loans 35(a) Higher-Priced Mortgage Loans 35(a)(2)

In its final rule implementing new requirements for higher-priced mortgage loans, 73 FR 44522; July 30, 2008, the Board adopted the

``average prime offer rate'' as the benchmark for coverage of new Sec. 226.35. In so doing, the Board adopted commentary under new Sec. 226.35(a)(2) regarding the calculation of the average prime offer rate and related guidance. Comment 35(a)(2)-4 indicated that the Board publishes average prime offer rates and the methodology for their calculation on the Internet. The Board is proposing to amend comment 35(a)(2)-4 to specify where on the Internet the table and methodology may be found (http://www.ffiec.gov/hmda).

The Board also is proposing new comment 35(a)(2)-5 to provide additional guidance on determination of applicable average prime offer rates for purposes of Sec. 226.35. The comment would clarify that the average prime offer rate is defined identically under Sec. 226.35 and under Regulation C (HMDA), 12 CFR 203.4(a)(12)(ii). Thus, for purposes of both coverage of Sec. 226.35 and coverage of the rate spread reporting requirement under Regulation C, 12 CFR 203.4(a)(12)(i), the applicable average prime offer rate is identical. The comment would clarify further that guidance on the applicable average prime offer rate is provided in the staff commentary under Regulation C, the

Board's A Guide to HMDA Reporting: Getting it Right!, and the relevant

``Frequently Asked Questions'' on HMDA compliance posted on the FFIEC's

Web site referenced above.

Section 226.36 Prohibited Acts or Practices in Connection With Credit

Secured by Real Property or a Consumer's Dwelling

The Board proposes to amend Sec. 226.36 to extend the scope of the section's coverage to all closed-end transactions secured by real property or a dwelling. Currently, this section applies to closed-end credit transactions secured by a consumer's principal dwelling. As revised, Sec. 226.36 would apply to closed-end transactions secured by any dwelling, not just a consumer's principal dwelling. This approach would be consistent with recent amendments to the TILA effected by the

MDIA. 36(a) Loan Originator and Mortgage Broker Defined

As discussed below in more detail, the Board proposes to prohibit certain payments to loan originators that are based on a transaction's terms and conditions, and also proposes to prohibit loan originators from ``steering'' consumers to transactions that are not in their interest in order to increase the originator's compensation.

Accordingly, the Board proposes to amend the regulation to provide a definition of ``loan originator'' in Sec. 226.36(a)(1), which would include persons who are covered by the current definition of mortgage broker but also would include employees of the creditor, who are not considered ``mortgage brokers.'' Existing Sec. 226.36(a) defines the term ``mortgage broker'' because mortgage brokers are subject to the prohibition on coercion of appraisers in Sec. 226.36(b). A revised definition of mortgage broker would be designated as Sec. 226.36(a)(2). The provision of existing Sec. 226.36(a) stating that a creditor making a ``table funded'' transaction is considered a mortgage broker would be revised for clarity; no substantive change is intended other than the expansion of the definition from mortgage broker to loan originator. Thus, under proposed Sec. 226.36(a)(1), a creditor that does not provide the funds for the transaction at consummation out of its own resources, out of deposits held by it, or by drawing on a bona fide warehouse line of credit would be considered a loan originator for purposes of Sec. 226.36. 36(b) and (c) Misrepresentation of Value of Consumer's Dwelling;

Servicing Practices

The Board proposes to amend Sec. 226.36(b) and (c) to reflect the expanded scope of coverage of Sec. 226.36, as noted above. Existing

Sec. 226.36(b) prohibits creditors and mortgage brokers and their affiliates from coercing, influencing, or otherwise encouraging appraisers to misstate or misrepresent the value of the consumer's principal dwelling in connection with a closed-end mortgage transaction. Section 226.36(c) currently prohibits certain practices of servicers of closed-end consumer credit transactions secured by a consumer's principal dwelling. Under this proposal, the rules relating to appraiser coercion and loan servicing would apply to all closed-end transactions secured by real property or a dwelling, for the reasons discussed above. 36(d) Prohibited Payments to Loan Originators

The Board is proposing to use its authority in HOEPA to prohibit unfair or deceptive acts or practices in mortgage lending to restrict certain practices related to the payment of loan originators. See TILA

Section 129(l)(2)(A), 15 U.S.C. 1639(l)(2)(A). For this purpose, a

``loan originator'' includes both mortgage brokers and employees of creditors who perform loan origination functions.

Specifically, to address the potential unfairness that can arise with certain loan originator compensation practices, the proposed rule would prohibit a creditor or other party from paying compensation to a loan originator based on the credit transaction's terms or conditions.

This prohibition would not apply to payments that consumers make directly to a loan originator. However, if a consumer directly pays the loan originator, the proposed rule would prohibit the originator from also receiving compensation from any other party in connection with that transaction.

The Board is soliciting comment on an alternative that would allow loan originators to receive payments that are based on the principal loan amount, which is a common practice today. The Board is also soliciting comment on whether it should adopt a rule that seeks to prohibit loan originators from directing or ``steering'' consumers to loans based on the fact that the originator will receive additional compensation, unless that loan is in the consumer's interest. The Board is expressly soliciting comment on whether the rule would be effective in achieving the stated purpose. Comment is also solicited on the feasibility and practicality of such a rule, its enforceability, and any unintended adverse effects the rule might have. These proposals and alternatives are discussed more fully below.

Background

In the summer of 2006, the Board held public hearings on home equity lending in four cities. During the hearings, consumer advocates urged the Board to ban ``yield spread premiums,'' payments that mortgage brokers receive from the creditor at closing for delivering a loan with an interest rate that is higher than the creditor's ``buy rate.'' The consumer advocates asserted that yield spread premiums provide brokers an incentive to increase consumers' interest rates

Page 43280

unnecessarily. They argued that a prohibition would align reality with consumers' perception that brokers serve consumers' best interests.

In light of the information received at the 2006 hearings and the rise in defaults that began soon after, the Board held an additional hearing in June of 2007 to explore how it could use its authority under

HOEPA to prevent abusive lending practices in the subprime mortgage market while still preserving responsible lending. Although the Board did not expressly solicit comment on mortgage broker compensation in its notice of the June 2007 hearing, a number of commenters and some hearing panelists raised the topic. Consumer and creditor representatives alike raised concerns about the fairness and transparency of creditors' payment of yield spread premiums to brokers.

Several commenters and panelists stated that consumers are not aware of the payments creditors make to brokers, or that such payments increase consumers' interest rates. They also stated that consumers may mistakenly believe that a broker seeks to obtain the best interest rate available. Consumer groups have expressed particular concern about increased payments to brokers for delivering loans both with higher interest rates and prepayment penalties. Consumer groups suggested a variety of solutions, such as prohibiting creditors paying brokers yield spread premiums, imposing on brokers that accept yield spread premiums a fiduciary duty to consumers, imposing on creditors that pay yield spread premiums liability for broker misconduct, or including yield spread premiums in the points and fees test for loans subject to

HOEPA. Several creditors and creditor trade associations advocated requiring brokers to disclose whether the broker represents the consumer's interests, and how and by whom the broker is to be compensated. Some of these commenters recommended that brokers be required to disclose their total compensation to the consumer and that creditors be prohibited from paying brokers more than the disclosed amount.

To address these concerns, the Board's January 2008 proposed rule would have prohibited a creditor from paying a mortgage broker any compensation greater than the amount the consumer had previously agreed in writing that the broker would receive. 73 FR 1672, 1698-1700; Jan. 9, 2008 (HOEPA proposal). In support of the rule, the Board explained its concerns about yield spread premiums, which are summarized below.

A yield spread premium is the present dollar value of the difference between the lowest interest rate the wholesale lender would have accepted on a particular transaction and the interest rate the broker actually obtained for the lender. This dollar amount is usually paid to the mortgage broker, though it may also be applied to reduce the consumer's upfront closing costs. The creditor's payment to the broker based on the interest rate is an alternative to the consumer paying the broker directly from the consumer's preexisting resources or from loan proceeds. Preexisting resources or loan proceeds may not be sufficient to cover the broker's total fee, or may appear to the consumer to be a more costly way to finance those costs if the consumer expects to prepay the loan in a relatively short period. Thus, consumers potentially benefit from having an option to pay brokers for their services indirectly by accepting a higher interest rate.

The Board shares concerns, however, that creditors' payments to mortgage brokers are not transparent to consumers and are potentially unfair to them. Creditor payments to brokers based on the interest rate give brokers an incentive to provide consumers loans with higher interest rates. Some brokers may refrain from acting on this incentive out of legal, business, or ethical considerations. Moreover, competition in the mortgage loan market may often limit brokers' ability to act on the incentive. The market often leaves brokers room to act on the incentive should they choose, however, especially as to consumers who are less sophisticated and less likely to shop among either loans or brokers.

Large numbers of consumers are simply not aware the incentive exists. Many consumers do not know that creditors pay brokers based on the interest rate, and the current legally required disclosures seem to have only limited effect. Some consumers may not even know that creditors pay brokers: A common broker practice of charging a small part of its compensation directly to the consumer, to be paid from the consumer's existing resources or loan proceeds, may lead consumers to believe, incorrectly, that this amount is all the consumer will pay or that the broker will receive. Consumers who do understand that the creditor pays the broker based on the interest rate may not fully understand the implications of the practice. They may not appreciate the full extent of the incentive the practice gives the broker to increase the rate because they do not know the dollar amount of the creditor's payment.

Moreover, consumers often wrongly believe that brokers have agreed, or are required, to obtain the best interest rate available. Several commenters in connection with the 2006 hearings suggested that mortgage broker marketing cultivates an image of the broker as a ``trusted advisor'' to the consumer. Consumers who have this perception may rely heavily on a broker's advice, and there is some evidence that such reliance is common. In a 2003 survey of older borrowers who had obtained prime or subprime refinancings, majorities of respondents with refinance loans obtained through both brokers and creditors' employees reported that they had relied ``a lot'' on their loan originators to find the best mortgage for them.\61\ The Board's recent consumer testing also suggests that many consumers shop little for mortgages and often rely on one broker or lender because of their trust in the relationship.

\61\ See Kellie K. Kim-Sung & Sharon Hermanson, Experiences of

Older Refinance Mortgage Loan Borrowers: Broker- and Lender-

Originated Loans, Data Digest No. 83 (AARP Public Policy Inst.,

Washington, DC, Jan. 2003, at 3, available at http:// assets.aarp.org/rgcenter/post-import/dd83_loans.pdf.

If consumers believe that brokers protect consumers' interests by shopping for the lowest rates available, then consumers will be less likely to take steps to protect their interests when dealing with brokers. For example, they may be less likely to shop rates across retail and wholesale channels simultaneously to assure themselves the broker is providing a competitive rate. They may also be less likely to shop and negotiate brokers' services, obligations, or compensation upfront, or at all. For example, they may be less likely to seek out brokers who will promise in writing to obtain the lowest rate available.

In response to these concerns, the 2008 HOEPA proposal would have prohibited a creditor from paying a broker more than the consumer agreed in writing to pay. Under the proposal, the consumer and mortgage broker would have had to enter into a written agreement before the broker accepted the consumer's loan application and before the consumer paid any fee in connection with the transaction (other than a fee for obtaining a credit report). The agreement also would have disclosed (i) that the consumer ultimately would bear the cost of the entire compensation even if the creditor paid part of it directly; and (ii) that a creditor's payment to a broker could influence the broker to offer the consumer loan terms or products that would not be in the consumer's interest

Continued on page 43281

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

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Truth in Lending

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or the most favorable the consumer could obtain.

Based on the Board's analysis of comments received on the HOEPA proposal, the results of consumer testing, and other information, the

Board withdrew the proposed provisions relating to broker compensation. 73 FR 44522, 44563-65; July 30, 2008. The Board's withdrawal of those provisions was based on its concern that the proposed agreement and disclosures could confuse consumers and undermine their decision-making rather than improve it. The risks of consumer confusion arose from two sources. First, an institution can act as either creditor or broker depending on the transaction. At the time the agreement and disclosures would have been required, such an institution could be uncertain as to which role it ultimately would play. This could render the proposed disclosures inaccurate and misleading in some, and possibly many, cases. Second, the Board was concerned by the reactions of consumers who participated in one-on-one interviews about the proposed agreement and disclosures as part of the Board's consumer testing. These consumers often concluded, not necessarily correctly, that brokers are more expensive than creditors. Many also believed that brokers would serve their best interests notwithstanding the conflict resulting from the relationship between interest rates and brokers' compensation.\62\

The proposed disclosures presented a significant risk of misleading consumers regarding both the relative costs of brokers and lenders and the role of brokers in their transactions.

\62\ For more details on the consumer testing, see the report of the Board's contractor, Macro International, Inc., Consumer Testing of Mortgage Broker Disclosures (July 10, 2008), available at http:// www.federalreserve.gov/newsevents/press/bcreg/ 20080714regzconstest.pdf.

In withdrawing the broker compensation provisions of the HOEPA proposal, the Board stated it would continue to explore options to address potential unfairness associated with loan originator compensation arrangements, such as yield spread premiums. The Board indicated it would consider whether disclosures or other approaches could effectively remedy this potential unfairness without imposing unintended consequences.

Potential for Unfairness in Loan Originator Compensation Practices

As noted above, the Board is now proposing rules to prohibit certain practices relating to payments made to compensate mortgage brokers and other loan originators. These rules would be adopted pursuant to the Board's authority under HOEPA, as contained in TILA

Section 129(l), which authorizes the Board to prohibit acts or practice in connection with mortgage loans that the Board finds to be unfair or deceptive. As discussed in part IV above, in considering whether a practice is unfair or deceptive under TILA Section 129(l), the Board has generally relied on the standards that have been adopted for purposes of Section 5(a) of the FTC Act, 15 U.S.C. 45(a), which also prohibits unfair and deceptive acts and practices.

For purposes of the FTC Act, an act or practice is considered unfair when it causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. As explained below, the practice of basing a loan originator's compensation on the credit transaction's terms or conditions appears to meet these standards and constitute an unfair practice. Furthermore, based on its experience with consumer testing, particularly in connection with the HOEPA proposal, the Board believes that disclosure alone would be insufficient for most consumers to avoid the harm caused by this practice. Thus, the Board is proposing a rule that would remedy the practice through substantive regulations that prohibit particular practices.

Specifically, under proposed Sec. 226.36(d)(1), compensation payments made to a mortgage broker or any other loan originator based on a mortgage transaction's terms or conditions would be prohibited.

Unlike the 2008 HOEPA proposal, the rule would also apply to creditors' employees who originate loans. As noted above, such payments when made to a mortgage broker are commonly referred to as yield spread premiums.

There are analogous payments made by creditors to their employees who originate loans at a higher interest rate than the minimum rate required by the creditor. This arrangement is frequently referred to as an ``overage.'' For convenience, the discussion below uses the term

``yield spread premium'' also to refer to these types of payments, which would be covered by the proposed rule as well.

Substantial injury. When loan originators receive compensation based on a transaction's terms and conditions, they have an incentive to provide consumers loans with higher interest rates or other less favorable terms. Yield spread premiums, therefore, present a significant risk of economic injury to consumers. Currently, such injury is common because consumers typically are not aware of the practice or do not understand its implications and cannot effectively negotiate its use.

Creditors' payments to mortgage brokers or their own employees that originate loans (``loan officers'') generally are not transparent to consumers. Brokers may impose a direct fee on the consumer which may lead consumers to believe that this is the sole source of the broker's compensation. While consumers expect the creditor to compensate its own loan officers, they do not necessarily understand that the loan originator may have the ability to increase the creditor's interest rate or include certain loan terms for the originator's own gain.

To guard effectively against this practice, a consumer would have to know the lowest interest rate the creditor would have accepted to ascertain that the offered interest rate represents a rate increase by the loan originator. Most consumers will not know the lowest rate the creditor would be willing to accept. The consumer also would need to understand the dollar amount of the yield spread premium that is generated by the rate increase to determine what portion, if any, is being applied to reduce the consumer's upfront loan charges. Although

HUD recently adopted disclosures in Regulation X, implementing RESPA, that could enhance some consumers' understanding of mortgage broker compensation, the details of the compensation arrangements are complex and the disclosures are limited. A creditor may show the yield spread premium as a credit to the borrower that is applied to cover upfront costs, but is also permitted to add the amount of the yield spread to the total origination charges being disclosed. This would not necessarily inform the consumer that the rate has been increased by the originator and that a lower rate with a smaller origination charge was also available. In addition, the Regulation X disclosure concerning yield spread premiums would not apply to overages occurring when the loan originator is employed by the creditor. Thus, the Regulation X disclosure, while perhaps an improvement over previous rules, is not likely by itself to prevent consumers from incurring substantial injury from the practice.

Because consumers generally do not understand the yield spread premium mechanism, they are unable to engage in effective negotiation.

Instead they are more likely to rely on the loan originator's advice and frequently obtain a higher rate or other unfavorable terms

Page 43282

solely because of greater originator compensation. These consumers suffer substantial injury by incurring greater costs for mortgage credit than they would otherwise be required to pay.

Injury not reasonably avoidable. Yield spread premiums create a conflict of interest between the loan originator and consumer. As noted above, many consumers are not aware of creditor payments to loan originators, especially in the case of mortgage brokers, because these arrangements lack transparency. Although consumers may reasonably expect creditors to compensate their own employees, consumers do not know how the loan officer's compensation is structured or that the loan officer can increase the creditor's interest rate or offer certain loan terms to increase their own compensation. Without this understanding, consumers cannot reasonably be expected to appreciate or avoid the risk of financial harm these arrangements represent.

Yield spread premiums are complex and may be counter-intuitive even to well-informed consumers. Based on the Board's experience with consumer testing, the Board believes that disclosures are insufficient to overcome the gap in consumer comprehension regarding this critical aspect of the transaction. Currently, the required disclosures of originator compensation under federal and State laws seem to have little, if any, effect on originators' incentive to provide consumers with increased interest rates or other unfavorable loan terms, such as a prepayment penalty, that can increase the originator's compensation.\63\ The Board's consumer testing, discussed above, supported the finding that disclosures about yield spread premiums are ineffective; consumers in these tests did not understand yield spread premiums and did not grasp how they create an incentive for loan originators to increase consumers' costs.

\63\ Creditors may be willing to offer a loan with a lower interest rate in return for including a prepayment penalty. A loan originator that offers a loan with a prepayment penalty might not offer the lower rate, resulting in a premium interest rate and the payment of a yield spread premium.

Consumers' lack of comprehension of yield spread premiums is compounded where the originator also imposes a direct charge on the consumer. A mortgage broker might charge the consumer a direct fee, for example $500, for arranging the consumer's mortgage loan. This charge encourages consumers to infer that the broker accepts the consumer-paid fee to represent the consumer's financial interests. Consumers may believe that the fee they pay is the originator's sole compensation.

This may lead reasonable consumers to believe, erroneously, that loan originators are working on their behalf and are under a legal or ethical obligation to help consumers obtain the most favorable loan terms and conditions. There is evidence that consumers often regard loan originators as ``trusted advisors'' or ``hired experts'' and consequently rely on originators' advice. Consumers who regard loan originators in this manner are far less likely to shop or negotiate to assure themselves that they are being offered competitive mortgage terms. Even for consumers who shop, the lack of transparency in originator compensation arrangements makes it unlikely consumers will avoid yield spread premiums that unnecessarily increase the cost of their loan.

Consumers generally lack expertise in complex mortgage transactions because they engage in such mortgage transactions infrequently. Their reliance on the loan originator is reasonable in light of the originator's greater experience and professional training in the area, the belief that originators are working on their behalf, and the apparent ineffectiveness of disclosures to dispel that belief.

Injury not outweighed by benefits to consumers or to competition.

Yield spread premiums can represent a potential consumer benefit in cases where the amount is applied to reduce consumers' upfront closing costs, including originator compensation. A creditor's increase in the interest rate (or the addition of other loan terms) may be used to generate additional income that the creditor uses to compensate the originator, in lieu of adding origination points or fees that the consumer would be required to pay directly from the consumer's preexisting funds or the loan proceeds. This can benefit a consumer who lacks the resources to pay closing costs in cash, or who might have insufficient equity in the property to increase the loan amount to cover these costs. Further, some consumers prefer to fund closing costs, including origination fees, through a higher rate if the consumer expects to own the property or have the loan for a relatively short period, for example, less than five years. For those consumers who understand this trade-off there could be potential benefits. In such cases, however, the yield spread premium does not increase the amount of compensation paid by the creditor to the originator, who would receive the same amount whether the loan has a higher rate or a lower rate accompanied by higher upfront fees.

Nevertheless, without a clear understanding of yield spread premiums or effective disclosure, the majority of consumers are not equipped to police the market to ensure that yield spread premiums are in fact applied to reduce their closing costs, especially in the case of loan originator compensation. This would be particularly difficult because consumers are not likely to have any basis for determining a

``typical'' or ``reasonable'' amount for originator compensation.

Accordingly, the Board is proposing a rule that prohibits any person from basing a loan originator's compensation on the loan's rate or terms but still affords creditors the flexibility to structure loan pricing to preserve the potential consumer benefit of compensating an originator through the interest rate.

The Board's Proposal

Under Sec. 226.36(d)(1), the Board proposes to prohibit any person from compensating a loan originator, directly or indirectly, based on the terms or conditions of a loan transaction secured by real property or a dwelling. This prohibition would apply to any person, rather than only a creditor, to prevent evasion by structuring loan originator payments through non-creditors. For example, secondary market investors that purchase closed loans from creditors would not be permitted to pay compensation to loan originators that is based on the terms or conditions of their transactions.

Under the proposal, compensation that is based on the loan amount would be considered a payment that is based on a term or condition of the loan. The prohibition would not apply to consumers' direct payments to loan originators. Under Sec. 226.36(d)(2), however, if the consumer compensates the loan originator directly, the originator would be prohibited from receiving compensation from the creditor or any other person.

Because the loan originator could not receive compensation based on the interest rate or other terms, the originator would have no incentive to alter the terms made available by the creditor to deliver a more expensive loan. For example, a company acting as a mortgage broker could not provide greater compensation to its employee acting as the loan originator for a transaction with a 7 percent interest rate than for a transaction with a 6 percent interest rate. A creditor would be under the same restriction in compensating its loan officer. For this purpose, the term ``compensation'' would not be limited to commissions, but would include

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salaries or any financial incentive that is tied to the transaction's terms or conditions, including annual or periodic bonuses or awards of merchandise or other prizes. See proposed comment 36(d)(1)-1.

Proposed comment 36(d)(1)-2 provides examples of compensation that is based on the transaction's terms or conditions, such as payments that are based on the interest rate, annual percentage rate, or the existence of a prepayment penalty. Examples of loan originator compensation that is not based on the transaction's terms or conditions are listed in proposed comment 36(d)(1)-3. These include compensation based on the originator's loan volume, the performance of loans delivered by the originator, or hourly wages.

The Board recognizes that loans originators may need to expend more time and resources in originating loans for consumers with limited or blemished credit histories. Because such loans are likely to carry higher rates, originators currently rely on higher yield spread premiums to compensate them for the additional time and efforts. Paying an originator based on the time expended would be permissible under the proposed rule.

Although the proposed rule would not prohibit a creditor from basing compensation on the originator's loan volume, such arrangements may raise concerns about whether it creates incentives for originators to deliver loans without proper regard for the credit risks involved.

The Board expects creditors to exercise due diligence to monitor and manage such risks. Financial institution regulators generally will examine creditors they supervise to ensure they have systems in place to exercise such due diligence.

The proposed rule also would not prohibit compensation that differs by geographical area, but any such arrangements must comply with other applicable laws such as the Equal Credit Opportunity Act (15 U.S.C. 1691-1691f) and Fair Housing Act (42 U.S.C. 3601-3619). See proposed comment 36(d)(1)-4. Creditors that use geography as a criterion for setting originator compensation would need to be able to demonstrate that this reflects legitimate differences in the costs of origination and in the levels of competition for originators' services.

Under the proposed rule, creditors also may compensate their own loan officers differently than mortgage brokers. For instance, in light of the fact that mortgage brokers relieve creditors of certain overhead costs of loan originations, a creditor might pay brokers more than its own loan officers. Likewise, a creditor might pay one loan originator of either type more than it pays another, as long as each originator receives compensation that is not based on the terms of the transactions they deliver to the creditor.

Scope of coverage. The Board believes that the proposed rule should apply to creditors' employees who originate loans in addition to mortgage brokers. A creditor's loan officers frequently have the same discretion over loan pricing that mortgage brokers have to modify a loan's terms to increase their compensation, and there is evidence suggesting that loan officers engage in such practices.\64\

Accordingly, the coverage of Sec. 226.36(d)(1) is broader than the 2008 HOEPA proposal, which covered only mortgage brokers. Some commenters on the HOEPA proposal expressed concern that it would create an ``unlevel playing field'' by creating an unfair advantage for creditors that would not have to comply with the same requirements as brokers.

\64\ For example, the Federal Trade Commission's settlement with

Gateway Funding, Inc. in December 2008 illustrates a case where a creditor's loan officers created ``overages,'' although the primary legal theory concerned disparate treatment by race in the imposition of overages. The FTC's complaint and the court's final judgment and order can be found on the FTC's web-site at http://www.ftc.gov/os/ caselist/0623063/index.shtm. The FTC has since filed a complaint alleging similar patterns of overages in violation of fair lending laws, against Golden Empire Mortgage, Inc. The May 2009 complaint can be found at http://www.ftc.gov/os/caselist/0623061/ 090511gemcmpt.pdf. A similar pattern of overages was alleged in legal actions brought by the Department of Justice (DOJ), which resulted in settlement agreements with Huntington Mortgage Company

(1995) and Fleet Mortgage Corp. (1996).

The proposed rule would apply to covered transactions whether or not they are higher-priced mortgage loans. A loan originator's financial incentive to deliver less favorable loan terms to a consumer could result in consumer injury whether or not the loan has a rate above the coverage threshold in Sec. 226.35. The risks of harm could be reduced in the lower-priced segment of the market, however, where consumers historically have more choices. Comment is solicited on the relative costs and benefits of applying the rule to all segments of the market, and whether the costs would outweigh the benefits for loans below the higher-priced mortgage loan threshold.

Creditors' pricing flexibility. The proposed rule would not affect creditors' flexibility in setting rates or other loan terms. The rule does not limit the creditor's ability to adjust the loan terms it offers to consumers as a means of financing costs the consumer would otherwise be obligated to pay directly (in cash or out of the loan proceeds), including the originator's compensation, provided this does not affect the amount the originator receives for the transaction.

Thus, a creditor could recoup costs by adding to the loan pricing terms an origination point (calculated as one percentage point of the loan amount) even though the creditor could not pay the originator's compensation on that basis. Similarly, a creditor could add a constant premium of, for instance, \1/4\ of one percent to the interest rates on all transactions for which the creditor will pay compensation to the loan originator, as a means of recouping the cost of the originator's compensation. The creditor would not recoup the same dollar amount in each transaction, however, because the present value of the premium in dollars would vary with the loan amount. Consequently, even though loan pricing could be set in this manner, this method could not be used to set the loan originator's compensation. See proposed comment 36(d)(1)- 5.

Effect of modification of loan terms. The proposed rule is designed to prevent consumers from being harmed by loan originators making unfavorable modifications to loan terms, such as increasing the interest rate, to increase the originator's compensation. Currently, loan originators might also exercise discretion to make modifications in the consumer's favor. For example, to retain the consumer's business, today a loan originator might agree with the consumer to reduce the amount the consumer must pay in origination points on the loan, which would be funded by a reduction in the amount the originator receives from the creditor as compensation for delivering the loan.

Under the proposed rule, however, a creditor would not be permitted to reduce the amount it pays to the loan originator based on such a change in loan terms. As a result, the reduction in origination points would be a cost borne by the creditor.

Thus, when the creditor offers to extend a loan with specified terms and conditions (such as the rate and points), the amount of the originator's compensation for that transaction is not subject to change, through either an increase or a decrease, even if different loan terms are negotiated. If this were not the case, a creditor generally could agree to compensate originators at a high level and then subsequently lower the compensation only in selective cases, such as when the consumer obtains a competing offer with a lower interest rate. This would have the same

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effect as increasing the originator's compensation for higher rate loans. Proposed comment 36(d)(1)-6 would address this issue.

Periodic changes in loan originator compensation. Under proposed

Sec. 226.36(d)(1) a creditor would not be prevented from periodically revising the compensation it agrees to pay a loan originator. However, a creditor may not revise a loan originator's compensation arrangement in connection with each transaction. This guidance is reflected in proposed comment 36(d)(1)-7. The revised compensation arrangement must result in payments to the loan originator that are not based on the terms or conditions of a credit transaction. A creditor might periodically review factors such as loan performance, transaction volume, as well as current market conditions for originator compensation, and prospectively revise the compensation it agrees to pay to a loan originator. For example, assume that during the first six months of the year, a creditor pays $3,000 to a particular loan originator for each loan delivered, regardless of the loan terms. After considering the volume of business produced by that originator, the creditor could decide that as of July 1, it will pay $3,250 for each loan delivered by that originator, regardless of the loan terms. The change in compensation would not be a violation even if the loans made by the creditor after July 1 generally carry higher interest rates than loans made before that date.

Alternative to permit compensation based on loan amount. The Board is also publishing for comment a proposed alternative that would allow loan originator compensation to be based on the loan amount, which would not be considered a transaction term or condition for purposes of the prohibition in Sec. 226.36(d)(1). Currently, the compensation received by many mortgage originators is structured as a percentage of the loan amount. Other participants in the mortgage market, such as creditors, mortgage insurers, and other service providers, also receive compensation based on the loan amount. The Board is therefore seeking comment on whether prohibiting originator compensation on this basis might be unduly restrictive and unnecessary to achieve the purposes of the proposed rule.

On the other hand, prohibiting compensation based on the loan amount would eliminate an incentive for the originator to steer consumers to a larger loan amount. Such steering maximizes the originator's compensation but also increases the transaction's loan-to- value ratio and decreases the consumer's equity in the property. If the loan-to-value ratio increases sufficiently, the consumer may incur additional costs in the form of a higher interest rate or additional points and fees, including the cost of mortgage insurance premiums.

Because the consumer's monthly payment would also be larger, the originator might direct the consumer to riskier loan products that have discounted initial rates but are subject to significant payment increases after the introductory period expires.

Because of the foregoing concerns, the Board is publishing two alternative versions of proposed Sec. 226.36(d)(1). The first alternative would consider the loan amount as a term or condition of the loan, thereby prohibiting the payment of originator compensation as a percentage of the loan amount. The second alternative provides that the loan amount is not a term or condition of the loan, and would permit such payments. The second alternative would be accompanied by proposed comment 36(d)(1)-10 to provide further guidance. Under proposed comment 36(d)(1)-10, a loan originator could be paid a fixed percentage of the loan amount even though the dollar amount paid by a particular creditor would vary from transaction to transaction and would increase as the loan amount increases. Comment 36(d)(1)-10 also permits compensation paid as a fixed percentage of the loan amount to be subject to a specified minimum or maximum dollar amount. For example, a loan originator's compensation could be set at one percent of the principal loan amount but not less than $1,000 or greater than

$5,000.

The Board seeks comment on the two alternatives. Further, if the final rule permits compensation based on the loan amount, should creditors be permitted to apply different percentages to loans of different amounts? Should creditors be allowed to pay a larger percentage for smaller loan amounts, which could be an incentive to originate loans in lower- priced neighborhoods that ensures that the originator receives an amount that is comparable to loans originated in high-priced neighborhoods? If so, should creditors also be permitted to pay originators a higher percentage for larger loan amounts?

Prohibition of compensation from both the consumer and another source. Proposed Sec. 226.36(d)(2) would provide that, if a loan originator is compensated directly by the consumer for a transaction secured by real property or a dwelling, no other person may pay any compensation to the originator for that transaction. Direct compensation paid by a consumer to a loan originator would not be limited to ``origination fees,'' ``broker fees,'' or similarly labeled charges. Rather, compensation for this purpose includes any payment by the consumer that is retained by the loan originator. Thus, a creditor that is a loan originator by virtue of making a table funded transaction, as discussed above, would be subject to this prohibition if it imposes and retains any direct charge on the consumer for the transaction.

Consumers reasonably may believe that when they pay a loan originator directly, that amount is the only compensation the originator will receive. As discussed above, consumers generally are not aware of creditor payments to originators. If the consumer were aware of such payments, the consumer might reasonably expect that making a direct payment to an originator would reduce or eliminate the need for the creditor to fund the originator's compensation through the consumer's interest rate. Because the consumer is unaware of yield spread premiums, however, the consumer cannot effectively negotiate the originator's compensation. In fact, if consumers pay loan originators directly and creditors also pay originators through higher rates, consumers may be injured by unwittingly paying originators more in total compensation (directly and through the rate) than consumers believe they agreed to pay.

The Board believes that simply disclosing the yield spread premium would not address this injury to consumers. Consumer testing in connection with the Board's 2008 HOEPA Final Rule shows that, even with a disclosure, consumers do not understand how a creditor payment to a loan originator can result in a higher interest rate for the consumer.

A disclosure therefore cannot inform consumers that they effectively are paying the loan originator more than they believe they agreed to pay. Without that knowledge, consumers cannot take steps to protect their own interests, such as by negotiating for a smaller direct payment, a lower rate, or both.

The Board also believes that this prohibition would increase transparency for consumers by requiring that all originator compensation come from the creditor or from the consumer, but not both.

This additional consequence of proposed Sec. 226.36(d)(2) would reduce the total number of loan pricing variables with which the consumer must contend. There is evidence that such simplification is consistent with

TILA's purpose of promoting the informed use of

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consumer credit.\65\ See TILA Section 102(a), 15 U.S.C. 1601(a).

\65\ See, e.g., Woodward, Susan E., A Study of Closing Costs for

FHA Mortgages at 70-73 (Urban Institute and U.S. Department of

Housing and Urban Development 2008), available at http:// www.urban.org/UploadedPDF/411682_fha_mortgages.pdf.

Proposed Sec. 226.36(d)(2) would prohibit only payments to an originator that are made in connection with the particular credit transaction, such as a commission for delivering the loan. The rule is not intended to prohibit payment of a salary to a loan originator who also receives direct compensation from a consumer in connection with that consumer's transaction. This guidance is contained in proposed comment 36(d)(2)-1.

Record retention requirements. Creditors are required by Sec. 226.25(a) to retain evidence of compliance with Regulation Z for two years. Proposed staff comment 25(a)-5 would be added to clarify that, to demonstrate compliance with Sec. 226.36(d)(1), a creditor must retain at least two types of records.

First, a creditor must have a record of the compensation agreement with the loan originator that was in effect on the date the transaction's rate was set. The Board believes this date is most likely when a loan originator's compensation was determined for a given transaction. The Board seeks comment, however, on whether some other time would be more appropriate, in light of the purposes of the proposed rule. Proposed comment 25(a)-5 would clarify that the rules in

Sec. 226.35(a) would govern in determining when a transaction's rate is set.

Second, proposed comment 25(a)-5 would state that a creditor must retain a record of the actual amount of compensation it paid to a loan originator in connection with each covered transaction. The proposed comment would clarify that, in the case of mortgage brokers, the HUD-1 settlement statement required under RESPA would be an example of such a record because it itemizes the compensation received by a mortgage broker. The Board solicits comment on whether any comparable record exists for loan officer compensation that should be referenced in proposed comment 25(a)-5. To facilitate compliance, a cross reference to the record retention requirement would be included in proposed comment 36(d)(1)-9.

The Board solicits comment on whether there are other records that should be subject to the retention requirements. The Board also seeks comment on whether the existing two-year record retention period is adequate for purposes of the rules governing loan originator compensation.

The current record retention requirements in Sec. 226.25 apply only to creditors. Although loan originator compensation has historically been paid by creditors, the prohibitions in Sec. 226.36(d) apply more broadly to any person to prevent evasion by restructuring of payments through non-creditors. Accordingly, the Board expects that payments to loan originators will continue to be made largely by creditors. The Board seeks comment on whether there is a need to adopt requirements for retaining records concerning originator compensation that would apply to persons other than creditors, including the relative costs and benefits of that approach. 36(e) Prohibition on Steering

Optional Proposal on Steering by Loan Originators

The Board is also soliciting comment on whether it should adopt a rule that seeks to prohibit loan originators from directing or

``steering'' consumers to loans based on the fact that the originator will receive additional compensation, when that loan may not be in the consumer's best interest. Under proposed Sec. 226.36(d)(1), a loan originator would receive the same compensation from a particular creditor regardless of the transaction's rate or terms. That provision, however, would not prohibit a loan originator from directing a consumer to transactions from a single creditor that offers greater compensation to the originator, while ignoring possible transactions having lower interest rates that are available from other creditors.

Attempting to address this issue presents difficulties. Determining whether a loan originator was warranted in directing a consumer to a loan that resulted in greater compensation for the originator also involves a determination of whether that loan was in the consumer's best interest compared to other available loan products. There is, however, no uniform method for making that evaluation. Consumers and loan originators may choose from among possible loan offers for a variety of reasons. The annual percentage rate (APR) is a tool that facilitates comparison shopping among different loans, but it is imperfect for reasons that are well documented, including the fact that the APR is calculated by amortizing origination fees over the full loan term rather than the expected life of the loan. See the 1998 Joint

Report to the Congress by the Board and HUD, cited above. In considering interest rates, consumers may view the economic trade-off between rates and points differently depending on their individual financial circumstances or the amount of time they expect to hold the loan. Moreover, consumers evaluate other factors in deciding whether a loan is in their best interest even if it is not represented as the lowest cost option among the possible loan offers available through the originator. Thus, some consumers may reasonably determine that the financial risk created by a loan's prepayment penalty is acceptable in light of the loan's lower interest rate, while other consumers may prefer to accept a higher rate to avoid the risk. Consumers and loan originators also may consider factors other than loan cost, such as the creditor's rate lock-in policies, or the creditor's reputation for delivering loans within the promised time-frame, especially for home- purchase loans.

The Board believes, however, that there is benefit in attempting to craft a rule that prohibits and deters the most egregious practices, even if such a rule cannot ensure that consumers always obtain the lowest cost loan. Under the proposal, a loan originator would have a duty not to steer a consumer to higher cost loans that pay more to the originator when the loan is not in the consumer's interest. Originators would violate the rule, for example, if they directed the consumer to a fixed-rate loan option from a creditor that maximizes the originator's compensation without providing the consumer with an opportunity to choose from other available loans that have lower fixed interest rates with the equivalent amount in origination and discount points.

The Board is publishing a proposal, designated as proposed Sec. 226.36(e)(1), to reflect this optional approach. Specifically, the rule would prohibit loan originators from directing or ``steering'' a consumer to consummate a transaction secured by real property or a dwelling that is not in the consumer's interest, based on the fact that the originator will receive greater compensation from the creditor in that transaction than in other transactions the originator offered or could have offered to the consumer. The proposed rule seeks to preserve consumer choice by ensuring that consumers have appropriate loan options that reflect considerations other than the maximum amount of compensation that will be paid to the originator. Proposed comments 36(e)(1)-1 through -3 would provide additional guidance on the rule.

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Proposed Sec. 226.36(e) would not require a loan originator to direct a consumer to the transaction that will result in the least amount of compensation being paid to the originator by the creditor.

However, if the loan originator reviews possible loan offers available from a significant number of the creditors with which the originator regularly does business and the originator directs the consumer to the transaction that will result in the least amount of creditor-paid compensation, the requirements of Sec. 226.36(e) would be deemed to be satisfied. See proposed comment 36(e)(1)-2(ii).

Loan originators employed by the creditor in a transaction would be prohibited under Sec. 226.36(d)(1) from receiving compensation based on the terms or conditions of the loan. Thus, when originating loans for the employer, the originator could not steer the consumer to a particular loan to increase compensation. Accordingly, in those cases, their compliance with Sec. 226.36(d)(1) would be deemed to satisfy the requirements of proposed Sec. 226.36(e). See proposed comment 36(e)(1)-2(ii). A creditor's employee, however, occasionally might act as a broker in forwarding a consumer's application to a creditor other than the originator's employer, such as when the employer does not offer any loan products for which the consumer would qualify. If the originator is compensated for arranging the loan with the other creditor, the originator would not be an employee of the creditor in that transaction and would be subject to proposed Sec. 226.36(e).

The Board is also publishing provisions that would facilitate compliance with the prohibition in proposed Sec. 226.36(e)(1). Under proposed Sec. 226.36(e)(2) and (3), a safe harbor would be created, and there would be no violation if the loan was chosen by the consumer from at least three loan options for each type of transaction (fixed- rate or adjustable-rate loan) in which the consumer expressed an interest, provided the following conditions are met. The loan originator must obtain loan options from a significant number of creditors with which the originator regularly does business. For each type of transaction in which the consumer expressed an interest, the originator must present and permit the consumer to choose from at least three loans that include: the loan with the lowest interest rate, the loan with the second lowest interest rate, and the loan with the lowest total dollar amount for origination points or fees and discount points.

The loan originator must have a good faith belief that these are loans for which the consumer likely qualifies. If the originator presents more than three loans to the consumer, the originator must highlight the three loans that satisfy the lowest rate and points criteria in the rule. Proposed comments 36(e)(2)-1 and 36(e)(3)-1 though -4 would provide guidance on the application of the rule.

Comment is expressly solicited on whether the proposed rule in

Sec. 226.36(e) and the accompanying commentary would be effective in achieving the stated purpose. Comment is also solicited on the feasibility and practicality of such a rule, its enforceability, and any unintended adverse effects the rule might have. 36(f)

The Board proposes to redesignate existing Sec. 226.36(d) as Sec. 226.36(f). Existing Sec. 226.36(d) provides that Sec. 226.36 does not apply to home-equity lines of credit (HELOCs). The redesignation would accommodate proposed new Sec. 226.36(d) and (e), discussed above.

The Board proposed as part of the 2008 HOEPA proposal to exclude

HELOCs from the coverage of Sec. 226.36 because of two considerations, which suggested that the protections may be unnecessary for such transactions. First, the Board understood that most originators of

HELOCs hold them in portfolio rather than sell them, which aligns these originators' interests in loan performance more closely with their borrowers' interests. Second, the Board understood that HELOCs are concentrated in the banking and thrift industries, where the federal banking agencies can use their supervisory authority to protect consumers. The Board sought comment on whether these considerations were valid or whether any or all of the protections in Sec. 226.36 should apply to HELOCs. Although mortgage lenders and other industry representatives commented in support of the proposed exclusion and consumer advocates commented in opposition, neither group provided the

Board with substantial evidence as to whether the kinds of problems

Sec. 226.36 addresses exist in the HELOC market.

In the July 2008 HOEPA Final Rule, the Board limited the scope of

Sec. 226.36 to closed-end mortgages. In the absence of clear evidence of abuse, the Board continued to believe the protections may be unnecessary for the reasons discussed above. Nevertheless, the Board remains aware of concerns that creditors may structure transactions as

HELOCs solely to evade the protections of Sec. 226.36. The Board also is aware that many of the same opportunities and incentives that underlie the abuses addressed by Sec. 226.36 for closed-end mortgages may well exist for HELOCs. Reasons therefore exist for positing that such unfair practices either may or may not occur with HELOCs, but the

Board lacks concrete evidence as to which is the case.

The Board requests comment on whether any or all of the protections in Sec. 226.36 should apply to HELOCs. Specifically, what evidence exists that shows whether loan originators unfairly manipulate HELOC terms and conditions to receive greater compensation, injuring consumers as a result? What evidence is there as to whether appraisals obtained for HELOCs have been influenced toward misstating property values? To what extent do creditors contract out HELOC servicing to third parties, thus undermining the Board's premise regarding aligned interests between servicers and consumers? Whether third parties or the original creditors primarily service HELOCs, what evidence shows whether they engage in the abusive servicing practices addressed by

Sec. 226.36(c)?

Section 226.37 Special Disclosure Requirements for Closed-End Mortgages

Section 226.17(a), which implements Sections 122(a) and 128(b)(1) of TILA, addresses format and other disclosure standards for all closed-end credit. 15 U.S.C. 1632(a), 1638(b)(1). For closed-end credit, creditors must provide disclosures in writing in a form that the consumer may keep, grouped together and segregated from other information. In addition, the loan's ``finance charge'' and ``annual percentage rate,'' using those terms, must be more conspicuous than other required disclosures.

The Board proposes special rules in new Sec. 226.37 to govern the format of required disclosures under TILA for transactions secured by real property or a dwelling. These new rules would be in addition to the rules in Sec. 226.17. The proposed format rules are intended to

(1) improve consumers' ability to identify disclosed loan terms more readily; (2) emphasize information that is most important to the consumer in the decision-making process; and (3) simplify the organization and structure of required disclosures to reduce complexity and ``information overload.'' Proposed Sec. 226.37 would establish special format rules for disclosures required by proposed Sec. Sec. 226.38 and 226.20(d), and existing Sec. Sec. 226.19(b) and 226.20(c).

The Board is proposing Sec. 226.37 and associated commentary to address the

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duty to provide ``clear and conspicuous'' disclosures that are grouped together and segregated from other information, and to require that certain information be highlighted in table form or in a graph.

Proposed Sec. 226.37 would also require creditors to use consistent terminology for all disclosures. The Board is proposing to revise the requirement that certain terms be used or disclosed more conspicuously, for transactions secured by real property or a dwelling. The general disclosure standards under Sec. 226.17(a)(1) and associated commentary continue to apply transactions secured by real property or a dwelling but, under the proposal creditors would also be required to meet the higher standards under proposed Sec. 226.37. 37(a) Form of Disclosures 37(a)(1) Clear and Conspicuous

Section 122(a) of TILA and Sec. 226.17(a)(1) require that all closed-end credit disclosures be made clearly and conspicuously. 15

U.S.C. 1632(a). Currently, under comment 17(a)(1)-1, the Board interprets the clear and conspicuous standard to mean that disclosures must be in a ``reasonably understandable'' form. This standard does not require any mathematical progression or format, or that disclosures be provided in a particular type size, although disclosures must be legible whether typewritten, handwritten, or printed by computer.

Comment 17(a)(1)-3 provides that the standard does not require disclosures to be located in a particular place.

Consumer testing conducted by the Board showed that information presented without any highlighting or other emphasis, and the use of small print led many participants to miss or disregard key information about the loan transaction. As discussed more fully under the following sections, consumer testing indicates that when certain information is presented and highlighted in a specific way consumers are able to identify and use key terms more easily: proposed Sec. 226.38 for disclosures required on transactions secured by real property or a dwelling, Sec. 226.19(b) for ARM loan program disclosures, Sec. 226.20(c) for ARM adjustment notices, and Sec. 226.20(d) for periodic statements on loans that are negatively amortizing.\66\ For example, consumer testing of the current TILA model form indicated that participants viewed both the interest rate and monthly payment as important. Although participants generally understood that the interest rate on their loan could change, several arrived at this conclusion because of the payment schedule disclosure, which showed different monthly payment amounts, not because they understood the loan had a variable rate feature that would affect their monthly payments. In addition to testing the current TILA model form, the Board also tested variations of that form, including a form it developed in 1998 with HUD

(``Joint Form'') that was submitted to Congress in the 1998 Joint

Report.\67\ Participants who reviewed the Joint Form also generally understood the loan had an adjustable rate, but less than half understood the rate was fixed only for the first three years and could vary only after that time period. However, when the Board consumer tested information about interest rates and monthly payments in a tabular form, participants could identify more readily that the loan had an adjustable rate feature, and comprehension of when interest rates would adjust and the impact that rate adjustments had on their monthly payments improved.

\66\ See also Improving Consumer Mortgage Disclosures (finding that incorporating white space, using clear headings, and using certain formatting and organization create a ``less intimidating appearance than many consumer financial disclosures, making it more likely that consumers will both want to read the form and be able to use it productively in their decisions.'').

\67\ See the 1998 Joint Report, App.A-6.

For these reasons, the Board proposes to require that creditors make disclosures for transactions secured by real property or a dwelling clearly and conspicuously, by highlighting certain information in accordance with the requirements in proposed Sec. Sec. 226.38, 226.19(b), Sec. 226.20(c), and Sec. 226.20(d). Proposed comment 37(a)(1)-1 would clarify that to meet the clear and conspicuous standard, disclosures must be in a reasonably understandable form and readily noticeable to the consumer. Proposed comment 37(a)(1)-2 provides that to meet the readily noticeable standard, the disclosures under proposed Sec. Sec. 226.38, 226.19(b), 226.20(c), and 226.20(d) generally must be provided in a minimum 10-point font. The approach of requiring a minimum of 10-point font for certain disclosures is consistent with the approach taken by the Board in revising disclosures required under TILA for certain open-end credit. 74 FR 5244; Jan. 29, 2009.

New comment 37(a)(1)-3 would clarify that disclosures under proposed Sec. Sec. 226.38 and 226.19(b) must be provided on a document separate from other information, although these disclosures, as well as disclosures under proposed Sec. Sec. 226.20(c) and 226.20(d), may be made on more than one page, on the front or back side of a page, and continued from one page to the next. Consumer testing suggests that consumers may not read information carefully if it is excessive in length, and if unable to identify relevant information quickly are likely to become frustrated and not read the disclosures. The Board believes that allowing creditors to combine disclosures with other information may increase the likelihood that consumers will not read the disclosures. 37(a)(2) Grouped Together and Segregated

Section 128(b)(1) of TILA and Sec. 226.17(a)(1) currently require that, except for certain information, the disclosures required for closed-end credit must be grouped together, segregated from everything else, and not contain any information not directly related to the required disclosures. 15 U.S.C. 1638(b)(1). Comment 17(a)(1)-2 states that creditors can satisfy the grouped together and segregation requirement in a variety of ways, including combining segregated disclosures with other information as long as they are set off by a certain format type. Comment 17(a)(1)-2 further provides that the segregation requirement does not apply to disclosures for variable rate transactions required under current Sec. Sec. 226.19(b) and 226.20(c).

Comment 17(a)(1)-7 clarifies that balloon-payment financing with leasing characteristics is subject to the grouped together and segregation requirement.

Consumer testing conducted by the Board indicated that participants generally are overwhelmed by the amount of information presented for loan transactions, and as a result, do not read their mortgage disclosures carefully. Consumer testing showed that emphasizing terms and costs consumers find important, and separating out less useful information, is critical to improving consumers' ability to identify and use key information in their decision-making process.\68\ Consumer testing also demonstrated that grouping related concepts and figures together, and presenting them in a particular format or structure can improve

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consumers' ability to identify, comprehend, or use disclosed terms.

\68\ See also Improving Consumer Mortgage Disclosure at 69

(consumer testing results showed that current mortgage disclosure forms failed to convey key cost disclosures, but that prototype disclosures, which removed less useful information, significantly improved consumers' recognition of key mortgage costs).

For these reasons, the Board proposes to require that certain disclosures be grouped together and segregated in the manner discussed below, pursuant to its authority under TILA Section 105(a). 15 U.S.C. 1604(a). Section 105(a) authorizes the Board to make exceptions and adjustments to TILA to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms and helping consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a), 1604(a). Grouping and segregating information which is most useful and relevant to the loan transaction would facilitate consumers' ability to evaluate a loan offer.

Segregation of disclosures. Proposed Sec. 226.37(a)(2) would implement TILA Section 128(b)(1) of TILA, in part, for transactions secured by real property or a dwelling. 15 U.S.C. 1604(a), 1638(b)(1).

Proposed Sec. 226.37(a)(2) would require that disclosures for such transactions be grouped together in accordance with the requirements under proposed Sec. 226.38(a) through (j), segregated from other information, and not contain any information not directly related to the segregated disclosures. Based on consumer testing, the Board also is proposing to require that ARM loan program disclosures under proposed Sec. 226.19(b), ARM adjustment notices under proposed Sec. 226.20(c), and periodic notices for payment option loans that are negatively amortizing under proposed Sec. 226.20(d), be subject to a grouped-together and segregation requirement. Thus, the reference to

Sec. Sec. 226.19(b) and 226.20(c) would be deleted from comment 17(a)(1)-2.

Proposed comment 37(a)(2)-1 would clarify that to be segregated, disclosures must be set off from other information. Based on consumer testing, the Board is concerned that allowing creditors to combine disclosures with other information, in any format, will diminish the clarity of key disclosures, potentially cause ``information overload,'' and increase the likelihood that consumers may not read the disclosures. Proposed comment 37(a)(2)-1 also would provide guidance on how creditors can group together and segregate the disclosures in accordance with proposed Sec. 226.38(a)-(j), such as by using bold print dividing lines.

Content of segregated disclosures; directly related information.

Footnotes 37 and 38 currently provide exceptions to the grouped- together and segregation requirement under Sec. 226.17(a)(1). Footnote 37 allows creditors to include information not directly related to the required disclosures, such as the consumer's name, address, and account number. Footnote 38, which implements TILA Section 128(b)(1), 15 U.S.C. 1638(b)(1), allows creditors to exclude certain required disclosures from the grouped-together and segregation requirement, such as the creditor's identity under Sec. 226.18(a), the variable-rate example under Sec. 226.18(f)(1)(iv), insurance or debt cancellation disclosures under Sec. 226.18(n), or certain security-interest charges under Sec. 226.18(o). Comment 17(a)(1)-4 clarifies that creditors have flexibility in grouping the disclosures listed in footnotes 37 and 38 either together with or separately from segregated disclosures, and comment 17(a)(1)-5 addresses what is considered directly related to the segregated disclosures.

Proposed Sec. 226.37(a)(2)(i) and (ii) would provide exceptions to the grouped-together and segregation requirement, and implement TILA

Section 128(b)(1) for transactions secured by real property or a dwelling. 15 U.S.C. 1638(b)(1). Proposed Sec. 226.37(a)(2)(i) replicates the content in current footnote 37 and would allow the following disclosures to be made together with the segregated disclosures: the date of the transaction, and the consumer's name, address and account number. Proposed Sec. 226.37(a)(2)(ii) generally replicates the substance in current footnote 38, except that the Board proposes to remove the reference to the variable-rate example under

Sec. 226.18(f)(iv), which would be eliminated for mortgage loans as discussed under proposed Sec. 226.19(b). Under proposed Sec. 226.37(a)(2)(ii), creditors also would have flexibility to make the tax deductibility disclosure, as discussed under proposed Sec. 226.38(f)(4), together with or separately from other required disclosures.

Proposed comment 37(a)(2)-2 clarifies that creditors may add or delete the disclosures listed in proposed Sec. 226.37(a)(2)(i) and

(ii) in any combination together with or separate from the segregated disclosures. Proposed comment 37(a)(2)-3 provides guidance on the type of information that would be considered directly related and that may be included with the segregated disclosures for transactions secured by real property or a dwelling. Information described in comments 17(a)(1)-5(i) through (xv) are not included in proposed comment 37(a)(2)-3 because they are not applicable to transactions secured by real property or a dwelling, or are unnecessary as a result of other proposed disclosures: grace periods for late fees; unsecured interest; demand features; instructions on multi-purpose forms; minimum finance charge statement; negative amortization; due-on-sale clauses; prepayment of interest statement; the hypothetical example disclosure required by current Sec. 226.18(f)(1)(iv); the variable rate transaction disclosure required by current Sec. 226.18(f)(1); assumption; and the late-payment fee disclosure for single-payment loans.

The Board also proposes to require that the disclosure of the creditor's identity be grouped together and segregated from other information, for all closed-end credit. The Board proposes to make this change pursuant to its authority under TILA Section 105(a). 15 U.S.C. 1604(a). Section 105(a) authorizes the Board to make exceptions and adjustments to TILA to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms, and avoiding the uninformed use of credit. 15 U.S.C. 1601(a). The Board believes that the creditor's identity should be included with the grouped- together and segregated disclosures so that consumers can more easily identify the appropriate entity. Thus, current footnote 38 would be revised, and proposed Sec. 226.37(a)(2) would implement this aspect of the proposal for transactions secured by real property or a dwelling.

In technical revisions, the Board proposes to move the substance of footnotes 37 and 38 to the regulatory text of Sec. 226.17(a)(1).

Current comment 17(a)(1)-7 would be revised to address disclosures for transactions secured by real property or a dwelling that have balloon payment financing with leasing characteristics; a cross-reference to comment 17(a)(1)-7 is proposed in new comment 37(a)(2)-4.

The Board seeks comment on whether it should continue to permit creditors to make the insurance or debt cancellation disclosures under proposed Sec. 226.4(d) together with or separately from other required disclosures. Consumer testing showed that many participants found these disclosures too long and complex, and as a result they do not read or only skim the disclosures. The Board is concerned that adding the insurance information to the information about loan terms required by proposed Sec. 226.38 will result in ``information overload.''

Multi-purpose forms. Comment 17(a)(1)-6 currently permits creditors to design multi-purpose forms for TILA-required closed-end credit disclosures as long as the clear and conspicuous requirement is met.

The Board proposes

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to require that disclosures for transactions secured by real property or a dwelling be made only as applicable, as discussed more fully under proposed Sec. 226.38. As noted, consumer testing indicates that consumers may not read information if it is excessive in length, and if unable to identify relevant information quickly are likely to become frustrated and not read the disclosures. The Board believes that allowing creditors to combine disclosures with other information that is not applicable to the transaction may contribute to ``information overload,'' and increase the likelihood that consumers will not read the disclosures.

For these reasons, under the proposal creditors would not be permitted to use forms for more than one type of mortgage transaction

(i.e., multi-purpose forms). The Board believes technology and form design software will allow creditors to prepare transaction-specific, customized disclosure forms at minimal cost. The Board seeks comment, however, on whether creditors already provide consumers with customized disclosures forms for mortgage loans in the regular course of business, or the extent to which creditors rely on multi-purpose forms. The Board seeks comment on potential operational changes, difficulties, or costs that would be incurred to implement the requirement to have transaction-specific disclosures for transactions secured by real property or a dwelling. 37(b) Separate Disclosures

Existing Sec. 226.17(a)(1) requires certain disclosures to be provided separately from the segregated information, such as the itemization of amount financed required by Sec. 226.18(c)(1) and TILA

Section 128(a)(2)(A). 15 U.S.C. 1638(a)(2)(A). The Board is proposing to expand the list of disclosures that must be provided separately from the segregated information, based on consumer testing.

Consumer testing showed that certain disclosures, such as disclosures about assumption or property insurance, were confusing to participants, or were generally not as useful in the participants' decision-making process as other information. For example, with respect to assumption, few participants understood the current assumption policy model clause in Model Clause H-6 in Appendix H to Regulation Z; almost no one stated that the assumption was important information when applying for and obtaining a loan. With respect to property insurance, most participants understood that the borrower can obtain property insurance from anyone that is acceptable to the lender, but participants stated they were already aware of this fact and therefore this information was not useful. Regarding rebates, consumers understood that early payoff of the loan could result in a refund of interest and fees, and generally expressed interest in knowing this information. However, most also indicated that information about rebates would not have an impact on whether they accepted a loan and therefore, it was not as important or useful to the decision-making process as other information, such as interest rate or closing costs.

With respect to the contract reference, almost all participants understood already that they could read their contract to learn what could happen if they stopped making payments, defaulted, paid off or refinanced their loan early. In addition, other proposed disclosures, such as the prepayment penalty under proposed Sec. 226.38(a)(5) or demand feature under proposed Sec. 226.38(d)(2)(iv), would make the contract reference disclosure less important because such information would already be disclosed directly on the disclosure statement itself.

Moreover, because creditors must provide disclosures within three business days after application for transactions secured by real property or a consumer's dwelling, consumers will not have a contract to reference at this point in time.

For these reasons, the Board proposes to require that certain information be disclosed separately from the grouped together and segregation information, to improve consumers' ability to focus on the terms that are most important for shopping and decision-making.\69\ New

Sec. 226.37(b) would require that creditors provide the following disclosures separately from other information for transactions secured by real-property or a dwelling: Itemization of amount financed under proposed Sec. 226.38(j)(1); rebates under proposed Sec. 226.38(j)(2); late payment under proposed Sec. 226.38(j)(3); property insurance under proposed Sec. 226.38(j)(4); contract reference under proposed

Sec. 226.38(j)(5); and assumption under proposed Sec. 226.38(j)(6).

\69\ See also Improving Consumer Mortgage Disclosures at 37-38, 59-60 (finding that streamlining disclosures improved consumer ability to identify and understand key terms of the loan transaction disclosed).

The Board proposes this approach pursuant to its authority under

TILA Section 105(a). 15 U.S.C. 1604(a). Section 105(a) authorizes the

Board to make exceptions and adjustments to TILA for any class of transactions to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms and helping consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a), 1604(a). In this case, the Board believes an exception from TILA's grouped together and segregation requirement is necessary to effectuate the Act's purposes for transactions secured by real property or a dwelling. As noted above, many consumers may not read information if it is excessive in length, and if unable to identify relevant information quickly are likely to become frustrated and not read the disclosures.

The Board is concerned that allowing creditors to combine the information in proposed Sec. 226.38(j) with other required information could contribute to ``information overload,'' distract from other important disclosures, such as the APR or monthly payments, and may increase the likelihood that consumers will not read the disclosures.

Thus, the Board believes that requiring these disclosures to be separate from the other required disclosures will serve TILA's purpose to avoid the uninformed use of credit. 15 U.S.C. 1601(a). 37(c) Terminology 37(c)(1) Consistent Terminology

Currently, there is no requirement that TILA disclosures for closed-end credit use consistent terminology. Consumer testing showed that some participants were confused when different terms are used for the same information. For example, when the terms loan amount, principal, and loan balance were used, some participants attributed different meaning to each term used. Based on these findings, the Board proposes Sec. 226.37(c)(1) to require the use of consistent terminology for the disclosures under proposed Sec. Sec. 226.38, 226.19(b), 226.20(c) and 226.20(d). The Board believes that using consistent terminology will enhance a consumers' ability to identify, review, and comprehend disclosed terms across all disclosures and therefore, avoid the uninformed use of credit. Proposed comment 37(c)(1)-1 clarifies that terms do not need to be identical, unless otherwise specified, but must be close enough in meaning to enable the consumer to relate the disclosures to one another. Proposed comment 37(c)(1)-2 provides guidance on combining terms for transactions secured by real property or a dwelling when more than one numerical disclosure would be the same, and provides an example relating to the total payments and amount financed disclosures required under proposed

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Sec. Sec. 226.38(e)(5)(i) and 226.38(e)(5)(iii), respectively. 37(c)(2) Terms Required To Be More Conspicuous

Currently TILA Section 122(a) and Sec. 226.17(a)(2) require creditors to disclose the terms ``finance charge'' and ``annual percentage rate,'' together with a corresponding dollar amount and percentage rate, more conspicuously than any other disclosure, except the creditor's identity under Sec. 226.18(a). 15 U.S.C. 1632(a). Under

TILA Section 103(u), the finance charge and the annual percentage rate are material disclosures; failure to disclose either term extends the right of rescission under TILA Section 125, and can result in actual and statutory damages under TILA Section 130(a). 15 U.S.C. 1602(u); 15

U.S.C. 1635, 1640(a).

Finance charge: interest and settlement charges. Section 226.18(d), which implements TILA Sections 128(a)(3) and (a)(8), requires creditors to disclose the ``finance charge,'' using that term, and a brief description such as ``the dollar amount the credit will cost you'' for closed-end credit. 15 U.S.C. 1638(a)(3), (a)(8). Consumer testing showed that participants could not correctly explain what the finance charge represented. Many consumers recognized that the finance charge included all of the interest they would pay over the loan's term, but did not know that it also included fees. Most participants did not find the finance charge to be useful in evaluating a loan offer. However, some participants expressed a general interest in knowing the information.

Based on these results, the Board tested a form with the finance charge disclosed as ``interest and settlement charges,'' to more closely represent the components of the finance charge. Participants generally understood the term, but still stated that they did not find the term very useful, particularly when compared to other information such as the interest rate or monthly payments. Consumer testing suggests that highlighting terms that are not useful in the decision- making process may generally diminish consumers' ability to understand other key terms.

For these reasons, and as discussed more fully in the discussion of proposed Sec. 226.38(e)(5)(ii), the Board proposes to exercise its authority under TILA Section 105(a) to make certain exceptions to the disclosure of the finance charge under TILA Section 128(a)(3) and TILA

Section 122(a). 15 U.S.C. 1604(a); 1632(a); 1638(a)(3). First, creditors would be required to disclose the finance charge as

``interest and settlement charges,'' not as the ``finance charge'' as required by TILA Section 128(a)(3). 15 U.S.C. 1638(a)(3). Second, the disclosure of interest and settlement charges would not have to be more conspicuous than other terms, as required by TILA Section 122(a). 15

U.S.C. 1632(a).

The exception to TILA's requirements that the finance charge be disclosed as the ``finance charge'' and that it be more conspicuous than other information is proposed pursuant to TILA Section 105(a). 15

U.S.C. 1604(a). The Board has authority under TILA Section 105(a) to adopt ``such adjustments and exceptions for any class of transactions as in the judgment of the Board are necessary or proper to effectuate the purposes of this title, to prevent circumvention or evasion thereof, or to facilitate compliance therewith.'' 15 U.S.C. 1601(a), 1604(a). The class of transactions that would be affected is closed-end transactions secured by real property or a dwelling. The Board believes an exception from TILA's requirements is necessary and proper to effectuate TILA's purposes to assure meaningful disclosure and informed credit use. Consumer testing showed that disclosing the finance charge as ``interest and settlement charges'' improved participants' understanding of the information, even though the figure may not include all interest and settlement charges applicable to the transaction. (See discussion under proposed Sec. 226.4 regarding content and calculation of the interest and settlement charges.)

Moreover, consumer testing showed that participants did not find the interest and settlement charges as useful, when choosing or evaluating a loan product, as other information, such as whether the loan has an adjustable rate or the monthly payment amount.

In addition, and for the reasons discussed more fully under proposed Sec. 226.38(e)(5)(ii) regarding interest and settlement charges, the proposal would group the interest and settlement charges disclosure with other disclosures relating to the total cost of the loan offered, such as the total of payments and the amount financed.

Consumer testing conducted by the Board, as well as basic document design principles, shows that grouping related concepts and figures makes it easier for consumers to identify, comprehend, or use disclosed terms.

Annual percentage rate. TILA Section 122(a) and Sec. 226.17(a)(1) require that the term ``annual percentage rate,'' when disclosed with the corresponding percentage rate, be disclosed more conspicuously than any other required disclosure. 15 U.S.C. 1632(a). The Board is proposing to revise the description of the APR and require that creditors provide context for the APR by disclosing it on a scaled graph with explanatory text, as discussed more fully under proposed

Sec. Sec. 226.38(b). In addition, the Board is proposing Sec. 226.37(c)(2) to implement TILA Section 122(a) for transactions secured by real property or a dwelling. 15 U.S.C. 1632(a). Section 226.37(c)(2) would require that creditors disclose the APR in a 16-point font, in a prominent location, and in close proximity to the scaled graph and explanations proposed under Sec. 226.38(b)(2) through (4).

As discussed under proposed Sec. 226.38(b), the APR is one of the most important terms disclosed about the loan; it is the only single, unified number available to help consumers understand the overall cost of a loan. To this end, the Board believes it is essential that consumers be able to identify the APR easily. Consumer testing and basic document design principles show that participants generally pay greater attention to figures, such as numbers, percentages and dollar signs, than to terminology that may accompany, describe or label any disclosed figure. However, the TILA disclosure contains many numerical figures that consumers must identify and review. Given that the Board is proposing to require a minimum 10-point font for disclosure of other terms on the TILA (see discussion under proposed comment 37(a)(1)-2), and based on document design principles, the Board consumer tested disclosing the APR figure in a larger font and in bold text to make it more readily noticeable as compared to other disclosed terms. When tested in this manner, participants were able to easily identify the

APR. Based on consumer testing, the Board believes that a 16-point font requirement for the APR is sufficient to highlight the APR. The Board also notes that the approach of requiring at least a 16-point font for the APR disclosure is consistent with the approach taken by the Board in revising the purchase APR disclosure required under TILA for open- end credit. 74 FR 5244; Jan. 29, 2009.

Proposed comment 37(c)-3(i) through (iii) would provide further guidance on the more conspicuous requirement and would clarify that the

APR must be more conspicuous only in relation to other required disclosures under proposed Sec. 226.38, and only as required under proposed Sec. 226.37(c)(2) and Sec. 226.38(b). Proposed comment 37(c)-4 would provide guidance on how creditors can comply with the more

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conspicuous requirement for transactions secured by real property or a dwelling.

The Board seeks comment on whether the APR should be made more or less prominent using a larger or smaller font-size, and whether different graphs or visuals could be used to provide better context for the APR. The Board also seeks comment on the relative advantages and disadvantages of a graphic-based versus text-based approach to disclosing the APR, and the potential operational changes, difficulties, or costs that would be incurred to implement the graphic- based APR disclosure requirement for transactions secured by real property or a dwelling. 37(d) Specific Formats

Currently, Sec. 226.17(a)(1) does not impose special format design or location requirements on disclosures for closed-end credit. However, as discussed more fully under proposed Sec. 226.38, consumer testing showed that the current TILA form did not present key loan information in a manner that was noticeable and easy for consumers to understand.

For example, the payment schedule required under current Sec. 226.18(g) did not effectively demonstrate to participants the relationship between monthly payments and an adjustable interest rate feature. Consumer testing also showed that the current TILA form highlighted terms that confused many participants. For example, most participants incorrectly assumed the amount financed was the same as the loan amount, a term not required on the current TILA form. In other instances, the current TILA form emphasized information that participants generally understood, but did not find useful or important, such as the total of payments. Many participants also noted that the current TILA form failed to include information they would find useful when shopping or evaluating a loan offer, such as the contract interest rate and settlement charges.

As discussed under proposed Sec. 226.19, consumer testing of the current ARM loan program disclosure and the CHARM booklet also revealed ineffective presentation of information relating to adjustable rate loan programs. Many participants found the narrative format and terminology used in the current ARM loan program disclosure complicated, dense, and difficult to read and understand. With respect to the CHARM booklet, many participants generally indicated that the information it contained was informative and educational, but they would be unlikely to read it because it was too long.

In addition, as noted previously, consumer testing suggests that consumers may not read information carefully if it is excessive in length, and if unable to identify relevant information quickly are likely to become frustrated and not read the disclosures. As discussed more fully under proposed Sec. 226.37(a) through (c), this suggests highlighting and structuring disclosures in a particular manner to improve clarity, identification and comprehension of disclosed terms.

To address the problems with the current TILA form and ARM loan program disclosures, the Board used various formats to present key loan information, such as tabular forms and question and answer format.

Consumer testing suggests that using tabular forms improved participants' ability to readily identify and understand key information, as discussed under proposed Sec. Sec. 226.19(b) and 226.38(c). For example, current ARM loan program disclosures provide information in narrative form, which participants found difficult to read and understand. However, consumer testing showed that when information about interest rate, monthly payment and loan features was presented in tabular format, participants found the information easier to locate and their comprehension of the disclosed terms improved. The benefits of disclosing important information in a tabular format are consistent with the results of consumer testing conducted by the Board in revising credit card disclosures. 74 FR 5244; Jan. 29, 2009.

Consumer testing also showed that using question and answer format improved participants' ability to recognize and understand potentially risky or costly features of a loan, as discussed under proposed

Sec. Sec. 226.19 and 226.38(d). Consumer testing and basic document design principles suggest that keeping language and design elements consistent between forms improves consumers' ability to identify and track changes in the information being disclosed. As a result, the

Board also integrated the question and answer format used on the revised TILA model form into ARM loan program disclosures required under proposed Sec. 226.19(b).

To present key loan terms more effectively, the Board also used specific location and structure requirements. Consumer testing suggests that the location and order in which information is presented impacts consumers' ability to find and comprehend the information disclosed.

For example, as discussed under proposed Sec. 226.38(a), disclosing key information, such as the loan term, amount, type, and settlement charges, before other required disclosures and in a tabular format improved participants' ability to quickly and accurately identify key loan terms. In another example, participants' ability to identify the frequency of rate adjustments after an introductory period expired also improved when this information was included both in the loan summary section at the top of the revised TILA model form, and then again below in the interest rate and payment summary section.

Based on consumer testing results, basic document design principles, and for the reasons discussed more fully under each of the following subsections, the Board is proposing to establish special format rules for: disclosures under proposed Sec. 226.38 for transactions secured by real property or a dwelling; ARM loan program disclosures under proposed Sec. 226.19(b) for adjustable rate transactions; ARM adjustment notices under proposed Sec. 226.20(c); and periodic statements required for payment option loans that are negatively amortizing under proposed Sec. 226.20(d). The special rules regarding format, structure and location of disclosures are noted in proposed Sec. 226.37(d)(1) through (10). Proposed comments 37(d)-1 and

-2 would provide guidance to creditors on how to comply with the special format rules noted in proposed Sec. 226.37(d)(1) through (10) regarding prominence and close proximity of disclosed terms. 37(e) Electronic Disclosures

Currently, under Sec. 226.17(a)(1) creditors are permitted to provide in electronic form any TILA disclosure for closed-end credit that is required to be provided or made available to consumers in writing if the consumer affirmatively consents to receipt of electronic disclosures in a prescribed manner. Electronic Signatures in Global and

National Commerce Act (the E-Sign Act), 15 U.S.C. 7001 et seq. The

Board proposes Sec. 226.37(e) to allow creditors to provide required disclosures for transactions covered by proposed Sec. 226.38 in electronic form in accordance with the requirements under Sec. 226.17(a)(1).

Section 226.38 Content of Disclosures for Credit Secured by Real

Property or a Dwelling 38(a) Loan Summary

To shop for and understand the cost of credit, consumers must be able to identify and understand the key credit terms offered to them.

As discussed

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below, the Board's consumer testing suggested that loan amount, loan term and loan type are key terms that consumers are familiar with and expect to see on closed-end mortgage disclosures, together with settlement charges and whether a prepayment penalty would apply to their loan.

The Board's Proposal

The Board proposes to require creditors to provide the following key loan features in a loan summary section: loan amount, loan term, loan type, the total settlement charges, whether a prepayment penalty applies and, the maximum amount of the penalty. The purpose of the proposed disclosures is to improve their effectiveness and consumer comprehension. A concise loan summary would help consumers compare loan offers; a summary may also help consumers determine whether they can afford the loan they are offered, and whether the disclosure presents the same loan terms they discussed with their mortgage broker or lender.

The Board conducted consumer testing of loan summary disclosures.

Participants were able to identify the exact loan amount, what type of a loan they were being offered, how long they would have to pay off their loan, how much they would have to pay in settlement charges, and whether a prepayment penalty would apply. A discussion of the items that would be included in the loan summary follows. 38(a)(1) Loan Amount

Currently creditors are not required to disclose the loan amount for closed-end mortgages, except for loans subject to HOEPA. Under

Sec. 226.32(c)(5), creditors are required to disclose the total amount borrowed. The Board is proposing to require a similar disclosure of the loan amount for all transactions secured by a real property or a dwelling. Proposed Sec. 226.38(a)(1) would require creditors to disclose ``loan amount,'' which would be defined as the principal amount the consumer will borrow reflected in the note or loan contract.

The loan amount is a core loan term that the consumer should be able to verify readily on the disclosure. Disclosing the loan amount may also alert the consumer to fees that are financed in addition to the principal balance. 38(a)(2) Loan Term

Currently, Regulation Z requires creditors to disclose the number of payments but not the term of the loan. The Board believes that the loan term is an important fact about the loan that consumers should know when evaluating a loan offer. Consumer testing of current model forms conducted by the Board indicated that some consumers are not able to readily identify the loan term from the number of payments disclosed in the current disclosures. Although some participants could determine the loan term by dividing by 12 the number of months shown in the payment schedule disclosed under Sec. 226.18(g), other participants could not readily figure the term of the loan offered, particularly for loans that have multiple payment levels, such as discounted adjustable- rate mortgages. For these reasons, the Board is proposing to require disclosure of the loan term in the summary section for loans covered by

Sec. 226.38, and to define ``loan term'' for these purposes as the time to repay the obligation in full. For instance, instead of disclosing the number of months for each payment amount for variable interest rate loans and requiring the consumer to add up those months to determine the loan term, the proposed disclosure would state ``Loan term: 30 years.'' Likewise, for a 10-year loan with a balloon payment due in year 10 and an amortization schedule of 30 years, the proposed disclosure would state ``Loan term: 10 years.'' 38(a)(3) Loan Type and Features

Regulation Z does not require the creditor to disclose the type of the loan, except in the case of loans with variable interest rates.

Current Sec. 226.18(f) requires a disclosure of a variable rate if the annual percentage rate may increase after consummation. The Board's consumer testing indicates that the current variable rate disclosures may not clearly convey whether the loan has a fixed or a variable interest rate. The Board believes that a specific disclosure of a loan type offered will assist consumers in better understanding whether a loan features a rate that may increase after consummation, so that the consumer may evaluate whether they want a loan in which the rate and payments can increase.

The Board is proposing to require a disclosure of the loan type in the loan summary section for loans covered by Sec. 226.38. Proposed

Sec. 226.38(a)(3)(i) would require that a loan be classified as one of three types: an ``adjustable-rate mortgage (ARM),'' a ``step-rate mortgage,'' or a ``fixed-rate mortgage'' using those terms. The categories proposed in Sec. 226.38(a)(3)(i) apply only to disclosures requires for closed-end transaction secured by real property or a dwelling, and are different from the categories in Sec. 226.18(f) and commentary to Sec. 226.17(c)(1). Proposed Sec. 226.38(a)(3)(ii) would require an additional disclosure if the loan has one or more of the following three features: ``negative amortization,'' ``interest-only payments,'' or ``step-payments,'' using those terms. The related commentary would provide examples for each loan type and feature. 38(a)(3)(i) Loan Type

As discussed above, consumer testing indicated that the current variable rate disclosure is not sufficiently clear for many consumers.

When presented with a current closed-end model form for an adjustable- rate mortgage, over half of the participants understood that the interest rate would change. However, several participants inferred this from the different monthly payments in the payment schedule, not because the check box on the form indicated that the loan had a

``variable rate.'' A few participants indicated that they did not know whether the rate would change. Some participants commented that although the current model form used the term ``variable rate,'' they were more familiar with the term ``adjustable rate.'' As a result, the

Board tested revised disclosures using the term ``adjustable rate mortgage'' in the loan summary section. All participants who were shown a revised disclosure for a variable rate transaction using the term

``adjustable-rate mortgage'' understood that the interest rate and payments could change during the loan's term.

Proposed Sec. 226.38(a)(3)(i) would define an adjustable-rate mortgage as a transaction in which the annual percentage rate may increase after consummation; a step-rate mortgage as a transaction in which the interest rate will change after consummation as specified in the legal obligation between the parties; and a fixed-rate mortgage as a transaction that is neither an adjustable-rate mortgage nor a step- rate mortgage. Proposed comment 38(a)(3)(i)(A)-2 would offer examples of adjustable-rate mortgages and clarify that some variable-rate transactions described in comment 17(c)(1)(iii)-4, such as certain renewable balloon-payment, preferred-rate and price-level-adjusted loans, would be considered fixed-rate mortgages for the purposes of the

``loan type'' disclosure in the loan summary required by Sec. 226.38(a). This follows the current approach in comment 17(c)(1)-11 which provide that disclosures for certain variable-rate transactions should be based on the interest rate that applies at consummation.

Proposed Sec. 226.38(a)(3)(i)(B) would require the creditor to disclose a loan as a ``step-rate mortgage'' if the interest rate will change after consummation,

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provided all such interest rates are specified in the legal obligation between the parties. Under existing guidance, such a loan would not be considered a variable rate loan. The Board believes that for the purposes of the loan summary, which is to alert the consumer to the possibility that their interest rate and payment could increase after consummation, step-rate loans should not be identified as fixed or variable rate loans, even though they share certain features with both loan types. Proposed comment 38(a)(3)(i)(B)-2 would clarify that certain preferred-rate loans would not be considered step-rate mortgages for the purposes of the ``loan type'' disclosures. Proposed comment 38(a)(3)(i)(C)-1 would offer examples of fixed-rate mortgages and explain which variable-rate transactions described in comment 17(c)(1)(iii)-4 would be considered fixed-rate mortgages for the purposes of the ``loan type'' disclosure. 38(a)(3)(ii) Loan Features

The general classification of loans as fixed rate, adjustable rate and step rate would enable consumers to understand what loan type they are being offered and to shop for loan products according to consumers' needs and preferences. However, these broad categories of loan types are not sufficient to warn consumers about the potential risks that a specific loan may carry. As discussed previously, nontraditional mortgage products with negatively amortizing or interest-only payments grew in popularity in recent years, subjecting consumers to the risk of payment shock. Disclosures should clearly alert consumers to these features before the consumer becomes obligated on the loan. To alert consumers to potentially risky loan features, the Board is proposing to require an additional disclosure for each loan type in the loan summary if the loan has step-payments, payment option or negative amortization features, or interest-only payments.

Proposed Sec. 226.38(a)(3)(ii) would require creditors to disclose whether a loan would have one or more of the following features: Step- payments if the legal obligation permits the periodic monthly payment to increase by a set amount for a specified amount of time; a payment option feature if the legal obligation permits the consumer to make payments that result in negative amortization and other types of payments; a negative amortization feature if the legal obligation requires the consumer to make payments that result in negative amortization--that is, the legal obligation does not permit the consumer to make payments that would cover all interest accrued or all interest accrued and principal; or an interest-only feature if the legal obligation permits or requires the consumer to make one or more regular periodic payments of interest accrued and no principal, and the legal obligation does not require or permit any payments that would result in negative amortization.

Proposed comment 38(a)(3)(ii)(A)-1 would offer an example of a step-payment feature. For example, if the consumer is offered a fixed- rate mortgage with 24 monthly payments at $1,000 that will later increase to $1,200 and remain at that level for a specified period of time, and the loan amortizes fully over the loan term, the creditor would disclose ``Fixed-Rate Mortgage, step-payments'' for the loan type in the loan summary. Proposed comment 38(a)(3)(ii)(B) and (C)-1 would clarify that a creditor should disclose the loan feature as either

``payment option'' or ``negative amortization'' but not both, whereas a loan may have both a ``step-payment'' feature and either a ``payment option'' or a ``negative amortization'' feature. Moreover, for a loan to have a ``payment option'' feature, all periodic payment choices must be specified in the legal obligation and must include a choice to make payments that may result in negative amortization. Proposed comment 38(a)(3)(ii)(D)-1 would provide that a creditor should not disclose both an ``interest-only'' feature and a ``payment option'' feature or

``negative amortization'' feature in a single transaction, whereas a loan may have both an ``interest-only'' feature and a ``step-payment'' feature. 38(a)(4) Total Settlement Charges

Currently, TILA and Regulation Z disclose settlement charges through the finance charge. TILA Section 128(a)(3) and Sec. 226.18(d) require the creditor to disclose the finance charge. 15 U.S.C. 1638(a)(3). TILA Section 106(a) defines the ``finance charge'' as the

``sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the credit or as an incident to the extension of credit.'' 15 U.S.C. 1605(a). Section 226.4(a) further defines the ``finance charge'' as

``the cost of consumer credit as a dollar amount.'' The finance charge includes any interest due under the loan terms as well as other charges incurred in connection with the credit transaction. See Sec. 226.4(a) and (b).

Consumer testing indicated that participants did not understand the term ``finance charge.'' Most participants believed the term referred only to the total amount of interest they would pay if they kept the loan to maturity, but did not always realize that it also includes the fees and costs incurred as part of the credit transaction. Most participants did not find the finance charge useful in evaluating a loan offer.

The disclosure of settlement charges is governed by RESPA, 12

U.S.C. 2601-2617, and implemented by HUD under Regulation X, 24 CFR part 3500. Under RESPA and Regulation X, creditors must provide a GFE of settlement costs within three business days of application for a mortgage, which is the same time creditors must provide the early TILA disclosure. RESPA and Regulation X also require a statement of the final settlement costs at loan closing (``HUD-1 or HUD-1A settlement statement''). Under the new final rule for Regulation X, effective

January 1, 2010, the GFE is subject to certain accuracy requirements, absent changed circumstances. RESPA and Regulation X do not, however, provide any remedies for a violation of the accuracy requirements.

Consumer testing consistently demonstrated that participants wanted to see settlement charges on the revised TILA disclosure. Participants stated that including such a disclosure would help them confirm information that the loan originator told them about the cost of the loan during the mortgage application process. During consumer testing, participants indicated that they were often surprised at the closing table by substantial increases in the settlement charges. Despite these changes, consumers reported that they proceeded with closing because they lacked alternatives (especially in the case of a home purchase loan), or were told that they could easily refinance with better terms in the near future. Participants indicated that they would like an estimate of their settlement charges as early as possible in the loan process, and that it would be helpful to have the settlement charges displayed in the context of the other loan terms, rather than on a separate GFE or HUD-1 or HUD-1A settlement statement.

For these reasons, the Board proposes Sec. 226.38(a)(4) to require creditors to disclose the ``total settlement charges,'' using that term, as those charges are disclosed under Regulation X, 12 CFR part 3500. The proposed rule would further require, as applicable, a statement of the amount of the charges already included in the loan amount. Finally, the proposed rule would require disclosure of a statement, as applicable, that the total amount does not include a down payment, along with

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a reference to the GFE or HUD-1 for more details.

Proposed comment 38(a)(4)-1 would clarify that on the early TILA disclosure required by Sec. 226.19(a)(1)(i), the creditor must disclose the amount of the ``Total Estimated Settlement Charges'' as disclosed on the GFE under Regulation X, 12 CFR part 3500, Appendix C.

For the final TILA disclosure required by proposed Sec. 226.19(a)(2)(ii), the creditor would be required to disclose the sum of the final settlement charges. The creditor would be permitted to use the sum of the ``Charges That Cannot Increase,'' ``Charges That In

Total Cannot Increase By More Than 10%,'' and ``Charges That Can

Change'' as would be disclosed in the column entitled ``HUD-1'' on page three of the HUD-1 or on page two of the HUD-1A settlement statement under Regulation X, 12 CFR part 3500, Appendix A. Alternatively, the creditor would be permitted to provide the consumer with the final HUD- 1 or HUD-1A settlement statement. For transactions in which a GFE, HUD- 1 or HUD-1A are not required, the proposed comment would clarify that the creditor may look to such documents for guidance on how to comply with the requirements of this section.

The Board recognizes that creditors are not currently required to provide the final settlement charges before consummation. Regulation X, 24 CFR 3500.10(b), permits the settlement agent to provide the completed HUD-1 or HUD-1A at settlement. However, proposed Sec. 226.19(a)(2)(ii) would require the creditor to provide the TILA disclosure required by proposed Sec. 226.38, including the total settlement charges disclosed under proposed Sec. 226.38(a)(4), so that the consumer receives it at least three business days before consummation. In addition, under proposed Sec. 226.19(a)(2)(iii)-

Alternative 1, if anything changes during the three-business-day waiting period, including total settlement charges, the creditor would be required to supply another final TILA disclosure and three-business- day waiting period before consummation could occur. Consumers could waive the three-day waiting periods for bona fide personal financial emergencies.

The Board recognizes that proposed Sec. Sec. 226.19(a)(2)(ii), 226.19(a)(2)(iii)-Alternative 1, and 226.38(a)(4) would require the creditor to disclose final settlement charge information several days in advance of consummation. These requirements would impose a cost on creditors, which may be passed on to consumers. Operational procedures and systems would need to be changed significantly to determine several days before closing the precise total amount of settlement charges that the consumer would pay at settlement. The Board believes, however, that the cost would be outweighed by the benefit to consumers of knowing their final total settlement charges three business days before consummation. This proposal would enable consumers to review and verify cost information in advance of consummation, and contact the creditor with questions or take other action, as appropriate. 38(a)(5) Prepayment Penalty

Current Disclosure Requirements

Under TILA Section 128(a)(11) and existing Sec. 226.18(k)(1), if an obligation includes a finance charge computed by applying a rate to the unpaid principal balance (a ``simple-interest obligation''), creditors must disclose whether or not a penalty may be imposed if the consumer prepays the obligation in full. Comment 18(k)(1)-1 states that the term ``penalty'' refers only to charges that are assessed because of the prepayment in full of a simple-interest obligation, in addition to other amounts.

The existing model form in Appendix H-2 contains checkboxes for creditors to indicate whether a consumer ``may'' or ``will not'' have to pay a penalty if the consumer prepays the obligation in full. The

Board adopted these checkbox options in 1980, in response to concerns that a statement that a prepayment penalty ``will be imposed'' would be misleading. The Board noted that many credit contracts allow a penalty to be imposed only if the loan is paid off within a certain time period after consummation or under other specific circumstances. See 45 FR 80648, 80682; Dec. 5, 1980.

Discussion

Consumer testing of the current disclosure showed that participants had difficulty identifying whether a loan would have a prepayment penalty and in what circumstances it would apply. For example, in the

Board's consumer testing, participants did not understand that refinancing a loan or paying off the loan with proceeds from the sale of the home securing the loan could trigger a prepayment penalty.

Similarly, consumer testing conducted by FTC staff found that two- thirds of participants who looked at a sample of the existing TILA disclosure showing a loan with a two-year prepayment penalty did not understand that a prepayment penalty would be charged if the consumer refinanced the loan two years after origination.\70\ Some participants thought that a prepayment penalty could be charged only if they paid off their entire loan from their own funds, such as with money obtained through a sudden financial windfall.\71\

\70\ Improving Consumer Mortgage Disclosures at 78.

\71\ Id.

The Board developed and tested a revised prepayment penalty disclosure. Participants in the Board's consumer testing generally understood that if they prepaid the loan within the time specified in the disclosure, a penalty could be imposed. Participants also understood that the penalty could be imposed if they refinanced or sold the home during the time the penalty was in effect.

The Board's Proposal

Under proposed Sec. 226.38(a)(5), if the legal obligation permits a creditor to impose a prepayment penalty the creditor must disclose in the ``Loan Summary'' section the period during which the penalty provision applies, the maximum possible penalty, and the circumstances in which the creditor may impose the penalty. If the legal obligation does not allow the creditor to impose a prepayment penalty, the creditor would make no disclosure regarding prepayment penalties in the

``Loan Summary'' section. (However, proposed Sec. 226.38(d)(1)(iii) requires the creditor to disclose whether or not the legal obligation permits the creditor to charge a prepayment penalty in the ``Key

Questions about Risk'' section.)

Maximum penalty amount. The Board is proposing to require creditors to disclose the maximum penalty possible under the legal obligation.

Prepayment penalties may be substantial. The existence of a prepayment penalty may make it difficult to refinance a loan or sell a home. This may be particularly difficult for consumers who have adjustable rate loans or other loans that pose the risk of payment shock, as these consumers may believe that they can refinance or sell the home to avoid the increased payments. Thus, it is important for consumers to know the maximum penalty amount before they are obligated on a loan.

Under proposed Sec. 226.38(a)(5) and (d)(1)(iii), creditors could not disclose the method or formula they use to determine the penalty with the disclosures required by Sec. 226.38. Although some consumers might benefit from knowing how a prepayment penalty will be determined, the Board is concerned that consumers may be overloaded with information if the

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calculation method is included with the segregated information. Many consumers would not read the prepayment penalty disclosure at all if it contains mathematical procedures and terms. Creditors may, of course, disclose how a prepayment penalty will be determined, as long as the disclosure is not disclosed together with the segregated disclosures.

Creditors also could not disclose a range of possible prepayment penalties or give examples of penalty amounts assuming the consumer prepaid at a hypothetical point in time under proposed Sec. 226.38(a)(5) or (d)(1)(iii). The Board believes that it is important that prepayment penalty disclosures simply and clearly convey to consumers the potential magnitude of the prepayment penalty.

Disclosures based on assumptions or averages could undermine the impact of the maximum penalty disclosure.

Additional penalty disclosures. Consumer testing indicated that some consumers do not understand that paying off the loan with the proceeds of a refinance loan or a home sale can trigger a prepayment penalty provision, as discussed above. Therefore, the proposed rule would require creditors to disclose the conditions upon which and the period during which they may impose a prepayment penalty.

It is important for a consumer to know what actions will trigger a prepayment penalty provision before obtaining a loan with such a provision. Consumers likely will not receive the loan agreement containing the prepayment penalty provision until consummation and may have little opportunity to review the agreement before becoming obligated. Moreover, a prepayment penalty is but one of many loan terms for consumers to consider at closing. The Board believes that including key information about a prepayment penalty provision in transaction- specific disclosures would help consumers avoid the uninformed use of credit.

Coverage. Comment 226.18(k)(1)-1 clarifies that Sec. 226.18(k)(1) applies to transactions in which interest calculations take into account all scheduled reductions in principal, whether interest calculations are made daily or at some other interval. Proposed comment 38(a)(5)-1 is consistent with comment 18(k)(1)-1. Proposed Sec. 38(j)(2) reflects existing Sec. 226.18(k)(2) on rebate disclosures, as discussed below. Existing comment 18(k)-2 discusses cases where a single transaction involves both a rebate and a penalty. Proposed comment 38(a)(5)-8 reflects this existing commentary.

Definition of prepayment penalty. Comment 18(k)(1)-1 states that under Sec. 226.18(k)(1) the term ``penalty'' refers only to those charges that are assessed because of the prepayment in full of a simple-interest obligation, in addition to other amounts. Comment 18(k)(1)-1 clarifies that interest charges for any period after prepayment in full is made and minimum finance charges are examples of prepayment penalties. The Board is proposing to revise comment 18(k)(1)-1 for clarity by substituting ``charges determined by treating the loan balance as outstanding for a period after prepayment in full and applying the interest rate to such `balance' '' for ``interest charges for any period after prepayment,'' as discussed above. Proposed comments 38(a)(5)-2(i) and (ii) are consistent with comment 18(k)(1)-1, as it is proposed to be amended.

Proposed comment 38(a)(5)-2(iii) states that origination or other charges that a creditor waives on the condition that the consumer does not prepay the loan are prepayment penalties, for transactions secured by real property or a dwelling. Fees imposed for a preparing a payoff statement and performing other services when a consumer prepays the obligation would not be considered a prepayment penalty under the proposed rule, however. Such fees are not strictly linked to a consumer's prepaying the obligation, as they are charged at the end of a loan's term as well. The Board solicits comment on this distinction.

For purposes of some State laws, a minimum finance charge is not considered a prepayment penalty. For purposes of disclosure under TILA, a minimum finance charge is considered a prepayment penalty. Existing comment 18(k)(1)-1 and proposed comment 38(a)(5)-2 are designed to promote clear, consistent disclosure of charges creditors may impose when a consumer prepays the obligation in full. The proposed rule would not preempt State laws unless State law disclosure requirements are inconsistent with the rule, and then only to the extent of any inconsistency.

Existing comment 17(a)(1)-5(vii) allows creditors to disclose that the borrower may pay a minimum finance charge as information directly related to the penalty disclosure. Further, if a State or federal law prohibits creditors from charging a prepayment penalty but permits the charging of interest for some period after the consumer prepays from that prohibition, existing comment 17(a)(1)-5(xi) permits creditors to disclose that a consumer may have to pay interest for some period after prepayment as information directly related to the prepayment penalty disclosure. Comments 17(a)(1)-5(vii) and (xi), together with other commentary in comment 17(a)(1)-5, would not apply to transactions secured by real property or a dwelling, as discussed above.

Existing comment 18(k)(1)-1 states that loan guarantee fees are examples of charges that are not penalties. The Board proposes to retain this example in comment 38(a)(5)-2. (In a separate rulemaking, the Board proposed to remove the example of interim interest on a student loan as an example of charges that are not penalties. See 74 FR 12464, 12469; Mar. 29, 2009.)

Disclosed as applicable; disclosure content. Proposed comment 38(a)(5)-4 clarifies that if no prepayment penalty applies, creditors need not disclose that fact in the ``Loan Summary'' section of transaction-specific disclosures. Proposed Sec. 226.38(d)(1)(iii) requires creditors to disclose whether or not the legal obligation permits the creditor to charge a prepayment penalty in the ``Key

Questions about Risk'' section, however. Proposed comment 38(a)(5)-5 clarifies that creditors must disclose the maximum penalty as a numerical amount. This is consistent with the general rule of construction of the word ``amount'' required by Sec. 226.2(b)(5).

Basis of disclosure. Proposed comment 38(a)(5)-6 explains how creditors determine the maximum penalty amount and contains examples that illustrate how those principles are applied. (Proposed comment 38(d)(1)(iii) states that creditors may rely on proposed comment 38(a)(5)-6 in determining the maximum prepayment penalty to be disclosed as one of the ``Key Questions about Risk'' disclosures.)

Proposed comment 38(a)(5)-6 states that in all cases, the creditor should assume that the consumer prepays at a time when the prepayment penalty may be charged. The comment also states that if more than one type of prepayment penalty applies (for example, if the loan includes a minimum finance charge and the creditor may collect interest after prepayment), the creditor should include the maximum amount of each type of prepayment penalty in determining the maximum penalty possible.

Existing comment 18(k)(1)-1 clarifies that interest charges for any period after a consumer prepays in full and a minimum finance charge in a simple interest transaction are deemed to be prepayment penalties.

Proposed comment 38(a)(5)-6(i) and (ii) clarifies that the amount of such charges must be

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counted in determining the maximum penalty.

Proposed comment 38(a)(5)-6(iii) provides examples of how creditors may calculate a maximum prepayment penalty where the creditor determines the penalty by applying a constant rate to the loan balance at the time of prepayment. In such cases, the prepayment penalty amount is largest when the balance is as high as possible. Proposed comment 38(a)(5)-6(iv) illustrates a method creditors could use to approximate the maximum penalty where the penalty amount depends on both the loan balance and the time at which the consumer prepays (for example, where a prepayment penalty on an adjustable-rate loan equals six months' interest payments). If the penalty amount depends on both the loan balance and the time at which the consumer prepays, under the proposed rule creditors would disclose the greater of (1) the penalty charged when the balance is the highest possible and (2) the penalty charged when the penalty rate is the highest possible (two-stage penalty calculation).

The two-stage penalty calculation produces an amount that approximates, but does not necessarily equal, the maximum prepayment penalty. The Board believes, however, that the amount determined using the two-stage penalty calculation ordinarily will be sufficiently close to the actual maximum prepayment penalty that it would be appropriate for creditors to use the method in complying with Sec. 226.38(a)(5) and (d)(1)(iii). The Board solicits comment on whether the Board should permit creditors to use the two-stage penalty calculation where the penalty rate increases. Will this ``two-stage penalty calculation'' method produce a prepayment penalty amount that sufficiently approximates the maximum prepayment penalty possible for a loan? Are there cases where there will be a significant disparity between the maximum penalty determined using the two-stage penalty calculation and the actual maximum penalty?

Neither the simple penalty calculation nor the two-stage penalty calculation will enable the creditor to determine the maximum penalty where the penalty rate on a negatively amortizing loan declines. In such a case, the creditor must determine the maximum prepayment penalty by determining what the penalty would be at each point during the loan term while the penalty is in effect.

Requiring all creditors to base maximum penalty disclosures on the foregoing rules ensures standardization of disclosures. Allowing creditors to select their own assumptions about when consumers are likely to prepay would result in inconsistencies among the disclosures given by different creditors. The Board considered other approaches, such as requiring creditors to disclose the maximum prepayment penalty based on a single hypothetical point in time (for example, one year after origination). However, this approach would understate the amount consumers who prepay earlier would have to pay.

Timely payment assumed. Proposed comment 38(a)(5)-7 states that creditors may assume that the consumer makes payments on time and may disregard any possible inaccuracies resulting from consumers' payment patterns. This is consistent with existing comment 17(c)(2)(i)-3 and proposed clarifications in comment 17(c)(1)-1. Proposed comment 38(a)(5)-7 further clarifies that where the payment required by a legal obligation's terms is not a fully amortizing payment, the creditor must base disclosures on the required periodic payment and may not assume that the consumer will make payments that exceed the required payment. 38(b) Annual Percentage Rate

The Board proposes to improve the APR's utility to consumers by making it a more inclusive measure of the cost of credit, as discussed under Sec. 226.4, and also by improving the manner in which the APR is disclosed on the TILA statement. Proposed Sec. 226.38(b)(1) would require the APR to be disclosed, using the term ``annual percentage rate'' and with the description, ``overall cost of this loan including interest and settlement charges.'' Proposed Sec. 226.38(b)(2) would require creditors to show the APR plotted on a graph, relative to (1) the ``average prime offer rate'' (APOR) for borrowers with excellent credit for a comparable loan type, in the week in which the disclosure is provided, and (2) the higher-priced loan threshold under Sec. 226.35(a).\72\ Proposed Sec. 226.38(b)(3) would require an explanation of the APOR and higher-priced threshold. Proposed Sec. 226.38(b)(4) would require creditors to disclose the average per-period savings from a 1 percentage-point reduction in the disclosed APR. Certain loans, including construction loans, would be excluded from proposed Sec. 226.38(b)(2) and (b)(3).

\72\ The Board issued Sec. 226.35(a) in its 2008 HOEPA Final

Rule; compliance with Sec. 226.35(a) is mandatory beginning on

October 1, 2009.

Current Rules

For closed-end credit, TILA Section 128(a)(4) and (a)(8) require creditors to disclose the ``annual percentage rate,'' using that term, together with a brief description such as ``the cost of your credit as a yearly rate.'' 15 U.S.C. 1638(a)(4), (a)(8). Section 226.18(e) implements these requirements. As discussed in proposed Sec. 226.37,

TILA Section 122 and Sec. 226.17(a) require the APR, with the finance charge, to be more conspicuous than other disclosures except the disclosure of the creditor's identity. Changes to the requirements of

Sec. 226.17(a) are discussed under Sec. 226.37.

Discussion

The APR is the only single, unified number available to help consumers understand the overall cost of a loan.\73\ 15 U.S.C. 1638(a)(4). Before enactment of TILA in 1968, creditors could advertise a 6 percent loan rate, but were allowed to calculate the interest charged to the consumer by using a simple interest, an add-on, or a discount rate method.\74\ Although the advertised loan rate would appear the same, the amount of interest consumers actually would pay over the loan term would differ greatly under each of these calculation methods.\75\ In addition, consumers were forced to evaluate different components of a loan's costs, such as interest rate, points, and closing costs, when comparing competing loan offers. The APR standardizes the interest rate calculation and seeks to capture the overall cost of the credit offered so that consumers can compare competing loan more easily than if they had to evaluate the relationship and impact of different loan costs themselves.\76\

\73\ The 1998 Joint Report at 8; see also Bd. Of Governors of

Fed. Res. Sys., 1996 Report to Congress: Finance Charges for

Consumer Credit under the Truth in Lending Act at (April 1996).

\74\ The 1998 Joint Report at 8.

\75\ Id.

\76\ Id.

Participants in the Board's consumer testing generally did not understand the APR and often mistook it for the loan's interest rate.\77\ The Board tested alternative descriptive statements and formats for the APR, but consumers continued to be confused by the APR.

For example, some participants thought the APR reflected future adjustments to the interest rate, or the maximum possible interest rate for a variable rate loan. A few participants recognized that

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the APR differed from the interest rate, but were unable to articulate the reason. In addition, when presented with two hypothetical loan offers, participants did not use the APR to compare and choose between the offers. Instead, participants chose a loan based on one or more of the following pieces of information: the interest rate, monthly payment, and settlement costs.

\77\ See also Improving Consumer Mortgage Disclosures at 35

(finding that most respondents in consumer testing did not understand or were confused by the APR and generally mistook it for the contract interest rate).

The Board's Proposal

The Board proposes to retain the APR disclosure, with several changes designed to improve the APR's utility for consumers. These proposed changes would apply only to closed-end transactions secured by real property or a dwelling. First, the Board proposes to revise the description to use simpler terminology. Proposed Sec. 226.38(b)(1) would require creditors to disclose the APR, expressed as a percentage, together with a statement that it represents the overall cost of the loan, including interest and settlement charges. As discussed under

Sec. 226.4, the Board also proposes to make the APR more inclusive of the cost of credit. Moreover, under Sec. 226.38(c), the interest rate would be disclosed on the form, which would help some consumers understand that the APR does not represent the interest rate.

Second, the proposed rule also would require creditors to disclose the APR using a graph that shows the consumer how the APR for the loan offered would compare to the average prime offer rate and the threshold for higher-priced loans under Sec. 226.35(a). This disclosure would help consumers understand how the APR on the loan offered to them compares to APRs offered to borrowers with excellent credit for a similar loan type, and higher-priced loans which generally are made to borrowers who present higher risk. Such borrowers include those with blemished credit histories, or with high loan-to-value ratios.

The Board's consumer testing shows that consumers do not understand the APR's utility. Testing the APR with different names and descriptions did not measurably increase consumers' understanding of the APR. Although the APR was designed in part to facilitate comparison of competing loan products, testing suggests that most consumers do not compare competing loans by APR, probably because they receive only one

TILA disclosure before they consummate a loan. If consumers comparison shop for a loan, they do so before they apply for a loan and likely shop based on oral quotes of interest rates and points.

The Board's testing suggests that with little understanding of the

APR and no ready and appropriate basis for comparison, many consumers ignore the APR in favor of information they find more accessible, such as the loan's monthly payment or settlement costs. Therefore, the Board is taking two steps to improve the disclosure of the APR. The first step is designed to draw consumers' attention to the APR. To do so, the

Board proposes to require disclosure of the consumer's APR on a graph to highlight the APR and distinguish it from other numerical disclosures, including the interest rate. Consumers would be more likely to notice the APR plotted on the graph, in a prominent location on the disclosure statement. Principles of consumer design provide that a graphic device accommodates different learning styles. And, consumer research has shown that use of graphics or similar visual devices help consumers attend to or notice important information.\78\

\78\ Kozup, John, Elizabeth Howlett, and Michael Pagano. 2008.

``The Effects of Summary Information on Consumer Perception of

Mutual Fund Characteristics.'' The Journal of Consumer Affairs, vol. 42. See also Testimony of John Kozup, Assistant Professor,

Department of Marketing, and Director, Center for Marketing and

Public Policy, Villanova University; http://www.federalreserve.gov/ events/publichearings/hoepa/2006/20060711/transcript.pdf.

The Board's next proposed step is to present the APR in a context that is designed to facilitate understanding of the APR. The Board believes that consumers would be more likely to use the APR if it is shown to them in context of other rates, rather than in isolation as is presently often the case. Research on consumer behavior suggests that consumer choice is affected by whether a consumer is presented with a single option for a product or multiple options. Consumers making a choice in the presence of more than one option are more likely to make a selection based on the relative merits of the options presented, rather than on their own existing ``references'' for the value of the product.\79\ Here, the Board believes that presenting consumers with information about other rates, current as of the week of the consumer's application, would help consumers make more informed decisions about the loan offered.

\79\ See, e.g., Hsee, Christopher K. and France Leclerc. 1988.

``Will Products Look More Attractive When Presented Separately or

Together?'' Journal of Consumer Research, vol. 25.

Testing suggests that showing the consumer the APR in context of information about other APRs would result in consumer benefits. For example, the APR graph would cause consumers to ask the creditor questions about the rate offered to them and when applicable, why it differs from the average APR offered to borrowers with excellent credit histories. The proposed APR disclosure would enable consumers to determine whether they are being offered a loan that comports with their creditworthiness. A borrower who knows his or her credit history is excellent or very good would be informed that the loan offered is higher-priced. Participants in the Board's testing stated that if they knew they had excellent credit, they would ask the lender why they were being offered a higher-priced loan and what they would need to do to get a better offer. The Board notes that some participants indicated that the disclosed APR, even if higher-priced, was lower than the interest rate on their current loan and thus was attractive to them.

Nevertheless, while some consumers may not be prompted by the APR graph to seek information about improved loan terms, testing suggests others may do so and benefit as a result.

The Board recognizes that not all consumers are aware of their credit history, and thus may not be able to assess whether the loan offered is consistent with their credit standing. The Board anticipates that the APR graph would cause some consumers to investigate their credit reports. If there are errors, these consumers could take steps to resolve the errors. If consumers in fact have impaired credit, some consumers might consider whether to delay seeking a loan until they could repair their credit standing.

In some instances the APR graph may be potentially confusing. That is, a loan may be a higher-priced loan for reasons other than the borrower's credit history. For example, a consumer might have little home equity, resulting in a high loan-to-value ratio and a higher APR.

The Board believes that even in such cases, the APR graph nonetheless would be beneficial to consumers. It would prompt the consumer to ask questions, and creditors should be able to explain to consumers why the

APR on a loan is higher-priced. In many cases the explanation may help the consumer determine whether they could take steps to get a lower

APR. For example, if the creditor explains that the offered loan is a higher-priced loan because of a low down-payment, the borrower would be alerted that providing a larger down payment would result in a reduced

APR and cost savings.

The Board also notes that certain loans may be higher-priced loans simply because of the loan type. For example, loans that exceed the threshold amount for eligibility for purchase by Fannie

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Mae and Freddie Mac, known as ``nonconforming'' or ``jumbo loans,'' may tend to be higher-priced loans because of the method for calculating the APOR. The APOR is the average APR for conforming loans offered to borrowers with excellent credit. In the case of such loans, creditors would have to explain to consumers why the loan's APR is higher-priced.

Third, the proposal would require the creditor to disclose the average per-period savings from a 1 percentage-point reduction in the disclosed APR. The Board believes that showing consumers the relationship between the APR and a concrete dollar figure would help make the possible benefits of obtaining better loan terms more concrete for consumers. Showing potential savings that could result from a lower

APR would help encourage consumers to shop and negotiate for better loan terms, or as discussed, to increase their downpayment, resolve errors in their credit report, or seek to improve their credit standing. 38(b)(2)

Proposed Sec. 226.38(b)(2) would require a graph indicating the consumer's APR within a range of APRs beginning with the average prime offer rate (``APOR''), as defined in Sec. 226.35(a)(2), including the higher-priced mortgage loan threshold, as defined in Sec. 226.35(a)(1), and terminating four percentage points greater than the higher-priced mortgage loan threshold. Proposed Sec. 226.38(b)(3) would require a statement of the APOR as defined in Sec. 226.35(a)(2), and the higher-priced mortgage loan threshold, as defined in Sec. 226.35(a)(1), current as of the week the disclosure is produced. The graphic would contain different shaded areas using different scales for the range between the APOR and the higher-priced mortgage loan threshold, and for the range above the higher-priced mortgage loan threshold. The graphic would also label the range above the higher- priced mortgage loan threshold as the ``high-cost zone.''

Creditors would use the Board's table of average prime offer rates to find the APOR for the loan type that matches the loan being disclosed, for the week in which the creditor provides the disclosure.

Creditors would follow the Board's guidance in commentary to Sec. 226.35(a) in determining how to select the appropriate APOR. In the text explaining the APOR, creditors may include a statement clarifying that the APOR is for conforming loans only.

The Board requests comment on any potential operational difficulty in producing the graph proposed in Sec. 226.38(b)(2) in an accurate and timely manner. Comment is also sought on whether a different graphical device would better draw consumers' attention to the APR and illustrate the APR's utility to consumers. 38(b)(3)

To help consumers navigate the information provided by the graph, proposed Sec. 226.38(b)(3) would require an explanation of the average prime offer rate as defined in Sec. 226.35(a)(2), and the higher- priced mortgage loan threshold, as defined in Sec. 226.35(a)(1).

Participants in the Board's consumer testing found this statement helpful in understanding the information in the graph. 38(b)(4)

Proposed Sec. 226.38(b)(4) would provide how creditors must calculate the average per-period savings that would result from a 1 percentage-point reduction in the APR. (This discussion refers to monthly savings because most mortgage loans require monthly payments.)

Creditors would calculate the average per-month savings by reducing the interest rate (or rates in the case of an ARM, as discussed in comment 34(b)(4)-1) by 1 percentage point, computing a hypothetical total of payments reflecting the payment schedule at the lower rate or rates.

The creditor would divide the difference between (1) the total of payments disclosed under proposed Sec. 226.38(e)(5)(i), and (2) the hypothetical total of payments by the number of payment periods required under the terms of the legal obligation. The creditor would report the results of this calculation as the average savings each month from a 1 percentage-point reduction in the APR. Proposed comment 38(b)(4)-1 would provide guidance on this method, and would include examples for fixed- and adjustable-rate mortgages.

The Board notes that the proposed method does not result in an exact 1 percentage-point reduction in APR, but is likely to be within a few basis points of a 1 percentage-point reduction. The results would be sufficiently accurate to show consumers that a lower APR will yield savings. Methods that might result in an actual 1 percentage-point reduction in the APR would likely be more complicated and would vary depending on the terms of the loan, such as whether the rate is variable and whether the payments amortize the loan. The Board believes that any additional consumer benefit from disclosing the precise 1 percentage-point APR reduction would not be sufficient to offset the costs of a more complex calculation method. The Board seeks comment, however, on its proposed method and whether another method would achieve the objectives of the disclosure without imposing undue compliance burdens. 38(b)(5) Exemptions

Proposed section 226.38(b)(5) would exempt construction loans, bridge loans, and reverse mortgages from the requirement to show the

APR plotted on a graph (Sec. 226.38(b)(2)) and the statement of the

APOR and the higher-priced loan threshold (Sec. 226.38(b)(3)). The exempted transactions are also exempt from the definition of a higher- priced mortgage, under Sec. 226.35(a)(3) in the Board's 2008 HOEPA

Final Rule. The Board does not publish an average prime offer rate for construction, bridge, or reverse mortgage loans. Thus, an exemption seems appropriate. The Board seeks comment, however, on whether these transactions should nevertheless be subject to Sec. 226.38(b)(2) and

(3). 38(c) Interest Rate and Payment Summary

Proposed Sec. 226.38(c) provides requirements for disclosure of the contract interest rate and the periodic payment for transactions secured by real property or a dwelling. The information proposed to be required by this paragraph must be in the form of a table, as provided in Sec. 226.38(c)(1), substantially similar to Model Forms H-19(A), H- 19(B), or H-19(C) in Appendix H. Additional formatting requirements would be provided in Sec. 226.37. The rules for disclosing the interest rate and periodic payments for an amortizing loan are provided in proposed Sec. Sec. 226.38(c)(2)(i) and 226.38(c)(3). Rules for disclosing the interest rate and periodic payments for a loan with negative amortization are in proposed Sec. Sec. 226.38(c)(2)(ii) and 226.38(c)(4). Special rules for disclosing balloon payments are found in proposed Sec. 226.38(c)(5). Additional explanations of introductory rates and negative amortization are contained in proposed Sec. Sec. 226.38(c)(2)(iii) and 226.38(c)(6), respectively. Proposed Sec. 226.38(c)(7) provides definitions for certain terms used in Sec. 226.38(c).

Existing Requirements for Periodic Payments

TILA Section 128(a)(6) requires the creditor to disclose the number, amount, and due dates or period of payments scheduled to repay the total of payments, for closed-end credit. 15 U.S.C. 1648(a)(6).

Currently, Sec. 226.18(g) implements TILA 128(a)(6). Under

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Sec. 226.18(g), creditors must show the number, amounts, and timing of payments scheduled to repay the obligation, except as provided in Sec. 226.18(g)(2) for certain loans with varying payments.\80\ The creditor must provide these disclosures on the TILA statement within three business days of receiving the consumer's written application, as provided in Sec. 226.19(a).

\80\ For a mortgage transaction with rates or fees that exceed certain thresholds, TILA Section 129 requires special disclosures regarding payments three business days before consummation of the transaction. See Sec. 226.32(c) (3), (4). The Board is not proposing revisions to these disclosures.

Comment 18(g)-1 provides that the payment schedule should include all components of the finance charge, not just interest. Thus, if mortgage insurance is required, the payment schedule must reflect the consumer's mortgage insurance payments until the date on which the creditor must automatically terminate coverage under applicable law.

See comment 18(g)-5. Commentary to Sec. 226.17(c) provides that for an adjustable-rate loan, creditors should disclose the payments and other disclosures based only on the initial rate and should not assume that the rate will increase. However, the disclosures must reflect a discounted or premium initial interest rate for as long as it is charged. The commentary permits, but does not require, creditors to include in the payments amounts that are not finance charges or part of the amount financed. Thus, creditors may, but need not, include insurance premiums excluded from the finance charge under Sec. 226.4(d), and ``real estate escrow amounts such as taxes added to the payment in mortgage transactions.''

TILA Section 128(b)(2)(C), as recently added by the MDIA, requires additional disclosures for loans secured by a dwelling in which the interest rate or payments may vary. 15 U.S.C. 1638(b)(2)(C).

Specifically, creditors must provide ``examples of adjustments to the regular required payment on the extension of credit based on the change in the interest rates specified by the contract for such extension of credit. Among the examples required * * * is an example that reflects the maximum payment amount of the regular required payments on the extension of credit, based on the maximum interest rate allowed under the contract. * * *'' TILA Section 128(b)(2)(C), 15 U.S.C. 1638(b)(2)(C). Creditors must provide these disclosures within three business days of receipt of the consumer's written application, as provided in Sec. 226.19(a). TILA Section 128(b)(2)(C) provides that these examples must be in conspicuous type size and format and that the payment schedule be labeled ``Payment Schedule: Payments Will Vary

Based on Interest Rate Changes.'' Section 128(b)(2)(C) requires the

Board to conduct consumer testing to determine the appropriate format for providing the disclosures to consumers so that the disclosures can be easily understood, including the fact that the initial regular payments are for a specific time period that will end on a certain date, that payments will adjust afterwards potentially to a higher amount, and that there is no guarantee that the borrower will be able to refinance to a lower amount. 15 U.S.C. 1638(b)(2)(C).

The Board's Proposal

The Board proposes to add new Sec. 226.38(c) to implement TILA

Section 128(a)(6) and Section 128(b)(2)(C) for all closed-end transactions secured by real property or a dwelling.\81\ (For all other closed-end credit transactions, Sec. 226.18(g) would continue to provide the rules for disclosing payments). Section 226.38(c) would require creditors to disclose the contract interest rate, regular periodic payment, and balloon payment if applicable. For adjustable- rate or step-rate amortizing loans, up to three interest rates and corresponding monthly payments would be required, including the maximum possible interest rate and payment. If payments are scheduled to increase independent of an interest-rate adjustment, the increased payment must be disclosed. Payments for amortizing loans must include an itemized estimate of the amount for taxes and insurance if the creditor will establish an escrow account. If a borrower may make one or more payments of interest only, all payments disclosed must be itemized to show the amount that will be applied to interest and the amount that will be applied to principal. Special rate and payment disclosures would be required for loans with negative amortization.

Creditors must provide the information about interest rates and payments in the form of a table, and creditors would not be permitted to include other unrelated information in the table.

\81\ TILA Section 128(b)(2)(C) also provides that the Board's testing should ensure that consumers can understand that there is no guarantee that they will be able to refinance. Proposed Sec. 226.38(f)(3) implements this aspect of Section 128(b)(2)(C).

Scope of proposed Sec. 226.38(c). TILA Section 128(b)(2)(C) applies to all transactions secured by a dwelling. The Board proposes to expand the requirement in Section 128(b)(2)(C) to include loans secured by real property that do not include a dwelling. As discussed in Sec. 226.19(a), unimproved real property is likely to be a significant asset for most consumers, and consumers should receive the disclosures required in Section 128(b)(2)(C) before they become obligated on a loan secured by such an asset. The disclosures would alert consumers to the potential for interest rate and payment increases and help them to determine whether these risks are appropriate to their circumstances.

The Board proposes this adjustment to TILA Section 128(b)(2)(C) pursuant to its authority under TILA Section 105(a). 15 U.S.C. 1604(a).

Section 105(a) authorizes the Board to make exceptions and adjustments to TILA for any class of transactions to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms and helping consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a), 1604(a). The class of transactions that would be affected is transactions secured by real property or a dwelling. As discussed, providing examples of increased interest rates and payments would help consumers understand the risks involved in certain loans.

The Board also proposes to revise the label for the interest rate and payment information from the statutory language, ``Payment Schedule:

Payments Will Vary Based on Interest Rate Changes,'' based on plain language principles, to make the disclosure more readily understandable.

Disclosure of the interest rate. Currently, TILA does not require disclosure of the contract interest rate for closed-end credit. In the consumer testing conducted for the Board, when consumers were asked what factors they considered when looking for a mortgage, by far the most common answers were that they wanted to obtain the lowest interest rate possible and that they wanted the loan with the lowest possible monthly payment. However, as they described their thought process, most consumers were primarily focused on the initial rate and payment, rather than how those terms might vary over time. Testing conducted on the current transaction-specific TILA disclosures indicated that consumers would like to see the interest rate disclosed on the form.

In addition, testing indicated that the current TILA payment schedule, which does not show the relationship between interest rate and payment, is ineffective at communicating to consumers what could happen to their payments over time on an ARM. Most participants said they liked the current presentation of the payments because it was specific and detailed. However, when shown a payment schedule for an

ARM with an

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introductory rate, many incorrectly assumed that payments shown were in fact their future payments, rather than payments based on the fully- indexed rate at consummation.

Under the Board's proposal, the interest rate and payment would be shown together in a table. The Board believes that highlighting the relationship between the interest rate and payment will enhance consumers' understanding of loan terms. If the interest rate is adjustable, the table would indicate changes in the adjustable interest rate over time. In addition, payment changes that are not based on adjustments to the interest rate would also be indicated in the table.

Highlighting potential changes to the interest rate and payment based on maximum interest rate increases, rather than showing a set payment schedule based on the assumption that the index used to calculate a adjustable interest rate will not change, will clarify to consumers not only that their interest rate and payments may change, but also how the interest rate and payment may change over time. Consumers would be better able to determine if a adjustable rate or payment loan will be affordable and appropriate for their individual circumstances.

Definitions for Sec. 226.38(c). Proposed Sec. 226.38(c) uses several terms that are defined in proposed Sec. 226.38(c)(7). Under

Sec. 226.38(c)(7), the terms ``adjustable-rate mortgage,'' ``step-rate mortgage,'' and ``interest-only'' would have the same meanings as in

Sec. 226.38(a)(3). An ``amortizing loan'' would be defined as a loan in which the regular periodic payments cannot cause the principal balance to increase; the term ``negative amortization'' would mean a loan in which the regular periodic payments may cause the principal balance to increase. Finally, the tern ``fully-indexed rate'' would mean the interest rate calculated using the index value and margin.

Proposed Sec. 226.38(c)(2)(i) and (c)(3) would require disclosure of interest rates and payment amounts for amortizing loans. Proposed

Sec. 226.38(c)(7) defines an amortizing loan as one in which the regular periodic payments cannot cause the principal balance to increase. Thus, loans with interest-only payments are amortizing loans.

If an escrow account will be established for an amortizing loan, creditors would be required to itemize the payment to show amounts to be included for taxes and insurance. See proposed Sec. 226.38(c)(3)(i)(C). Proposed Sec. Sec. 226.38(c)(2)(ii) and 226.38(c)(4) would require a special table for disclosures of interest rates and payment amounts for negatively amortizing loans. For such loans in which the consumer may choose between several payment options, the table will show only two: the minimum required payment option, and the fully amortizing option. Creditors may, however, disclose other payment options to the consumer, outside the segregated information required by this section. 38(c)(1) Format

Proposed Sec. 226.38(c)(1) would require the interest rate and payment information to be disclosed in the form of a table. This would ensure that payment examples required by the MDIA are in conspicuous format as required by TILA Section 128(b)(2)(C). The MDIA also requires conspicuous type size for the examples. Under the proposal, all disclosures must be in a minimum 10 point font, including the table required under Sec. 226.38(c), to ensure that they are clear and conspicuous. See proposed Sec. 226.37(a).

The Board's proposal would prescribe the number of interest rates and payments that could be shown in a table. The number of columns and rows for the table required by this part would vary depending on whether the loan is an amortizing loan and whether it has adjustable rates. However, tables disclosed under this section would have no more than 5 columns across, and creditors would not include information in the table that is not required under 226.38(c), to avoid information overload. Model and Sample Forms would be provided in Appendix H. 38(c)(2) Interest Rates 38(c)(2)(i) Amortizing Loans

Proposed Sec. 226.38(c)(2)(i) would provide disclosure of interest rates for amortizing loans. For a fixed-rate mortgage with no scheduled payment increases or balloon payments, the creditor would disclose only one interest rate. Fixed-rate loans with payment increases would require the creditor to disclose the interest rate with each increase.

For adjustable-rate mortgages and step-rate mortgages, more than one interest rate must be shown, as discussed below.

Interest Rates for Fixed-Rate Mortgages

For fixed-rate mortgages, proposed Sec. 226.38(c)(2)(i)(A) would require creditors to disclose the interest rate applicable at consummation. If the transaction does not provide for any payment increases, only one interest rate would be disclosed. However, some fixed-rate mortgages will have scheduled payment increases and in those cases the creditor must show the interest rate again, even though it is redundant, as discussed under Sec. 226.38(c)(2)(i)(C) below.

Interest Rates for Adjustable-Rate Mortgages and Step-Rate Mortgages

Interest rates at consummation, maximum possible at first adjustment, and maximum possible interest rate. As discussed, TILA

Section 128(b)(2)(C) requires creditors to disclose examples of payment increases including the maximum possible payment, for adjustable-rate mortgages and mortgages where payments may vary. Under Sec. 226.38(c)(2)(i), creditors would disclose more than one interest rate and corresponding monthly payment for adjustable-rate mortgages and step-rate mortgages. Under proposed Sec. 226.38(c)(2)(i)A)(I), the creditor must provide the interest rate at consummation, and the period of time until the first adjustment. If the interest rate at consummation is less than the fully-indexed rate (the sum of the index and margin at consummation), the interest rate must be labeled as

``introductory.'' Additional explanation of discounted introductory rates is required in proposed Sec. 226.38(c)(2)(iii), as discussed below.

Maximum at first adjustment. The Board proposes to require disclosure of the maximum rate and payment at first adjustment, as one of the examples required by TILA Section 128(b)(2)(C). Proposed Sec. 226.38(c)(2)(i)(B)(1) requires the creditor to provide the maximum interest rate applicable at the first interest rate adjustment, and the calendar month and year in which the first scheduled adjustment occurs would be required to be disclosed. The creditor would take into account any limitations on interest rate increases when determining the interest rate to be disclosed under Sec. 226.38(c)(2)(i)(B)(2). If the interest rate may reach the maximum possible at the first adjustment, the creditor should disclose the rate as the maximum possible as discussed below.

The Board proposes to require disclosure of the maximum interest rate at first adjustment because many consumers may take out adjustable-rate mortgages, planning to sell the home or refinance the loan before the first interest rate adjustment. It is important for consumers to know how much their rate and payment might increase at that point, if they are unable to refinance or sell the home before the first adjustment. The Board believes that for the same reason, the first interest rate increase should be shown for step-rate mortgages.

Although such mortgages do

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not present the uncertainty that an adjustable-rate mortgage does, consumers need to be informed of what their rate will increase to at the first increase. Consumer testing conducted for the Board shows that most consumers would find this information useful in determining whether the loan is affordable and suitable to their needs.

Maximum possible interest rate. Proposed Sec. 226.38(c)(2)(i)(B)(3) would require creditors to disclose the maximum interest rate that could apply, and the earliest possible year in which that rate could apply, as required by TILA Section 128(b)(2)(C). The

Board proposes to require this disclosure for step-rate mortgages as well, because the rate and payment will increase in such loans.

Consumer testing conducted for the Board suggests that consumers find this information about the maximum rate and payment particularly important in evaluating a loan offer for an adjustable-rate mortgage.

Participants indicated that this information is most useful to them in determining whether such a loan was affordable. If an amortizing adjustable-rate mortgage has intermediate limitation on interest rate increases, then the table required by proposed Sec. 226.38(c) would have at least three columns; if the transaction has no intermediate limitation on interest rates then the table would have two columns, one showing the rate at consummation and the other showing the maximum possible under the loan's terms.

Interest rate applicable at scheduled payment increase. Some mortgages provide for a payment increase that is not attributable to an interest rate adjustment or increase. For example, a loan may permit the borrower to make payments that cover only accrued interest for some specified period, such as the first five years following consummation; at the end of this ``interest-only'' period, the borrower must begin making larger payments to cover both interest accrued and principal.

Proposed Sec. 226.38(c)(2)(i)(C) would provide that, where such an increase will not coincide with an interest rate adjustment or increase, the creditor must include a column that discloses the interest rate that would apply at the time the adjustment is scheduled to occur, and the date in which the increase would occur. The creditor must include a description such as ``first increase'' or ``first adjustment.'' Thus, for a fixed-rate mortgage, the creditor would show the same interest rate twice (and the corresponding payments as discussed in Sec. 226.38(c)(4) below). The Board believes this would help the consumer understand that the increase in payment is due to the requirement to begin repaying loan principal and not to an interest- rate adjustment.

The same is true for adjustable-rate mortgages and step-rate mortgages. For example, some adjustable-rate mortgages permit the borrower to make interest-only payments for a specified period, such as the first five years following consummation. A scheduled payment increase may or may not coincide with a scheduled interest rate adjustment. Under proposed Sec. 226.38(c)(2)(i)(C), if a scheduled payment increase does not coincide with an interest rate adjustment (or rate increase for a step-rate mortgage), creditors must include a column that discloses the interest rate that would apply at the time of the increase, the date the increase is scheduled to occur, and an appropriate description such as ``first increase'' or ``first adjustment'' as appropriate. Proposed comment 38(c)(2)(i)(C)-1 provides clarifying examples. The Board is not aware of step-rate loans with interest-only features; however, if such a loan is offered, creditors would disclose the payment increase in the same manner as for an adjustable-rate mortgage. 38(c)(2)(ii) Negative Amortization Loans

Proposed Sec. 226.38(c)(2)(ii) would require disclosure of the interest rate applicable at consummation. Many payment option loans do not provide any limitations on interest rate increases (``interest rate caps''); the only cap is the maximum possible interest rate required by

Sec. 226.30(a.) For payment option loans, the creditor would disclose the interest rate in effect at consummation, and assume that the interest rate reaches the maximum at the next adjustment--often the second month after consummation. The creditor would disclose that rate for the first and second scheduled payment increases, as explained more fully in Sec. 226.38(c)(4) below, and in the last column, when the loan has recast and the consumer must first make a fully amortizing payment. The proposed approach to interest rates for negative amortization loans is consistent with the MDIA, which requires disclosure of the payment at the maximum possible rate, and other examples of payment increases.

Additional proposed rules for disclosing the interest rate on a loan with negative amortization are discussed under 38(c)(6) Special

Disclosures for Loans with Negative Amortization, below. 38(c)(2)(iii) Introductory Rate Disclosure for Adjustable-Rate

Mortgages

Many adjustable-rate mortgages have an introductory or teaser rate, set below the index and margin used for later adjustments. Proposed

Sec. 226.38(c)(2)(iii) would require a special disclosure in the case of an introductory rate. In consumer testing conducted for the Board, many participants did not understand the ramifications of an introductory interest rate. Participants understood that if market interest rates increased, the interest rate and payment on their loan would increase. However, participants did not understand that if they had an introductory rate, their interest rate and payment would increase when the introductory rate expired, even if market interest rates did not increase. Several different disclosures designed to show the impact of an introductory rate were tested in tabular form, with mixed results. Therefore, the Board proposes to require an explanation of the introductory rate below the table itself. Proposed Sec. 226.38(c)(2)(iii) would require disclosure of the introductory rate, how long it will last, and that the interest rate will increase at the first scheduled adjustment even if market rates do not increase.

Creditors would also disclose the fully indexed rate that otherwise would apply at consummation. Proposed Sec. 226.37(d)(4) would provide that this disclosure must be prominent and placed in a box under the table. 38(c)(3) Payments for Amortizing Loans 38(c)(3)(i) Principal and Interest Payments

Section 226.38(c)(3)(i) would require disclosure of the principal and interest payment that corresponds to each interest rate disclosed under proposed Sec. 226.38(c)(2)(i). Special itemization of the payment is required, however, if the loan permits the consumer to make any payments that will be applied only to interest accrued. Proposed

Sec. 226.3(c)(3)(ii)(C) would require disclosure of an estimate of the amount of taxes and insurance, including mortgage insurance. Proposed

Sec. 226.3(c)(3)(i)(D) would require disclosure of the estimated total payment including principal, interest, and taxes and insurance.

Principal and interest payments. Proposed Sec. 226.38(c)(3)(i) would require the disclosure of payment amounts that correspond to the interest rates disclosed under Sec. 226.38(c)(2)(i). Proposed comment 38(c)(3)-1 would clarify that the interest rate and payment amount applicable at consummation are required to be

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disclosed for all loans. In addition, the comment would clarify that if a payment amount is required to be disclosed under more than one subparagraph, the payment should only be disclosed once. For example, in an adjustable-rate transaction with a balloon payment, if the balloon payment will occur at the same time the loan may reach its maximum interest rate, only one disclosure of the interest rate and payment is required. Proposed comment 38(c)(3)-2 provides examples of the types of loans that trigger additional payment disclosures.

Fixed-rate mortgages. Under proposed Sec. 226.38(c)(3)(i)(A), for fixed-rate transactions where the regular periodic payment fully amortizes the loan and there are no scheduled payment increases (such as upon the expiration of an interest-only feature), the payment amount including both principal and interest would be required to be disclosed.

Fixed-rate interest-only loans. For fixed-rate transactions in which the consumer may make one or more interest-only payments, proposed Sec. 226.38(c)(3)(i)(B) would require disclosure of the payment at any scheduled increase in the payment amount and the date on which the increase is scheduled to occur. For example, in a fixed-rate interest-only loan a scheduled increase in the payment amount from an interest-only payment to a fully amortizing payment would be required to be disclosed. Similarly, in a fixed-rate balloon loan, the balloon payment must be disclosed, but it would be disclosed under the table pursuant to Sec. 226.38(c)(5).

Adjustable-rate and step-rate transactions. Under proposed Sec. 226.38(c)(3)(i), for adjustable-rate and step-rate transactions, a payment amount corresponding to each interest rate in Sec. 226.38(c)(2) would be required to be disclosed.

Adjustable-rate interest-only and balloon loans. For adjustable- rate transactions in which the consumer may make interest-only payments, proposed Sec. 226.38(c)(3)(ii) would require additional disclosures. Section 226.38(c)(3)(i)(B) would require disclosure of the payment amount at any scheduled payment increase that does not coincide with an interest rate adjustment, and the date on which the increase is scheduled to occur. In addition, for an adjustable-rate balloon loan, if the balloon payment will not coincide with either the first interest rate adjustment or the time when the interest rate reaches its maximum, the balloon payment is required to be disclosed separately, below the table, in accordance with Sec. 226.38(c)(5).

Principal and interest payment itemization. Under proposed Sec. 226.38(c)(3)(i) and (ii), the format of the payment disclosure would vary depending on whether all regular periodic payment amounts will include principal and interest. If all regular periodic payments include principal and interest, under Sec. 226.38(c)(3)(i) each payment amount would be listed in a single row in the table with a description such as principal and interest (except that a balloon payment would be disclosed in accordance with Sec. 226.38(c)(5)). If any regular periodic payment amounts will include interest but not principal, under Sec. 226.38(c)(3)(ii) all payments for the loan must be itemized into principal and interest. For a payment that includes no principal, the creditor must indicate that none of the payment amount will be applied to principal. The creditor must label the dollar amount to be applied to interest ``Interest Payment.'' The Board proposes this itemization and labeling to emphasize for consumers the impact of making interest-only payments. Many participants in the Board's consumer testing did not clearly understand that an ``interest-only'' loan was different from a loan in which all payments are applied to principal and interest without this emphasis and the statement in the loan summary required in proposed Sec. 226.38(a)(3).

Balloon payment. Under proposed Sec. 226.38(c)(5)(i), if a payment amount is a balloon payment, the payment must be disclosed in the last row of the table rather than in a column, unless it coincides with an interest rate adjustment or other payment increase such as the expiration of an interest-only option. Section 226.38(c)(5)(i) would clarify that a payment is a balloon payment if it is more than twice the amount of other payments. This is consistent with how balloon payments are defined for purposes of restrictions on balloon payments for higher-priced and HOEPA loans.

Escrows; mortgage insurance premiums. Proposed Sec. 226.38(c)(3)(i)(C) would provide that if an escrow account will be established, the creditor must disclose the estimated payment amount for taxes and insurance, including mortgage insurance. For transactions secured by real property or a dwelling, creditors would no longer have the flexibility provided in existing 226.18(g) to exclude escrow amounts. Consumer testing conducted for the Board shows that many consumers compare loans based on the monthly payment amount. The Board believes that in order for consumers to fully understand the monthly amount they actually will be required to pay for a particular loan, information about payments for taxes and insurance is necessary. Escrow information would be included in the table to make it easier for consumers to identify whether there is an escrow and how much of their payment would apply to the escrow.

Proposed comment 38(c)(3)(i)(C)-1 would clarify the types of taxes and insurance that would be required to be included in the estimate.

Proposed comment 38(c)(i)(C)-2 would provide guidance on how to determine the length of time for which mortgage insurance payments must be included in the estimate. Under the proposed comment, which is substantially similar to current comment 18(g)-5, the payment amount should reflect the consumer's mortgage insurance payments until the date on which the creditor must automatically terminate coverage under applicable law, even though the consumer may have a right to request that the insurance be canceled earlier.

The Board solicits comment on whether premiums or other amounts for credit life insurance, debt suspension and debt cancellation agreements and other similar products should be included or excluded from the disclosure of escrows for taxes and insurance. Including such amounts in the estimated escrow and monthly payment, particularly on the early

TILA disclosures delivered within three days of application, may cause some consumers to believe these products are required as part of the loan agreement. This may affect consumers' ability to weigh the relative merits of credit insurance and other similar products and determine whether the product is appropriate for their circumstances.

Total periodic payments. Proposed Sec. 226.38(c)(3)(i)(D) would require disclosure of the total estimated monthly payment. The total estimated monthly payment is the sum of the principal and interest payments and the estimated taxes and insurance payments required to be disclosed in Sec. 226.38(c)(3)(i)(C). 38(c)(4) Periodic Payments for Loans With Negative Amortization

For each interest rate disclosed under Sec. 226.38(c)(2)(ii), the creditor would disclose a corresponding payment. One row of the table would show the fully amortizing payment for each interest rate; for purposes of calculating these payments the creditor would assume the interest rate reaches the maximum at the

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earliest date, and that the consumer makes only fully amortizing payments. The other row of the table would show the minimum required payment for each rate, until the recast point. At the recast point, the minimum payment row would show the fully amortizing payment. For purposes of the minimum payment row, creditors must assume the interest rate reaches the maximum at the earliest date, and that the consumer makes only the minimum required payment for as long as permitted under the terms of the legal obligation.

Minimum payment amounts. Proposed Sec. 226.38(c)(4)(i)(A) would require disclosure of the minimum required payment at consummation. The proposal would require a disclosure of the amount of the minimum payment applicable for each interest rate required to be disclosed under Sec. 226.38(c)(2)(ii), and the date. Under proposed Sec. 226.38(c)(4)(i)(C), the creditor must provide a statement that the minimum payment will cover only some of the interest accrued and none of the principal, and will cause the principal balance to increase. The

Board proposes this required statement to ensure that consumers are informed about the consequences of making minimum payments. As stated above, participants in the Board's consumer testing were unfamiliar with the concept of negative amortization and struggled to understand why a loan's balance would increase when payments were made.

Payment increases. As noted above, many payment option loans do not have interest rate caps, and thus the interest rate may reach its maximum possible amount at the first interest rate adjustment. However, such loans may have limits on the amount that the minimum payment may increase following an interest rate adjustment. For example, a minimum payment increase may be limited by a certain percentage, such as 7.5% greater than the previous minimum payment. (Such limits are generally subject to conditions and will not apply either at a specific time, such as at the fifth year of the loan, or when the loan balance reaches a certain maximum.) Under proposed Sec. 226.38(c)(2)(ii)(D), if adjustments in the minimum payment amount are limited such that the payment will not fully amortize the loan even after the interest rate has reached the maximum, a disclosure of the minimum payment amount at the first and second payment adjustments would be required. That is, in cases where the first interest rate adjustment will be the only interest rate adjustment, but payment adjustments will continue to occur before the minimum payment recasts to a fully amortizing payment, a disclosure of one additional minimum payment adjustment would be required.

Fully amortizing payment amount. Proposed Sec. 226.38(c)(4)(iii) would require disclosure of the amount of the fully amortizing payment, assuming that the consumer makes only fully amortizing payments beginning at consummation. The fully amortizing payment row must be filled in for each interest rate required to be disclosed under Sec. 226.38(c)(4)(ii) and (iv). The Board believes that contrasting the fully amortizing payment with the minimum required payment will help consumers to understand the implications of making the fully amortizing payment and the minimum payment. In consumer testing, participants understood from the table that if they made the fully amortizing payment each month they would pay their loan off, and that if they instead made the minimum payment they would not pay the loan off and in fact would increase the amount that they owe.

Statement of balance increase and other information. Proposed Sec. 226.38(c)(4)(vi) would require a statement of the amount of the increase in the loan's principal balance if the consumer makes only minimum payments and the earliest month and year in which the minimum payment will recast to a fully amortizing payment under the terms of the legal obligation, assuming that the interest-rate reaches its maximum at the earliest possible time. As noted, participants in testing expressed confusion about negative amortization; the Board believes this disclosure and the other required disclosures in the table should help consumers understand the risks of making minimum payments.

In addition, the explanation preceding the table would provide the consumer's option to make fully amortizing payments or to make minimum payments, the maximum possible interest rate, the earliest number of months or years in which the interest rate could reach its maximum, and the amount of estimated taxes and insurance included in each payment disclosed. If the maximum interest rate may be reached in less than a year the statement would be required to provide the number of months after consummation in which the interest rate may reach its maximum, otherwise the statement would provide the number of years. In addition, the creditor would disclose whether an escrow account will be established and if so, an estimate of the amount for taxes and insurance included in each periodic payment. 38(c)(6) Special Disclosures for Loans With Negative Amortization

Some mortgage transactions permit the borrower to make payments that are insufficient to cover all of the interest accrued, and the unpaid interest is added to the loan's balance. Thus, although the borrower is making payments, the loan balance is increasing instead of decreasing. Negative amortization could occur on a fixed-rate mortgage or an adjustable-rate mortgage. Mortgages with negative amortization were relatively rare until the early part of this decade, when the

``payment option'' loan began to grow in popularity.\82\ Payment option loans have adjustable rates, and allow the borrower to choose among up to five monthly payment options, including a minimum payment that would result in negative amortization. Other options would include an interest-only option, a fully amortizing option, and the option to make extra payments of principal and pay the loan off early. Typically, payment option loans permit consumers to make minimum payments for a limited time, such as for the first five years following consummation or until the loan's principal balance reaches 115 percent of the original balance, whichever occurs first. Upon either event, the consumer must begin to make fully amortizing payments.

\82\ Interagency Guidance on Nontraditional Mortgage Product

Risks, 71 FR 58609; October 4, 2006.

Payment option loans and other nontraditional mortgages can result in significant ``payment shock'' for borrowers, particularly when the loan ``recasts'' and a fully amortizing payment must be made. Concerns about payment shock led the Board, OCC, OTS, FDIC and NCUA to propose supervisory guidance on nontraditional mortgages in 2005, and issue final guidance in October 2006.\83\ The guidance emphasizes that institutions should use prudence in underwriting nontraditional mortgages, and should provide accurate and balanced information to consumers before the consumer is obligated on such a mortgage. The agencies published illustrations to assist financial institutions in providing information that would help consumers understand the risks involved in nontraditional mortgages.\84\ Those illustrations were not consumer tested.

\83\ Id.

\84\ 72 FR 31825, 318231; Jun. 8, 2007

The Board's consumer testing indicates that the unusual and complex nature of negative amortization loans requires a different approach to the

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disclosure of interest rates and payments than for amortizing loans.

Nearly all participants in the Board's consumer testing were unfamiliar with the concept of negative amortization, and technical explanations of negative amortization proved challenging for them. The Board believes that selected information about payment option loans may be more effective in conveying the risks of such mortgages than extensive text explaining negative amortization and its impact.

Accordingly, the Board developed and tested an interest rate and payment summary table designed to inform consumers about the risks of a payment option loan. The proposed rules would also require disclosure of the interest rate and payment for a loan with negative amortization that is not an adjustable rate mortgage. However, the Board found no examples of such loans in the marketplace, and seeks comment on whether such loans are offered and if so, whether proposed Sec. 226.38(c) provides sufficient guidance on disclosing such loans.

The interest rate and payment summary would display only two payment options, even if the terms of the legal obligation provide for others, such as an option to make interest-only payments. The table would show only the option to make minimum payments that would result in negative amortization, and the option to make fully amortizing payments. The Board believes that displaying all of the options in the table would have the unintended consequence of confusion and information overload for consumers. Creditors would be free to provide information on options not displayed in the table, outside the segregated information required under this subsection.

In addition, to help consumers navigate the information in the table, proposed Sec. 226.38(c)(6) would require a statement directly above the interest rate and payment summary table explaining that the loan offers payment options. A disclosure of the maximum possible balance would also be required, directly below the table, to help ensure that consumers understand the nature and risks involved in loans with negative amortization. 38(d) Key Questions About Risk

Based on consumer testing, as discussed in greater detail in Sec. 226.19(b)(2) above, the Board proposes to require creditors to disclose certain information grouped together under the heading ``Key Questions about Risk,'' using that term. This disclosure would be specific to the loan program for which the consumer applied. Proposed Sec. 226.38(d)(1) would require the creditor to disclose information about the following three terms: (1) Rate increases, (2) payment increases, and (3) prepayment penalties. Proposed Sec. 226.38(d)(2) would require the creditor to disclose information about the following six terms, but only if they are applicable to the loan program: (1) interest-only payments, (2) negative amortization, (3) balloon payment, (4) demand feature, (5) no-documentation or low-documentation loans, and (6) shared-equity or shared-appreciation. The ``Key Questions about Risk'' disclosure would be subject to special format requirements, including a tabular format and a question and answer format, as described under proposed Sec. 226.38(d)(3). 38(d)(1) Required Disclosures

As noted above, proposed Sec. 226.38(d)(1) would require the creditor to disclose information about the following three terms: (1)

Rate increases, (2) payment increases, and (3) prepayment penalties.

The Board believes that these three factors should always be disclosed.

Rate and payment increases pose the most direct risk of payment shock.

In addition, consumer testing consistently showed that interest rate and monthly payment were the two most common terms that participants used to shop for a mortgage. The Board also believes that the prepayment penalty is a key risk factor because it is critical to the consumer's ability to sell the home or refinance the loan to obtain a lower rate and payments. While the other risk factors are important if contained in the loan program, the Board believes it appropriate to include those factors only as applicable to avoid information overload.

Rate increases. Proposed Sec. 226.38(d)(1)(i) would require the creditor to indicate whether or not the interest rate on the loan may increase. If the interest rate on the loan may increase, then the creditor would indicate the frequency with which the interest rate may increase and the date on which the first interest rate increase may occur. Proposed comment 38(d)(1)-1 would clarify that disclosing the date means that the creditor must disclose the calendar month and year.

Payment increases. Proposed Sec. 226.38(d)(1)(ii) would require the creditor to indicate whether or not the periodic payment on the loan may increase. If the periodic payment on the loan may increase, then the creditor would be required to indicate the date on which the first payment increase may occur. For payment option loans, the creditor would be required to disclose the dates on which the full and minimum payments may increase. Proposed comment 38(d)(1)-1 would clarify that disclosing the date means that the creditor must disclose the calendar month and year.

Prepayment penalty. As currently required under TILA Section 128(a)(11), 15 U.S.C. 1638(a)(11), and Sec. 226.18(k)(1), if the obligation includes a finance charge computed from time to time by application of a rate to the unpaid principal balance, proposed Sec. 226.38(d)(1)(iii) would require the creditor to indicate whether or not a penalty will be imposed if the obligation is prepaid in full. If the creditor may impose a prepayment penalty, the creditor would disclose the circumstances under which and period in which the creditor would impose the penalty and the amount of the maximum penalty. Because of the importance of prepayment penalties, the proposed rule would also require disclosure of prepayment penalties, if applicable, under proposed Sec. 226.38(a)(5). To avoid duplication, proposed comments 38(d)(1)(iii)-1 to -3 would cross-reference proposed comments 38(a)(5)- 1 to -3 for information about whether there is a prepayment penalty, and examples of charges that are or are not prepayment penalties. In addition, proposed comment 38(d)(1)(iii)-4 would cross-reference comment 38(a)(5)-6 to determine the maximum prepayment penalty.

Proposed comment 38(d)(1)(iii)-5 would cross-reference comment 38(a)(5)-7 for information about any differences resulting from the consumer's payment patterns and basing disclosures on the required payment for a negative amortization loan. Although under proposed Sec. 226.38(a)(5) the disclosure of the prepayment penalty would appear on the first page of the transaction-specific TILA disclosure only if this feature were present in the loan, the disclosure would always appear on the second page in the ``Key Questions'' disclosure in order for the consumer to verify whether or not there is a prepayment penalty associated with the loan. 38(d)(2) Additional Disclosures

As noted above, proposed Sec. 226.38(d)(2) would require the creditor to disclose information about the following six terms, as applicable: (1) Interest-only payments, (2) negative amortization, (3) balloon payment, (4) demand feature, (5) no-documentation or low- documentation loans, and (6) shared-equity or shared-appreciation.

Proposed comment 38(d)(2)-1 would

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clarify that ``as applicable'' means that any disclosure not relevant to a particular loan may be omitted. Although consumer testing showed that some participants felt reassured by seeing all of the risk factors whether the factors were a feature of the loan or not, the Board is concerned about the potential for information overload if the entire list is included.

Interest-only payments. Proposed Sec. 226.38(d)(2)(i) would require the creditor to disclose that periodic payments will be applied only toward interest on the loan. The creditor would also disclose any limitation on the number of periodic payments that will be applied only toward interest on the loan, that such payments will cover the interest owed each month, but none of the principal, and that making these periodic payments means the loan amount will stay the same and the consumer will be not have paid any of the loan amount. For payment option loans, the creditor would disclose that the loan gives the consumer the choice to make periodic payments that cover the interest owed each month, but none of the principal, and that making these periodic payments means the loan amount will stay the same and the consumer will not have paid any of the loan amount.

Negative amortization. Proposed Sec. 226.38(d)(2)(ii) would require the creditor to disclose that the loan balance may increase even if the consumer makes the periodic payments. In addition, the creditor would be required to disclose that the minimum payment covers only a part of the interest the consumer owes each period and none of the principal, that the unpaid interest will be added to the consumer's loan amount, and that over time this will increase the total amount the consumer is borrowing and cause the consumer to lose equity in the home.

Balloon payment. Proposed Sec. 226.38(d)(2)(iii) would require the creditor to disclose that the consumer will owe a balloon payment, along with a statement of the amount that will be due and the date on which it will be due. Proposed comment 38(d)(2)(iii)-1 would clarify that the creditor must make this disclosure if the loan program includes a payment schedule with regular periodic payments that when aggregated do not fully amortize the outstanding principal balance.

Demand feature. As currently required under Sec. 226.18(i), proposed Sec. 226.38(d)(2)(iv) would require the creditor to disclose a statement that the creditor may demand full repayment of the loan, along with a statement of the timing of any advance notice the creditor is required to give the consumer before the creditor exercises such right. Proposed comment 38(d)(2)(iv)-1 would clarify that this requirement would apply not only to transactions payable on demand from the outset, but also to transactions that convert to a demand status after a stated period. Proposed comment 38(d)(2)(iv)-2 would cross- reference comment 18(i)-2 regarding covered demand features.

No-documentation or low-documentation loans. Proposed Sec. 226.38(d)(2)(v) would require the creditor to disclose that the consumer's loan will have a higher rate or fees because the consumer did not document employment, income, or other assets. In addition, the creditor would disclose that if the consumer provides more documentation, the consumer could decrease the interest rate or fees.

Shared-equity or shared-appreciation. Proposed Sec. 226.38(d)(2)(vi) would require the creditor to disclose a statement that any future equity or appreciation in the real property or dwelling that secures the loan must be shared, along with a statement of the events that may trigger such obligation. 38(d)(3) Format Requirements

Based on consumer testing, as discussed more fully in Sec. Sec. 226.19(b)(2) and 226.37, proposed Sec. 226.38(d)(3) would require the creditor to disclose the ``Key Questions about Risk'' using a special format. Proposed Sec. 226.38(d)(3)(i) would require the creditor to provide the disclosures required in Sec. 226.38(d)(1) and (d)(2), as applicable, in the form of a table with headings, content and format substantially similar to Model Forms H-19(A), H-19(B), or H-19(C) in

Appendix H. Only the information required or permitted by Sec. 226.38(d)(1) and (2) would be permitted in this table. In addition, under Sec. 226.38(d)(3)(ii), the disclosures would be required to be grouped together and presented in the format of a question and answer in a manner substantially similar to Model Form H-19(A), H-19(B), or H- 19(C) in Appendix H. Proposed Sec. 226.38(d)(3)(iii) would further require the creditor to disclose each affirmative answer in bold text and in all capitalized letters, but negative answers would be disclosed in nonbold text. Finally, proposed 226.38(d)(3)(iv) would require the creditor to make the disclosures, as applicable, in the following order: rate increases under Sec. 226.38(d)(1)(i), payment increases under Sec. 226.38(d)(1)(ii), interest-only payments under Sec. 226.38(d)(2)(i), negative amortization under Sec. 226.38(d)(2)(ii), balloon payments under Sec. 226.38(d)(2)(iii), prepayment penalties under Sec. 226.38(d)(1)(iiii), demand feature under Sec. 226.38(d)(2)(iv), no-documentation or low-documentation loans under

Sec. 226.38(d)(2)(v), and shared-equity or shared-appreciation under

Sec. 226.38(d)(2)(vi). This order would ensure that consumers receive critical information about their payments first. 38(e) Information About Payments

Proposed Sec. 226.38(e) would require disclosure of additional information about interest rates and payments, including disclosure of the amount financed, the ``interest and settlement charges,''

(currently the ``finance charge''), the total of payments, and the number of payments. Proposed Sec. 226.38(e) would also require disclosure of whether or not an escrow account for taxes and insurance is required, a disclosure about private mortgage insurance, if applicable, and information about limitations on rate and payment changes. In the consumer testing conducted by the Board, consumers did not find certain terms that are prominently disclosed on the current transaction-specific TILA form to be useful. Specifically, the amount financed, the total of payments, and the finance charge were less useful to consumers than other information such as information about the loan amount, interest rates, and monthly payments. The Board believes that it would enhance consumers' overall understanding of the disclosures if these items were placed less prominently on the form. In addition, by placing these terms in the context of a larger explanatory statement, some consumers may better be able to understand these terms.

At the same time, consumer testing conducted for the Board has shown that there is other information about the loan terms that consumers find beneficial that is not currently disclosed on the transaction- specific form. Specifically, the Board believes that consumers would find it beneficial to have explanations of how the interest rate or payment amounts can change and whether there are limits on those changes, and notification of whether an escrow account or private mortgage insurance are required. 38(e)(1) and (2) Rate Calculation; Rate and Payment Change Limits

Proposed Sec. Sec. 226.38(e)(1) and 226.38(e)(2) would require disclosures of how the consumer's variable interest rate is calculated, of any limitations on adjustments to the interest rate, and of any limitations on payment adjustments in negatively amortizing loans. The

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requirements under proposed Sec. Sec. 226.38(e)(1) and 226.38(e)(2) to provide disclosures of how the rate is calculated and any limitations on adjustments to the interest rate are similar to the requirements of current Sec. Sec. 226.18(f)(1)(i) and 226.18(f)(1)(ii) for transactions not secured by the consumer's principal dwelling or secured by the consumer's principal dwelling with a term of one year or less. Currently, for transactions secured by the consumer's principal dwelling with a term greater than one year, Sec. 226.19(b)(2) requires information about the variable interest rate to be disclosed at the time an application form is provided to the consumer, or before the consumer pays a nonrefundable fee, whichever is earlier. However, under current Sec. 226.18(f)(2), in the transaction-specific disclosures provided before consummation, only a statement that the transaction contains a variable-rate feature, and a statement that variable-rate disclosures have been provided earlier, are required. The Board believes that providing information about how the interest rate is calculated and about limitations on interest rate adjustments along with other transaction-specific disclosures would provide consumers with meaningful information about their particular interest rate in the context of the entire transaction being disclosed. For adjustable-rate mortgages, proposed Sec. 226.38(e)(1) would require a statement of how the interest rate is calculated. In addition, if the interest rate at consummation is not based on the index and margin that will be used to make later interest rate adjustments, the statement would be required to include the time period when the initial interest rate expires.

Proposed comment 38(e)(1)-1 is similar to current comment 18(f)(1)(i)-1 for credit not secured by the consumer's principal dwelling, or secured by the consumer's principal dwelling with a term of one year or less. The proposed comment would clarify that if the interest rate is calculated based on the addition of a margin to an index the statement would have to identify the index to which the rate is tied and the margin that will be added to the index, as well as any conditions or events on which the increase is contingent. When no specific index is used, the factors used to determine whether to increase the rate would be required to be disclosed. When the increase in the rate is discretionary, the fact that any increase is within the creditor's discretion would be required to be disclosed. When the index is internal (for example, the creditor's prime rate), the creditor would be permitted to comply with the disclosure requirement by providing either a brief description of that index or a statement that any increase is in the discretion of the creditor. An external index, however, would be required to be identified.

Proposed Sec. 226.38(e)(2) would require a statement of any limitations on the increase in the interest rate in a variable-rate transaction, and, for negatively amortizing loans, a statement of any limitations on the increase in the minimum payment amount and the circumstances under which the minimum payment required may recast to a fully amortizing payment. Proposed comment 38(e)(2)-1, covering variable-rate transactions, would be similar to current comment 18(f)(1)(ii)-1 and would clarify that the disclosure of limitations on adjustments to the interest rate must provide any maximum imposed on the amount of an increase in the rate at any time, as well as any maximum on the total increase over the transaction's term to maturity.

Proposed comment 38(e)(2)-2, covering negatively amortizing loans, would clarify that any limit imposed on the change of a minimum payment amount, whether or not the change follows an adjustment to the interest rate, would be required to be disclosed. In addition, any conditions to the limitation on payment increases would also be required to be disclosed. For example, some loan programs provide that the minimum payment will not increase by more than a certain percentage, regardless of the corresponding increase in the interest rate. However, there may be exceptions to the limitation on the payment increase, such as if the consumer's principal balance reaches a certain threshold, or if the legal obligation sets out a scheduled time when payment increases will not be limited. 38(e)(3) Escrow

Proposed Sec. 226.38(e)(3) would require, if applicable, a statement substantially similar to the following: ``An escrow account is required for property taxes and insurance (such as homeowner's insurance). Your escrow payment is an estimate and can change at any time. See your Good Faith Estimate or HUD-1 form for more details.'' If no escrow is required, the creditor would be required to state that fact and that the consumer must pay property taxes and insurance directly. 38(e)(4) Mortgage Insurance

Proposed Sec. 226.38(e)(4) would require, if applicable, a statement substantially similar to the following: ``Private Mortgage

Insurance (PMI) is required for this loan. It is included in your escrow.'' If other mortgage insurance is required, such as insurance or guaranty obtained from a government agency, the creditor would be required to omit the word ``private'' from the description. 38(e)(5) Total Payments 38(e)(5)(i) Total Payments

Section 226.18(h), which implements TILA Section 128(a)(5) and (8), requires creditors to disclose the total of payments, using that term, together with a descriptive statement that the disclosed amount reflects the sum of all scheduled payments disclosed under Sec. 226.18(g).\85\ 15 U.S.C. 1638(a)(5), (a)(8). Current comment 18(h)-1 allows creditors to revise the total of payments descriptive statement for variable rate transactions to convey that the disclosed amount is based on the annual percentage rate and may change. In addition, current comments 18(h)-3 and -4 permit creditors to omit the total of payments disclosure in certain single-payment transactions and for demand obligations that have no alternate maturity date.

\85\ Section 128(a)(5) of TILA states that the total of payments should be disclosed as the sum of the amount financed and finance charge. 15 U.S.C. 1638(a)(5). Since 1969, the Board has required that the total of payments equal the sum of payments disclosed in the payment schedule under TILA Section 128(a)(6) and Sec. 226.18(g), which can include amounts beyond the amount financed and the finance charge. 15 U.S.C. 1638(a)(6). Thus, if a creditor includes escrowed taxes and insurance in its disclosure of scheduled payments under Sec. 226.18(g), it must also include those amounts in the total of payments disclosed under Sec. 226.18(h). 34 FR 02002; Feb. 11, 1969.

Consumer testing conducted by the Board showed that participants did not find the total of payments to be helpful in evaluating a loan offer. Most participants understood that the total of payments generally represented the sum of scheduled payments and charges, including interest; several suggested that an explanation of how the total of payments is calculated would facilitate comprehension of the term. Some participants expressed interest in knowing the total of payments required to pay off the loan obligation, but regarded this information as marginally useful to their shopping and decision-making process. On the other hand, some participants commented that information about the total of payments was unnecessary and therefore, could be removed from the form entirely.

As part of consumer testing, the Board shortened the term ``total of payments'' to ``total payments'' because it is a more

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direct and simple term to communicate to consumers what the dollar amount represented. In addition, an explanation of the assumptions underlying the total payments calculation was added with an explicit reference to whether the amount included escrowed amounts. The total payment amount was disclosed with a statement explaining that a portion of it goes towards interest and settlement charges. This approach enhanced consumer comprehension of the total payments and, as discussed more fully below, the interest and settlement charges disclosure.

The Board proposes to rename ``total of payments'' as ``total payments,'' and require that it be disclosed with a descriptive statement, for transactions secured by real property or a dwelling. The

Board proposes to make this adjustment pursuant to its exception authority under TILA Section 105(a). 15 U.S.C. 1604(a). Section 105(a) authorizes the Board to make exceptions and adjustments to TILA to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms and helping consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a), 1604(a). The Board believes that proposing the exception is appropriate. Consumer testing indicates that ``total payments'' is more understandable to consumers than ``total of payments.''

The Board proposes to add new Sec. 226.38(e)(5)(i), which would implement TILA Sections 128(a)(5), 128(a)(6), in part, and 128(a)(8) for transactions secured by real property or a dwelling. 15 U.S.C. 1638(a)(5), (a)(6), and (a)(8). Proposed Sec. 226.38(e)(5)(i) would require creditors to disclose for transactions secured by real property or a dwelling, the number and total amount of payments that the consumer would make over the full term of the loan. The Board proposes that this disclosure be made together with a brief statement that the amount is calculated assuming market rates will not change, and that the consumer will make all payments as scheduled for the full term of the loan. The Board believes that although the total payments disclosure is not critical to the shopping or decision-making process for many consumers, it provides information about the total cost of the loan that provides context for, and increases understanding of, other required disclosures, such as interest and settlement charges (formerly finance charge) and amount financed.

Proposed comments 38(e)(5)(i)-1 through -3 would be added to provide guidance to creditors on how to calculate and disclose the total payments amount and the number of payments. As discussed more fully under proposed Sec. 226.38(c), the Board is proposing to require creditors to provide interest rate and monthly payment disclosures in a tabular format for transactions secured by real property or a dwelling.

As a result, creditors would not be subject to the disclosure requirements for payment schedules under current Sec. 226.18(g).

However, proposed comment 38(e)(5)(i)-1 would clarify that creditors should continue to follow the rules in Sec. 226.18(g) and associated commentary, and comments 17(c)(1)-8 and -10 for adjustable rate transactions, to calculate the total payments for transactions secured by real property or a dwelling. New comment 38(e)(5)(i)-2 would cross- reference to comment 18(g)-3, which the Board proposes to revise to require creditors to disclose the total number of payments for all payment levels as a single figure for transactions secured by real property or a dwelling. Proposed comment 38(e)(5)(i)-3 would provide guidance regarding demand obligations. In technical revisions, the text from current footnote 44 would be moved to the regulation text in Sec. 226.18(h); however, this text is not included in proposed Sec. 226.38(e)(5)(ii) because it is not applicable to transactions secured by real property or a dwelling.

As discussed more fully under proposed Sec. 226.38(e)(5)(ii) for interest and settlement charges (formerly ``finance charge''), creditors would be required to group the total payments disclosure together with the interest and settlement charges and amount financed disclosures under proposed Sec. 226.38(e)(5)(ii) and (iii), respectively. 38(e)(5)(ii) Finance Charge: Interest and Charges

Section 226.18(d), which implements TILA Sections 128(a)(3) and

(a)(8), requires creditors to disclose the ``finance charge,'' using that term, and a brief description such as ``the dollar amount the credit will cost you.'' 15 U.S.C. 1638(a)(3), (a)(8). Current comment 18(d)-1 allows creditors to modify this description for variable rate transactions with a phrase that the disclosed amount is subject to change. In addition, Sec. 226.17(a)(2), which implements TILA Section 122(a), requires creditors to disclose the finance charge, and the annual percentage rate, more conspicuously than any other required disclosure, except the creditor's identity. 15 U.S.C. 1633(a). The rules addressing which charges must be included in the finance charge are set forth under TILA Section 106 and Sec. 226.4, and are discussed more fully under Sec. 226.4 of this proposal. 15 U.S.C. 1605.

Consumer testing conducted by the Board indicated that many participants could not correctly explain the term ``finance charge.''\86\ Most participants thought that the finance charge represented the amount of interest the borrower would pay over the life of the loan, but did not realize that it also included fees until directed to read a statement that explained fees were included.

Consumer testing showed that comprehension of the finance charge improved when it was renamed to reflect the costs it actually represented--the interest and settlement charges paid over the life of the loan. However, even when participants understood what the finance charge signified they tended to disregard it, often because it was such a large dollar amount. Several participants commented that it is helpful to know the total amount of interest and fees that would be paid, but that they could not otherwise purchase a home, or refinance an existing obligation, in cash and therefore, already understood they would pay a significant amount in interest and fees when repaying the loan. Still, participants expressed an interest in knowing the total amount of interest and other charges they would pay over the full term of the loan.

\86\ See also Improving Consumer Mortgage Disclosures (stating that a number of respondents misinterpreted the finance charge).

The Board proposes to exercise its authority under TILA Section 105(a) to rename ``finance charge'' as ``interest and settlement charges,'' except it from the requirement under TILA Section 122(a) that it be disclosed more conspicuously, and require that it be disclosed with a descriptive statement. 15 U.S.C. 1632(a); 1604(a),

(f). Section 105(a) authorizes the Board to make exceptions or adjustments to TILA for any class of transactions to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms and helping consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a), 1604(a). In this case, the Board believes an exception from TILA's requirements are necessary to effectuate the

Act's purposes for transactions secured by real property or a dwelling.

Although some consumers expressed interest in the finance charge when evaluating a loan offer, consumer testing showed that for most consumers it is not as useful in the shopping or decision-making process as other terms, and therefore, should be de-emphasized relative to other disclosed terms. Consumer testing also showed that

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participants had a better understanding of the finance charge when it was disclosed as a portion of the total payments amount, accompanied by a statement that explained the finance charge amount plus the amount financed is used to calculate the APR. Thus, based on consumer testing, the Board believes that consumers will find the finance charge disclosure more meaningful when described in a manner consistent with consumers' general understanding, and disclosed in context with other information that relate to loan payments, such as the total payments.

The Board proposes to add new Sec. 226.38(e)(5)(ii), which would implement TILA Section 128(a)(3) and (8) for closed-end mortgage loans covered by Sec. 226.38. 15 U.S.C. 1638(a)(3), (8). Section 226.38(e)(5)(ii) would require creditors to disclose the ``interest and settlement charges,'' using that term, together with a brief statement that the disclosed amount represents part of the total payments amount disclosed. Creditors would also be required to disclose the ``interest and settlement charges'' grouped together with the ``total payments'' and ``amount financed'' disclosures under proposed Sec. 226.38(e)(5)(i) and (iii), respectively, under the subheading ``Total

Payments,'' using that term. Based on consumer testing, the Board believes this approach is appropriate to help serve TILA's purpose of assuring a meaningful disclosure of credit terms. Consumer testing suggests that providing the disclosure of ``interest and settlement charges'' in context of the total payments improves consumers' ability to understand that this disclosure represents the cost (i.e., interest and fees) of borrowing the loan amount.

The Board also proposes comment 38(e)(5)(ii)-1 to provide guidance on how creditors must calculate and disclose the interest and settlement charges. However, the proposed rule would not allow creditors to modify the description that accompanies the disclosure for variable-rate transactions. The Board proposes this restriction under

TILA Section 105(a) to help serve TILA's purpose of meaningful disclosure of credit terms so that consumers will be able to compare more readily the various credit terms available, and avoid the uninformed use of credit. 15 U.S.C. 1601(a). Consumer testing showed that the simple disclosure aided consumer understanding. The Board believes that adding language that states the disclosed amount is subject to change could dilute the significance of the disclosure. 38(e)(5)(iii) Amount Financed

Disclosure of amount financed. Section 226.18(b), which implements

TILA Section 128(a)(2)(A) and (a)(8), requires creditors to disclose the amount financed, using that term, together with a brief description that it represents the amount of credit of which the consumer has actual use. 15 U.S.C. 1638(a)(2)(A), (a)(8). Section 226.18(b) delineates how creditors should calculate the amount financed so that it reflects the net amount of credit being extended.

In consumer testing conducted for the Board, virtually no participant understood the disclosure of the amount financed.\87\ The

Board tested several versions of the amount financed disclosure, with alternative formatting and descriptions, to explain briefly that it represents the amount of credit of which the consumer has actual use to purchase a home or refinance an existing loan. However, these changes made no difference in participants' understanding of the term. In addition, consumer testing showed that the amount financed disclosure actually detracted from consumers' understanding of other disclosures.

Many consumers mistook the amount financed for the loan amount. Some of these consumers were confused, however, because the amount financed was slightly lower than the amount borrowed in the hypothetical loan offer.

Consumers offered various explanations regarding the difference in the disclosed amounts, including that the amount financed was the cost of purchasing a home less a down payment. Other participants stated that the amount financed represented escrowed amounts. Sample disclosures were used to try to explain that the difference between the loan amount and amount financed is attributable to prepaid finance charges, but this explanation did not appear to improve consumer comprehension.

Consumer testing also indicated that participants would not consider the amount financed when shopping for a mortgage or evaluating competing loan offers.

\87\ See also Improving Consumer Mortgage Disclosures at 35

(finding that most respondents in consumer testing did not understand the term ``amount financed,'' and confused it for the loan amount, and discussing the risks of falling subject to predatory lending practices as a result of this confusion).

For these reasons, the Board proposes to add new Sec. 226.38(e)(5)(iii), which would implement TILA Section 128(a)(2)(A) and

(a)(8) for transactions secured by real property or a dwelling. 15

U.S.C. 1638(a)(2)(A), (a)(8). Section 226.38(e)(5)(iii) would require creditors to disclose the amount financed with a brief statement that the amount financed, plus the interest and settlement charges, is the amount used to calculate the annual percentage rate. As noted above, creditors would be required to disclose the amount financed grouped together with the total payments and interest and settlement charges required under proposed Sec. 226.38(e)(5)(i) and (ii).

The Board proposes this approach pursuant to its authority under

TILA Section 105(a). 15 U.S.C. 1604(a). Section 105(a) authorizes the

Board to prescribe regulations to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms and helping consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a), 1604(a). Based on consumer testing, the Board believes this proposal is appropriate to help serve TILA's purpose of assuring a meaningful disclosure of credit terms. The Board believes that requiring creditors to disclose the amount financed in the loan summary with other key loan terms would add unnecessary complexity and result in ``information overload.'' Consumer testing showed that when the amount financed was disclosed with the total payments and interest and settlement charges, that consumer comprehension of the term improved slightly, and confusion over other key loan terms, such as the loan amount, was eliminated. The Board believes that disclosing the amount financed as one component in the APR calculation provided consumers with a better understanding of its significance to the loan transaction. The Board also proposes new comment 38(e)(5)(iii)-3 to provide guidance regarding disclosure of the ``amount financed.''

Calculation of amount financed. The Board proposes to simplify the calculation of the amount financed for transactions subject to the disclosure requirements of proposed Sec. 226.38, pursuant to the

Board's authority under TILA Section 105(a). The Board believes that the proposed simplification would improve understanding of the rules and facilitate compliance with Regulation Z. Under proposed Sec. 226.38(e)(5)(iii), for a transaction secured by real property or a consumer's dwelling, the creditor would determine the amount financed by subtracting all prepaid finance charges from the loan amount as defined in proposed Sec. 226.38(a)(1), discussed above. Under existing

Sec. 226.18(b) and its staff commentary, creditors may elect from among multiple alternatives in calculating the amount financed. All of

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the permissible methods yield the same mathematical result.

The Board has received input from bank examiners and others that providing multiple approaches to calculation of the amount financed creates unnecessary complication. Examiners also indicate that, of the permissible approaches, mortgage lenders generally use the one that is simplest and most straightforward. The Board is now proposing to require that approach and to eliminate the alternatives. The Board also is proposing to make a conforming amendment to the staff commentary under Sec. 226.18(b) to reflect the fact that it would not apply to mortgages.

TILA provides that the amount financed is calculated as follows:

(1) Take the principal amount of the loan (or cash price less downpayment);

(2) Add any charges that are not part of the finance charge or of the principal amount and that are financed by the consumer; and

(3) Subtract any prepaid finance charge.

TILA Section 128(a)(2)(A), 15 U.S.C. 1638(a)(2)(A). Regulation Z provides a substantially identical calculation. See Sec. 226.18(b).

Neither the statute nor Regulation Z defines ``principal amount of the loan.'' As a result, more than one understanding of that term is possible, and Regulation Z seeks to address several of those understandings rather than to define principal amount definitively.

Current Regulation Z permits non-finance charges and prepaid finance charges that are financed to be included in the principal loan amount under step (1) or not, at the creditor's option. The creditor then must add in under step (2) any financed non-finance charges that were not included under step (1). See comment 18(b)(2)-1. Similarly, the creditor must subtract under step (3) any financed prepaid finance charges only if they were included under step (1). See comment 18(b)(3)-1. Proposed Sec. 226.38(e)(5)(iii) effectively would define

``principal loan amount'' as the loan amount, as that is defined in proposed Sec. 226.38(a)(1), which would mean the principal amount the consumer will borrow reflected in the loan contract. Under that definition, all amounts that are financed necessarily would be included in step (1), whether they are finance charges or not. Consequently, no amount ever would be added under step (2). The new provision therefore would streamline the calculation to eliminate that step. Similarly, the current commentary providing that financed prepaid finance charges should be subtracted in step (3) only if they were included in step (1) would be unnecessary, as such finance charges always would be included in step (1). Proposed Sec. 226.38(e)(5)(iii) would provide definitively that the amount financed is determined simply by subtracting the prepaid finance charge from the loan amount.

The Board also is proposing comment 38(e)(5)(iii)-2 to clarify how to treat creditor or third-party premiums and buy-downs for purposes of the amount financed calculation. This proposed comment is based on existing comment 18(b)-2, which relates to rebates and loan premiums.

The discussion in comment 18(b)-2 was primarily intended to address situations that are more common in non-mortgage transactions, especially credit sales, such as automobile financing. It provides that creditor-paid premiums and seller- or manufacturer-paid rebates may be reflected in the disclosures under Sec. 226.18 or not, at the creditor's option. Although such premiums and rebates are less likely to exist in mortgage transactions precisely as they are described in comment 18(b)-2, analogous situations can apply to mortgage financing.

For example, real estate developers may offer to pay some or all closing costs or to buy down the consumer's interest rate, and creditors may agree to pay certain closing costs in return for a particular interest rate. Rather than permit any treatment at the creditor's option, however, proposed comment 38(e)(5)(iii)-2 would reflect the Board's belief that such situations are analogous to buydowns. Like buydowns, such premiums and rebates may or may not be funded by the creditor and reduce costs otherwise borne by the consumer. Accordingly, their impact on the amount financed, like that of buydowns, properly depends on whether they are part of the legal obligation. See comments 17(c)(1)-1 through -5. Proposed comment 38(e)(5)(iii)-2 would clarify that the disclosures, including the amount financed, must reflect loan premiums and rebates regardless of their source, but only if they are part of the terms of the legal obligation between the creditor and the consumer. As noted above, the

Board also is proposing similar revisions to existing comment 18(b)-2. 38(f) Additional Disclosures 38(f)(1) No Obligation Statement

The MDIA amended Section 128(b)(2) of TILA to require creditors to disclose, in conspicuous type size and format, that receiving and signing a TILA disclosure does not obligate a consumer to accept the loan (``the MDIA statement''). 15 U.S.C. 1638(b)(2). The MDIA sets forth the following language for creditors to use in making this disclosure: ``You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.'' \88\ The Board proposes to modify this statutory language to facilitate consumers' use and understanding of the MDIA statement pursuant to its authority under TILA Section 105(a) to make adjustments that are necessary to effectuate the purposes of TILA. 15

U.S.C. 1604(a). Based on consumer testing, the Board believes that using plain language principles to revise the statutory language improves consumers' ability to understand the disclosure and would help serve TILA's purpose to provide meaningful disclosure of credit terms.

\88\ Housing and Economic Recovery Act, Public Law 110-289, 122

Stat. 2655, Sec. 2502(a)(6) (July 30, 2008).

As part of consumer testing, the Board included the MDIA statement on the front page of the TILA, modified to replace legalistic phrasing with more common word usage. On the second page, the Board included a signature line and date, as most creditors require the consumer to sign the disclosure form to establish compliance with TILA. Most participants did not notice the MDIA statement, but indicated that they understood they were under no obligation to accept the loan; participants who did notice the text similarly understood they were under no obligation to accept the loan. However, upon seeing the signature line, some participants believed they would be obligated to accept the loan if they signed or initialized the disclosure. Based on consumer testing, the Board is concerned that although consumers may initially understand they are not obligated to accept a loan, this belief may be altered by creditors' practice of requiring consumers to sign or initial receipt of the disclosures. This may further discourage negotiation and shopping among loan products and lenders.

To implement the new disclosure required by the MDIA, the Board proposes to add new Sec. 226.38(f)(1) for all transactions secured by real property or a dwelling. Proposed Sec. 226.38(f)(1) would require a statement that a consumer is not obligated to accept the loan because he or she has signed the disclosure. In addition, the Board proposes that if a creditor provides space for the consumer to sign or initial the TILA disclosures, then the creditor

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must place the statement in close proximity to the space provided for the consumer's signature or initials. The statement must also specify that a signature only confirms receipt of the disclosure statement.

The Board proposes this approach pursuant to its authority under

TILA Section 105(a) to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms and helping consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a), 1604(a). The Board believes that this proposal is necessary to encourage consumers to shop among available credit alternatives. The

Board tested the disclosure as proposed under Sec. 226.38(f)(1). Most participants understood they were not obligated to accept the loan and could refuse to accept the loan offer even after signing. As a result, the Board believes the disclosure proposed by new Sec. 226.38(f)(1) is necessary to ensure that consumers are not discouraged from shopping or negotiating with the lender. 38(f)(2) Security Interest

TILA Section 128(a)(9), 15 U.S.C. 1638(a)(9), and Sec. 226.18(m) require the creditor to disclose whether it has a security interest in the property securing the transaction. During consumer testing of the current TILA disclosure, participants were shown the following language: ``Security: You are giving a security interest in the real property, and fixtures and rents if indicated in the rider mortgage.''

Very few participants understood the current language regarding a security interest. The Board is concerned that consumers might not understand that the creditor can take the consumer's home if the consumer defaults on the loan agreement. To clarify the significance of the security interest disclosure to consumers, the Board proposes Sec. 226.38(f)(2) to require the creditor to state that the consumer could lose the home if the consumer is unable to make the payments on the loan. This would provide a clearer disclosure regarding the effect of the lender taking a security interest in the home. 38(f)(3) No Guarantee to Refinance Statement

The MDIA also amended Section 128(b)(2) of TILA to require creditors to disclose for variable rate transactions, in conspicuous type size and format, that there is no guarantee that the consumer will be able to refinance the transaction to lower the interest rate or monthly payments (``MDIA refinancing warning'').\89\ 15 U.S.C. 1638(b)(2). To implement the disclosure required by the MDIA, the Board proposes to add Sec. 226.38(f)(3) to require that creditors disclose that there is no guarantee that the consumer will be able to refinance the loan to obtain a lower interest rate and payment. The Board believes that including such a statement on the TILA disclosure form will alert consumers to consider the impact of future rate adjustments and increased monthly payments

\89\ Specifically, the MDIA requires that the Board use consumer testing to develop disclosures for variable rate transactions, including the fact that ``there is no guarantee that the borrower will be able to refinance to a lower amount.'' Public Law 109-8, 119

Stat. 23, Sec. 2502(a)(6).

Although the MDIA requires this refinancing warning only for variable rate transactions secured by a dwelling, the Board proposes to expand the scope of the requirement to also include fixed-rate transactions secured by a dwelling, as well as transactions secured by real property without a dwelling. The Board proposes this approach pursuant to its authority under TILA Section 105(a) to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms and helping consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a), 1604(a). The Board is concerned that some consumers may accept loan terms that could present refinancing concerns similar to variable rate transactions, such as a three-year fixed-rate mortgage with a balloon payment. Based on consumer testing, the Board believes all consumers, regardless of transaction-type, would benefit from a statement that encourages consideration of future possible market rate increases. 38(f)(4) Tax Deductibility

The Board is also proposing changes to the closed-end disclosures to implement provisions of the Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005 (the ``Bankruptcy Act'') which requires disclosure of the tax implications for home-secured credit that may exceed the dwelling's fair market value. See Public Law 109-8, 119

Stat. 23. The Bankruptcy Act primarily amended the federal bankruptcy code, but also contained several provisions amending TILA. Section 1302 of the Bankruptcy Act amendments requires that advertisements and applications for credit (either open-end or closed-end) that may exceed the fair market value of the dwelling include a statement that the interest on the portion of the credit extension that exceeds the fair market value is not tax-deductible and a statement that the consumer should consult a tax advisor for further information on tax deductibility.

The Board stated its intent to implement the Bankruptcy Act amendments in an ANPR published in October 2005 as part of the Board's ongoing review of Regulation Z (October 2005 ANPR). 70 FR 60235; Oct. 17, 2005. The Board received approximately 50 comment letters: forty- five letters were submitted by financial institutions and their trade groups, and five letters were submitted by consumer groups. In general, creditors asked for flexibility in providing the disclosure regarding the tax implications for home-secured credit that may exceed the dwelling's fair market value, either by permitting the notice to be provided to all mortgage applicants, or to be provided later in the approval process after creditors have determined whether the disclosure is triggered. Creditor commenters asked for guidance on loan-to-value calculations and safe harbors for how creditors should determine property values. Consumer advocates favored triggering the disclosure when negative amortization could occur. A number of commenters stated that in order for the disclosure to be effective and useful to the borrower, it should be given when the new extension of credit, combined with existing credit secured by the dwelling (if any), may exceed the fair market value of the dwelling. A few industry comments took the opposite view that the disclosure should be limited only to when a new extension of credit itself exceeds fair market value, citing the difficulty in determining how much debt is already secured by the dwelling at the time of application.

The Board implemented section 1302 with regard to advertisements in its 2008 HOEPA Final Rule. See 73 FR 44522, 44600; July 30, 2008. In the supplementary information to that rule, the Board stated that it intends to implement the application disclosure portion of the

Bankruptcy Act during its forthcoming review of closed-end and HELOC disclosures under TILA. Proposed Sec. 226.38(f)(4) would implement provisions of the Bankruptcy Act by requiring creditors to include the disclosure of the tax implications for a loan secured by a dwelling, if extension of credit may, by its terms, exceed the fair market value of the dwelling. The text of the proposed disclosure is based on the

Board's consumer testing of model HELOC disclosure forms. The disclosure would be segregated and located directly below the table.

The Board recognizes that creditors may not be able to determine whether the amount of credit extended exceeds

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the fair market value of the dwelling, especially three days after application when they are required to provide an early transaction- specific disclosures. The creditor may not be able to verify the value on the property until later in the loan underwriting process. The Board has considered whether the disclosure should be provided later in the approval process after the creditor has determined that the disclosure is triggered, for instance, after receiving the appraisal report or completing the underwriting process. However, such late timing of the disclosure would not satisfy the requirements of the Bankruptcy Act which requires that the disclosures be provided at the time of application. See 15 U.S.C. 1638(a)(15).

The Board also considered whether the disclosure should be provided to all mortgage applicants, regardless of whether the amount of credit extended exceeds the fair market value of the dwelling. To address the situations in which the creditor is not certain whether the credit extended may exceed the fair market value of the dwelling, comment 38(f)(4)-2 permits the disclosure to be provided to all mortgage applicants at creditors' discretion and provides model language.

The Board recognizes that the scope of the proposed Sec. 226.38(f)(4) is limited to dwellings whereas proposed Sec. 226.38 would apply to real property and dwellings. While the Bankruptcy Act amendment specifically references ``consumer's dwelling,'' the Board believes that it would be unnecessarily burdensome to require creditors to create separate disclosures for the transactions secured by real property and those secured by a dwelling solely for the purposes of the tax implications disclosure. For that reason, a creditor would be permitted, but not required, to provide the disclosures about the tax implications in connection with transactions secured by both real property and dwellings. 38(f)(5) Additional Information and Web Site

Consumer testing showed that many participants educated themselves about the mortgage process through informal networking with family, friends, and colleagues, while others relied on the Internet for information. To improve consumers' ability to make informed decisions about credit, the Board proposes Sec. 226.38(f)(5) to require the creditor to disclose that if the consumer does not understand any of the disclosures, then the consumer should ask questions. The creditor would also disclose that the consumer may obtain additional information at the Web site of the Federal Reserve Board and disclose a reference to that Web site. The Board will enhance its Web site to further assist consumers in shopping for a mortgage. Although it is hard to predict from the results of the consumer testing how many consumers might use the Board's Web site, and recognizing that not all consumers have access to the Internet, the Board believes that this Web site may be helpful to some consumers as they shop for a mortgage. The Board seeks comment on the content for the Web site. 38(f)(6) Format

The Board is proposing to specify precise formatting requirements for the disclosures required by Sec. 226.38(f)(1) through (5).

Proposed Sec. 226.38(f)(6)(i) would set forth location requirements, providing that the no obligation and confirmation of receipt statements must be disclosed together, the security interest and no guarantee to refinance statements must be disclosed together, and the recommendation to ask questions and statement regarding the Board's Web site must be disclosed together. Proposed Sec. 226.38(f)(6)(ii) would set forth highlighting requirements, providing that the no obligation and security interest statements, and the advice to ask questions, must be disclosed in bold text. 38(g) Identification of Originator and Creditor 38(g)(1) Creditor

Currently, Sec. 226.18(a), which implements TILA Section 128(a)(1), 15 U.S.C. 1638(a)(1), requires the creditor to disclose the identity of the creditor making the disclosure. Proposed Sec. 226.38(g)(1) would require the same disclosure. In addition, proposed comment 38(g)(1)-1 would parallel existing comment 18(a)-1 to clarify that use of the creditor's name is sufficient, but the creditor may also include an address and/or telephone number. In transactions with multiple creditors, any one of them may make the disclosures, but the one doing so must be identified. The Board solicits comment on whether the creditor making the disclosures should be required to disclose its contact information, such as its address and/or telephone number.

Existing footnote 38 to Sec. 226.17(a), which implements TILA

Section 128(b)(1), 15 U.S.C. 1638(b)(1), states that the creditor's identity may be made together with or separately from the other required disclosures. The Board proposes to amend the substance of current footnote 38 to remove the reference to the creditor's identity disclosure required under Sec. 226.18(a), thereby making it subject to the grouped-together and segregation requirement for all non-mortgage closed-end credit. Similarly, Sec. 226.37(a)(2) would require the disclosure of the creditor's identity to be subject to the grouped- together and segregation requirement for closed-end credit transactions secured by real property or a dwelling.

The Board proposes to make this adjustment pursuant to its authority under TILA Section 105(a). 15 U.S.C. 1604(a). Section 105(a) authorizes the Board to make exceptions and adjustments to TILA to effectuate the statute's purposes, which include facilitating consumers' ability to compare credit terms, and avoid the uninformed use of credit. 15 U.S.C. 1604(a), 15 U.S.C. 1601(a). The Board believes it is important to disclose the creditor's identity so that consumers can more easily identify the appropriate entity. Thus, the Board believes this proposal would help serve TILA's purpose to provide meaningful disclosure of credit terms. 38(g)(2) Loan Originator

On July 30, 2008, the Secure and Fair Enforcement for Mortgage

Licensing Act of 2008 (SAFE Act), 12 U.S.C. 5101-5116, was enacted to create a Nationwide Mortgage Licensing System and Registry of loan originators to increase uniformity, reduce fraud and regulatory burden, and enhance consumer protection. 12 U.S.C. 5102. Under the SAFE Act, a

``loan originator'' is defined as ``an individual who (I) takes a residential mortgage loan application; and (II) offers or negotiates terms of a residential mortgage loan for compensation or gain.'' 12

U.S.C. 5102(3)(A)(i). Each loan originator is required to obtain a unique identifier through the Nationwide Mortgage Licensing System and

Registry. 12 U.S.C. 5103(a)(2). The term ``unique identifier'' is defined as ``a number or other identifier that (i) permanently identifies a loan originator; (ii) is assigned by protocols established by the Nationwide Mortgage Licensing System and Registry and the

Federal banking agencies to facilitate electronic tracking of loan originators and uniform identification of, and public access to, the employment history of and the publicly adjudicated disciplinary and enforcement actions against loan originators; and (iii) shall not be used for purposes other than those set forth under this title.'' 15

U.S.C. 5102(12)(A). The system is intended to provide

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consumers with easily accessible information to research a loan originator's history of employment and any disciplinary or enforcement actions against that person. 12 U.S.C. 5101(7).

To facilitate the use of the Nationwide Mortgage Licensing System and Registry and promote the informed use of credit, the Board proposes

Sec. 226.38(g)(2) to require the loan originator to disclose his or her unique identifier on the TILA disclosure, as defined by the SAFE

Act. Proposed comment 38(g)(2)-1 would clarify that in transactions with multiple loan originators, each loan originator's unique identifier must be listed on the disclosure. For example, in a transaction where a mortgage broker meets the SAFE Act definition of a loan originator, the identifiers for the broker and for its employee loan originator meeting that definition would be listed on the disclosure.

The Board notes that the Board, FDIC, OCC, OTS, NCUA, and Farm

Credit Administration have published a proposed rule to implement the

SAFE Act. See 74 FR 27386; June 9, 2009. In this proposed rule, the federal banking agencies have requested comment on whether there are mortgage loans for which there may be no mortgage loan originator. For example, the agencies query whether there are situations where a consumer applies for and is offered a loan through an automated process without contact with a mortgage loan originator. See id. at 27397. The

Board solicits comments on the scope of this problem and its impact on the requirements of proposed Sec. 226.38(g)(2). 38(h) Credit Insurance and Debt Cancellation and Debt Suspension

Coverage

As discussed more fully in Sec. 226.4(d)(1) and (3), concerns have been raised that consumers do not understand the voluntary nature, costs, and eligibility restrictions of credit insurance and debt cancellation and debt suspension coverage. For this reason, the Board proposes Sec. 226.38(h) to require creditors to provide certain disclosures, which would be grouped together and substantially similar in headings, content and format to Model Clause H-17(C) in Appendix H to this part. Proposed comment 38(h)-1 would clarify that this disclosure may, at the creditor's option, appear apart from the other disclosures. It may appear with any other information, including the amount financed itemization, any information prescribed by State law, or other information. When this information is disclosed with the other segregated disclosures, however, no additional explanatory material may be included.

The proposed disclosures seek to address concerns that consumers may not understand that some products are voluntary and not required as a condition of receiving credit. If the product is optional, proposed

Sec. 226.38(h)(1)(i) would require the creditor to disclose the term

``OPTIONAL COSTS,'' in capitalized and bold letters, along with the name of the program in bold letters. If the product is required, then proposed Sec. 226.38(h)(1)(ii) would require the creditor to disclose only the name of the program in bold letters. In addition, if the product is optional, proposed Sec. 226.38(h)(2) would require the creditor to disclose the term ``STOP,'' in capitalized and bold letters, along with a statement that the consumer does not have to buy the product to get the loan. The term ``not'' would be in bold letters and underlined.

Concerns have also been raised that consumers may not realize that there are alternatives to the product. Therefore, under proposed Sec. 226.38(h)(3), the creditor would disclose that if the consumer already has insurance, then the policy or coverage may not provide the consumer with additional benefits. Under proposed Sec. 226.38(h)(4), the creditor would disclose that other types of insurance may give the consumer similar benefits and are often less expensive.

As described more fully in Sec. 226.4(d)(1) and (3), concerns have been raised that consumers are not aware that they could incur a cost for a product that may offer no benefit if the eligibility criteria are not met at the time of enrollment. That is, consumers may not be aware that if they do not meet the eligibility criteria at the time of enrollment, the product would not pay off, cancel, or suspend the credit obligation. Although the creditor typically has information about the consumer's age or employment status, some creditors do not use this information to determine whether the consumer meets the age or employment eligibility restrictions at the time of enrollment. Some consumers are later denied benefits based on these eligibility restrictions.

For these reasons, the Board is proposing under Sec. 226.38(h)(5)(i) to require the creditor to disclose a statement that based on the creditor's review of the consumer's age and/or employment status at the time of enrollment, the consumer would be eligible to receive benefits. However, if there are other eligibility restrictions, such as pre-existing health conditions, the creditor would be required to make certain other disclosures. Under proposed Sec. 226.38(h)(5)(ii), the creditor would disclose that based on the creditor's review of the consumer's age and/or employment status at the time of enrollment, the consumer may be eligible to receive benefits.

Under proposed Sec. 226.38(h)(6), the creditor would also disclose that the consumer may not be eligible to receive any benefits because of other eligibility restrictions.

Proposed comment 38(h)(5)-1 would state that if, based on the creditor's review of the consumer's age and/or employment status at the time of enrollment in the product, the consumer would not qualify for the benefits of the product, then providing the disclosure under Sec. 226.38(h)(5) would not comply with this provision. That is, if the consumer does not meet the age and/or employment eligibility criteria, then the creditor cannot state that the consumer may be eligible to receive benefits and cannot comply with this provision. In addition, the proposed comment would clarify that if the creditor offers a bundled product (such as credit life insurance combined with credit involuntary unemployment insurance) and the consumer is not eligible for all of the bundled products, then the disclosure under Sec. 226.38(h)(5) would not comply with this provision. Finally, the proposed comment would clarify that the disclosure would still satisfy this provision if an event subsequent to enrollment, such as the consumer passing the age limit of the product, made the consumer ineligible for the product based on the product's age or employment eligibility restrictions.

Proposed comment 38(h)(5)-2 would clarify that the disclosure under

Sec. 226.38(h)(5) would be deemed to comply with this provision if the creditor used reasonably reliable evidence to determine whether the consumer met the age or employment eligibility criteria of the product.

Reasonably reliable evidence of a consumer's age would include using the date of birth on the consumer's credit application, on the driver's license or other government-issued identification, or on the credit report. Reasonably reliable evidence of a consumer's employment status would include a consumer's statement on a credit application form, an

Internal Revenue Service Form W-2, tax returns, payroll receipts, or other written evidence such as a letter or e-mail from the consumer or the consumer's employer.

Finally, the disclosure would contain the debt suspension coverage disclosure, a Web site reference, cost

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information, and a space for the consumer's signature and the date. To ensure consistency with the debt suspension coverage provisions of the

December 2008 Open-End Final Rule, proposed Sec. 226.38(h)(7) would require the creditor to disclose, as applicable, a statement that the obligation to pay loan principal and interest is only suspended, and that interest will continue to accrue during the period of suspension.

To provide more information to consumers, proposed Sec. 226.38(h)(8) would require the creditor to disclose a statement that the consumer may obtain additional information about credit insurance or debt suspension or debt cancellation coverage at the Web site of the Federal

Reserve Board, and a reference to that Web site. If the product is optional, proposed Sec. 226.38(h)(9)(i) would require the creditor to disclose a statement of the consumer's request to purchase or enroll in the optional product and a statement of the cost of the product expressed as a dollar amount per month or per year, as applicable, together with the loan amount and the term of the product in years.

This disclosure parallels Sec. 226.4(d)(1) and (3), which requires cost disclosures in order to exclude from the finance charge the credit insurance premium or debt cancellation or debt suspension coverage charge. If the product is required, proposed Sec. 226.38(h)(9)(ii) would require the creditor to disclose that fact, along with a statement of the cost of the product expressed as a dollar amount per month or per year, as applicable, together with the loan amount and the term of the product in years. The cost, month or year, loan amount, and term of the product would be underlined. The provisions regarding required products would be applicable to the extent Regulation Y, 12

CFR part 225, or State or other law would not prohibit requiring the product. Finally, proposed Sec. 226.38(h)(10) would require the creditor to provide a designation for the signature of the consumer and the date of the signing.

The Board proposes to require this disclosure using its authority under TILA Section 105(a), 15 U.S.C. 1604(a). Because proposed Sec. 226.4(g) would treat a premium or charge for credit insurance or debt cancellation or debt suspension as a finance charge for closed-end credit transactions secured by real property or a dwelling, the creditor would not be required to provide the disclosure under Sec. 226.4(d)(1) and (3) to exclude the premium or charge from the finance charge. The Board believes, however, that the consumer would still benefit from a disclosure of the voluntary nature, costs, and eligibility restrictions of credit insurance or debt cancellation or debt suspension coverage, and thus the proposal would require a substantially similar disclosure.

TILA Section 105(a), 15 U.S.C. 1604(a), authorizes the Board to prescribe regulations to carry out the purposes of the act. TILA's purpose includes promoting ``the informed use of credit,'' which

``results from an awareness of the cost thereof by consumers.'' TILA

Section 102(a), 15 U.S.C. 1601(a). A premium or charge for credit insurance or debt cancellation or debt suspension coverage is a cost assessed in connection with credit. The credit transaction and the relationship between the creditor and the consumer are the reasons the product is offered or available. Because the merits of this product have long been debated,\90\ the Board believes that consumers would benefit from clear and meaningful disclosures regarding the costs, benefits, and risks associated with this product. As discussed more fully in Sec. 226.4(d)(1) and (3), consumer testing showed that without clear disclosures participants were unaware of the voluntary nature, costs, and eligibility restrictions. For these reasons, the

Board believes that this proposed rule would serve to inform consumers of the cost of this credit product.

\90\ See, e.g., Credit CARD Act of 2009, Public Law No. 111-24,

Sec. 509; 123 Stat. 1734, 1763 (2009) (requiring the General

Accounting Office to provide a report to Congress by December 31, 2010, of the suitability of credit insurance, debt cancellation agreements, and debt suspension agreements for target customers, the

``predatory nature'' of such offers, and the loss rates compared to more traditional insurance products).

38(i) Required Deposit

Proposed Sec. 226.38(i) addresses disclosure requirements when creditors require consumers to maintain deposits as a condition to the specific transaction, for transactions secured by real property or a dwelling. Proposed Sec. 226.38(i) is consistent with Sec. 226.18(r), which applies to transactions not secured by real property or a dwelling. The Board is proposing to revise Sec. 226.18(r) and associated commentary, as discussed above, and proposed Sec. 226.38(i) reflects the revised text and associated commentary. 38(j) Separate Disclosures

Consumer testing indicated that participants generally felt overwhelmed by the amount of information presented throughout the loan process and especially at consummation. As a result, the Board seeks to streamline the TILA disclosures and focus on the terms that participants stated were important for shopping and for understanding their loan terms. Currently, TILA and Regulation Z mandate that the following disclosures be grouped together with the required disclosures and segregated from everything else: rebate, late payment, property insurance, contract reference, and assumption policy. See TILA Sections 128(a)(9), (10), (11), (12), (13) and (b) and 106(c); 15 U.S.C.

Sec. Sec. 1638(a)(9), (10), (11), (12), (13) and (b) and 1605(c);

Sec. Sec. 226.4(d)(2), 226.17(a)(1), and 226.18(k)(2), (l), (n), (p), and (q). Consumer testing showed that these terms were not of primary importance to consumers in choosing a mortgage. With respect to assumption, for example, very few participants understood the language indicating that the loan was assumable, and even fewer felt it was important information. With respect to property insurance, most participants understood the language indicating that the borrower can obtain property insurance from anyone that is acceptable to the lender, but the participants felt that this was not important to their decision making.

TILA Section 105(a) authorizes the Board to make exceptions to TILA to effectuate the statute's purposes, which includes promoting the informed use of credit. 15 U.S.C. 1601(a), 1604(a). The Board believes that requiring these disclosures to appear separately from the other required disclosures would improve the consumer's ability to focus on the terms most useful to evaluating the proposed credit transaction.

TILA Section 105(f) authorizes the Board to exempt any class of transactions from coverage under any part of TILA if the Board determines that coverage under that part does not provide a meaningful benefit to consumers in the form of useful information or protection. 15 U.S.C. 1604(f)(1). TILA Section 105(f) directs the Board to make this determination in light of specific factors. 15 U.S.C. 1604(f)(2).

These factors are (1) the amount of the loan and whether the disclosure provides a benefit to consumers who are parties to the transaction; (2) the extent to which the requirement complicates, hinders, or makes more expensive the credit process for the class of transactions; (3) the status of the borrower, including any related financial arrangements of the borrower, the financial sophistication of the borrower relative to the type of transaction, and the importance to the borrower of the credit, related supporting property, and coverage under TILA; (4) whether the loan is secured by the principal residence of

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the consumer; and (5) whether the exemption would undermine the goal of consumer protection. Although a credit transaction secured by real property or a dwelling is important to the borrower, the Board believes that removing these disclosures from the other segregated information would further, rather than undermine, the goal of consumer protection because consumers would then focus on the terms that are most important to their decision making process. The proposed rule would still require that the information be disclosed but would simply no longer require the disclosures to be provided with the segregated information. 38(j)(1) Itemization of Amount Financed

TILA Section 128(a)(2)(B), 15 U.S.C. 1638(a)(2)(B), and Sec. 226.18(c) currently require that the creditor provide the consumer with a notice that an itemization of amount financed is available on request and to provide it when the consumer so requests. Regulation Z also provides that the good faith estimate of settlement costs (GFE) provided pursuant to RESPA suffices to satisfy the itemization of amount financed requirement. See Sec. 226.18(c)(1), fn. 40. The staff commentary provides further that the HUD-1 settlement statement provided at settlement under RESPA also may be substituted for the itemization in connection with later disclosures made pursuant to Sec. 226.19(a). See comment 18(c)-4.

Proposed Sec. 226.38(j)(1) would mirror the rules currently found under Sec. 226.l8(c) permitting a creditor to provide disclosures pursuant to RESPA in lieu of the itemization of amount financed. These rules originally were established by the Board pursuant to its authority under TILA Section 105(a) to make exceptions to facilitate compliance with TILA, and the Board is proposing to permit similar treatment under the same authority. Proposed Sec. 226.38(j)(1) would differ from current Sec. 226.18(c), as discussed below, to reflect recent changes to Regulation Z.

Under the proposal, the provisions permitting substitution of RESPA disclosures for the itemization of amount financed would be removed from Sec. 226.18 and included under proposed Sec. 226.38(j)(1). That section would govern the itemization disclosure contents for mortgage transactions, including all those subject to RESPA. As noted above, the

Board also is proposing to make certain technical and conforming amendments under Sec. 226.18(c).

Proposed Sec. 226.38(j)(1)(i) would provide the same four categories of the itemization as currently appear in Sec. 226.18(c)(1)--the amount of proceeds distributed directly to the consumer, the amount credited to the consumer's account, amounts paid to other persons on the consumer's behalf, and the prepaid finance charge. Proposed Sec. 226.38(j)(1)(ii) similarly would provide to creditors the alternative under current Sec. 226.18(c)(2) of disclosing the right to receive an itemization and providing it when the consumer so requests, instead of delivering the itemization routinely. Finally, proposed Sec. 226.38(j)(1)(iii) would provide the alternative of substituting the RESPA GFE for the itemization. It also would state a parallel alternative of substituting the HUD-1 settlement statement for the itemization when a creditor provides later disclosures pursuant to Sec. 226.19(a)(2), which currently is addressed only in the staff commentary under Sec. 226.18(c). And proposed Sec. 226.38(j)(1)(iii) would provide that the substitution is permissible for any transaction subject to Sec. 226.38, whether subject to RESPA or not.

The Board notes that the timing of the HUD-1 settlement statement no longer is consistent with the timing of the TILA redisclosure under

Sec. 226.19(a)(2). Regulation X under RESPA requires the HUD-1 to be provided at settlement,\91\ which generally corresponds with consummation of the transaction under Regulation Z. Under the MIDA final rule, and the proposed revisions to Sec. 226.19 under this proposal, the redisclosure required under Sec. 226.19(a)(2) must be received by the consumer at least three business days before consummation of the transaction. As current comment 18(c)-1 provides, and proposed Sec. 226.38(j)(1) also would require, the itemization must be provided at the same time as the segregated disclosures.

Accordingly, proposed Sec. 226.38(j)(1)(iii) would provide that the

HUD-1 settlement statement is a permissible substitute for the itemization of amount financed only if it is received by the consumer at least three business days prior to consummation, in accordance with

Sec. 226.19(a)(2).

\91\ 24 CFR 3500.10(b). The settlement agent must provide the borrower with an opportunity to inspect the HUD-1 during the business day preceding settlement, but only completed to reflect all information known to the settlement agent at the time. Id. 3500.10(a).

The Board realizes that, in general, consumers currently receive a fully completed HUD-1 settlement statement only at consummation, in accordance with RESPA's requirements. For this reason, mortgage creditors might not take advantage of the alternative in proposed Sec. 226.38(j)(1)(iii) as widely as they historically have done under Sec. 226.18(c)(1), fn. 40. On the other hand, the Board notes that a creditor that does not avail itself of that alternative must follow one of the other two alternatives. Under proposed Sec. Sec. 226.19(a) and 226.38(j)(1)(i), the creditor still must provide substantially the same information three business days before consummation. Under proposed

Sec. Sec. 226.19(a) and 226.38(j)(1)(ii), the creditor also must do so, at least in those cases where the consumer requests the itemization. Further, given the proposed expansion of the finance charge under Sec. 226.4, discussed above, all of the information contained in either the good faith estimate or the itemization would have to be firmly established by three business days before consummation so that the creditor can comply with the timing requirements of proposed Sec. 226.19(a)(2).

In any event, the Board believes that to permit substitution of the

HUD-1 settlement statement for the itemization without requiring that it be delivered three business days before consummation would be inconsistent with the purposes of the MDIA amendments. The Board seeks comment on whether creditors would continue to make significant use of this alternative as proposed Sec. 226.38(j)(1)(iii) would implement it and, if not, whether the alternative should be retained. If it should be retained, the Board seeks comment on how it might be structured without requiring that the HUD-1 settlement statement be received by the consumer earlier than RESPA requires while also preserving the purposes of the MDIA. 38(j)(2) Through (6) Rebate; Late Payment; Property Insurance; Contract

Reference; Assumption Policy

The Board proposes to use its exception and exemption authorities under TILA Section 105(a), 15 U.S.C. 1604(a), to require creditors to provide the following disclosures separately from the other required disclosures: rebate under proposed Sec. 226.38(j)(2), late payment under proposed Sec. 226.38(j)(3), property insurance under proposed

Sec. 226.38(j)(4), contract reference under proposed Sec. 226.38(j)(5), and assumption policy under proposed Sec. 226.38(j)(6).

The Board is not proposing to change the substantive content of these disclosures. Proposed Sec. 226.38(j) would mirror Sec. 226.18, except that the proposed requirement would be provided separately from the other required disclosures. The proposed comments for these

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disclosures would also parallel the applicable comments under Sec. 226.18.

In addition, the Board proposes Model Clauses at Appendix H-23 for the following non-segregated disclosures: rebate, late payment, property insurance, contract reference, and assumption policy. The

Model Clauses are based on the Board's consumer testing and the Board believes that model clauses will enhance consumer understanding of the information, helping consumers to avoid the uninformed use of credit.

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

Appendices G and H set forth model forms, model clauses and sample forms that creditors may use to comply with the requirements of

Regulation Z. Appendix G contains model forms, model clauses and sample forms applicable to open-end plans. Appendix H contains model forms, model clauses and sample forms applicable to closed-end loans. Although use of the model forms and clauses is not required, creditors using them properly will be deemed to be in compliance with the regulation with regard to those disclosures. As discussed above, the Board proposes to revise or add several model forms, model clauses and sample forms to Appendix H for transactions secured by real property or a dwelling. The revised or new model forms and clauses, and sample forms, are discussed above in the section-by-section analysis applicable to the regulatory provisions to which the forms or clauses relate. See discussion under Sec. Sec. 226.19(b), 226.20(c)-(e), and 226.38(a)-

(j). In addition, the Board proposes to add new model clauses and a sample form relating to credit insurance, debt cancellation and debt suspension coverage to both Appendix G and H for open-end and closed- end loans. These model clauses and sample forms are discussed under proposed Sec. 226.4(d)(1) and (3) and 226.38(h). In Appendix H, all other existing forms and clauses applicable to transactions not secured by real property or a dwelling have been retained without revision.

The Board also proposes to revise or add commentary to the model forms, model clauses and sample forms in Appendix H, as discussed below. The Board solicits comments on the proposed revisions below, as well as whether any additional commentary should be added to explain the forms and clauses contained in Appendix H.

Permissible Changes

The commentary to appendices G and H currently states that creditors may make certain changes in the format and content of the model forms and clauses, and may delete any disclosures that are inapplicable to a transaction or a plan without losing the Act's protection from liability. However, certain formatting changes may not be made with respect to certain model and sample forms in Appendix G.

See comment app. G and H-1. As discussed above, the Board is proposing format and content requirements with respect to disclosures for transactions secured by real property or a dwelling, such as a tabular requirement for ARM loan program disclosures and ARM adjustment notices, and transaction-specific disclosures required for loans secured by real property or a dwelling. See proposed Sec. Sec. 226.19(b), 226.20(c), and 226.38(a)-(j). Accordingly, the Board would amend comment app. G and H-1 to indicate that certain formatting changes may not be made with respect to certain model forms, model clauses and sample forms in Appendix H. In addition, as discussed more fully under Sec. 226.38, the Board proposes to require creditors to provide disclosures for transactions secured by real property or a dwelling only as applicable. As a result, the Board would not allow creditors to use multi-purpose forms; the Board would amend comment app. G and H-1(vi) to clarify that the use of multipurpose standard forms is not permitted for transactions secured by real property or a dwelling. See discussion under Sec. 226.37(a)(2).

Debt Cancellation Coverage

Currently, commentary to appendices G and H states that creditors are not authorized to characterize debt-cancellation fees as insurance premiums for purposes of the regulation. The Board proposes to amend comment app. G and H-2 to clarify that the commentary also applies to debt suspension fees.

Appendix H--Closed-End Model Forms and Clauses

Model Forms, Model Clauses, and Sample Forms for Closed-End Disclosures

As noted above, the Board proposes a new disclosure regime under

Sec. 226.38 for transactions secured by real property or a dwelling.

As a result, the following sample forms are rendered unnecessary and deleted: Sample H-13 (mortgage with demand feature sample); Sample H-14

(variable-rate mortgage sample); and Sample H-15 (graduated-payment mortgage sample). Comment app. H-1 would be revised to reflect the deletion of Samples H-13 through H-15. The Board would further amend comment app. H-1 to reflect that, under the proposal, new model clauses are added regarding credit life insurance, debt cancellation, or debt suspension disclosures, and creditor-placed property insurance disclosures. See discussion under Sec. Sec. 226.4(d)(1) and (3), 226.38(h), and 226.20(e). These deleted samples forms and new model clauses are discussed more fully below.

Currently, comment app. H-2 addresses the flexibility given to creditors in providing the itemization of amount financed disclosure required under current Sec. 226.18(c) and illustrated by Model Clause

H-3. As discussed above, the Board is proposing new Sec. 226.38(j)(1) regarding disclosure of the itemization of amount financed for transactions secured by real property or a dwelling. As a result, the

Board would amend comment app. H-2 to update cross-references. In a technical revision, the Board would amend comment app. H-3 to clarify that the guidance applies to new Model Clauses H-4(B) and H-4(C), H- 4(H), H-16, H-17(A) and H-17(C), H-18, and H-20 through H-23. These new model clauses are discussed more fully below.

Model Forms, Model Clauses, and Sample Forms for ARM Loan Program

Disclosures

Currently, Appendix H contains several model clauses, and a sample form, related to variable-rate loan program disclosures required under current Sec. 226.18(f)(1), 226.18(f)(2) and 226.19(b). Current Model

Clause H-4(A) contains model clauses for variable-rate disclosures required under Sec. 226.18(f)(1) for transactions not secured by a principal dwelling, or transactions secured by a dwelling with a term of one year or less. Current Model Clause H-4(B) contains model clauses for variable-rate disclosures for transactions that are secured by a principal dwelling with a term greater than one year. Current Model

Clause H-4(C) contains model clauses related to variable-rate loan program disclosures required under Sec. 226.19(b). Current Sample H-14 is a sample disclosure illustrating required disclosures under current

Sec. 226.19(b) of interest rate and monthly payment changes, as well as an historical example, for variable-rate loan programs.

Under the proposal, the Board would require new disclosures under

Sec. 226.19(b) for adjustable-rate loan programs, and would revise

Sec. 226.18(f)(1) and delete Sec. 226.18(f)(2) to

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reflect such proposed changes to Sec. 226.19(b). Accordingly, the

Board proposes to delete current Model Clause H-4(B) and add new Model

H-4(B) to illustrate, in the tabular format, the disclosures required under Sec. 226.19(b) for adjustable-rate transactions secured by real property or a dwelling. The Board also would delete current Model

Clause H-4(C) and add new Model Clauses H-4(C) to reflect the proposed changes to Sec. 226.19(b), as discussed above, and to provide model clauses regarding interest rate carryover, conversion features, and preferred rates. The Board proposes to add Samples H-4(D) through H- 4(F) to provide examples of how certain disclosures under Sec. 226.19(b) may be provided, in the tabular format, for adjustable-rate loan programs that contain a hybrid, interest only, or payment option feature, respectively. In addition, the heading to Model Clause H-4(A) would be revised to update the cross-reference to Sec. 226.18(f), and current Sample H-14 regarding variable-rate disclosures would be deleted and reserved.

The Board also proposes to revise existing commentary that provides guidance to creditors on how to use current Model Clauses H-4(A) through (C). Currently, comments app. H-4 through H-6 provide guidance regarding variable-rate loan program disclosures required under current

Sec. Sec. 226.18(f)(1)-(2) and 226.19(b). Under the proposal, the

Board would delete guidance contained in current comment app. H-5 regarding disclosures under Sec. 226.18(f)(2) as unnecessary, and instead provide that disclosures required under Sec. 226.19(b) for adjustable-rate transactions be provided in the tabular format, as illustrated by Model H-4(B), and Samples H-4(D) through H-4(F). The

Board also would delete guidance currently contained in comment app. H- 6 relating to variable-rate disclosures, and instead provide guidance regarding model clauses on carryover interest, a conversion feature, or a preferred rate. In a technical revision, the Board would revise comment app. H-4 to update the cross-reference to Sec. 226.18(f).

Model Forms, Model Clauses, and Sample Forms for ARM Adjustment Notices

Currently, Appendix H contains Model Clause H-4(D), which contains model clauses regarding interest rate and payment adjustment notices required for variable-rate transactions under current Sec. 226.20(c).

As discussed above under proposedSec. 226.20(c), the Board proposes new timing and disclosure requirements regarding interest rate and payment changes for adjustable-rate transactions secured by real property or a dwelling. Accordingly, the Board would add a model form and two samples forms to illustrate, in the tabular format, the disclosures required under proposed Sec. 226.20(c)(2) for ARM adjustment notices when there is an interest rate and payment change.

See proposed Model H-4(G) and Samples H-4(I) and H-4(J). In addition, the Board proposes to add a model form to illustrate disclosures required under proposed Sec. 226.20(c)(3) when there is an interest rate adjustment without any change to payment. See proposed Model H- 4(K). Current Model Clause H-4(D) would be deleted and new Model

Clauses H-4(H) would be added to reflect the proposed changes to Sec. 226.20(c), as discussed above. The Board also proposes to revise current comment app. H-7 to provide that disclosures required under

Sec. 226.20(c) be provided in the tabular format, as illustrated by new Model H-4(G), and Samples H-4(I) and H-4(J).

Model Forms, Model Clauses, and Sample Forms for Periodic Statements

Currently, creditors are not required to provide certain disclosures with respect to periodic statements for loans that are negatively amortizing. As discussed under proposed Sec. 226.20(d), the

Board would require creditors to disclose periodic payment options on a monthly basis for transactions secured by real property or a dwelling that offer payment options and are negatively amortizing. Accordingly, the Board is proposing to add new Model Form H-4(L) that creditors may use to comply with the requirements in proposed Sec. 226.20(d).

Model Clauses for Section 32 (HOEPA) Disclosures

Currently, Appendix H contains Mortgage Sample H-16, which provides model clauses for disclosures required under Sec. 226.32(c), such as a notice to the borrower that he or she is not obligated to accept the terms of the loan and security interest disclosures. As discussed under proposed Sec. 226.32(c)(1), the Board would require creditors to provide plain-language versions of the ``no obligation'' and ``security interest'' disclosures to better inform consumers who are considering obtaining HOEPA loans. The Board would revise Mortgage Sample H-16 accordingly. In addition, the Board proposes to revise commentary currently contained in comment app. H-20 to clarify that these disclosures are required for all HOEPA loans, and as noted below, would move this commentary to current comment app. H-17. In a technical revision, the Board would revise the heading to Mortgage Sample H-16 to reflect that it contains model clauses.

Model Clause for Credit Insurance, Debt Cancellation, or Debt

Suspension

Currently, Appendix H contains a model clause and sample form that creditors may use to comply with the disclosure requirements under current Sec. 226.4(d)(3) for debt suspension. See Model Clause H-17(A) and Sample H-17(B). As discussed above, the Board proposes new disclosure requirements for credit insurance, debt cancellation and debt suspension for all closed-end loans. See proposed Sec. Sec. 226.4(d)(1), (d)(3) and 226.38(h). Accordingly, the Board proposes to add Model Clause H-17(C) and Sample H-17(D) that creditors may use to comply with the proposed requirements under Sec. Sec. 226.4(d)(1),

(d)(3) and 226.38(h).

Model Clause for Creditor-Placed Property Insurance

Currently, creditors are not required to provide any disclosures to the consumer with respect to creditor-placed property insurance. As discussed under proposed Sec. 226.20(e), the Board would require creditors to provide notice of the cost and coverage of creditor-placed property insurance before charging the consumer for such insurance for transactions secured by real property or a dwelling. For all other closed-end loans, these disclosures would be required if creditors intend to exclude the creditor-placed property insurance fee from the finance charge under Sec. 226.4(d). Accordingly, the Board proposes to add Model Clause H-18 that creditors may use to comply with the proposed requirements under Sec. 226.20(e).

Model Forms, Model Clauses, and Sample Forms for Transaction-Specific

Disclosures for Loans Secured by Real Property or a Dwelling

Currently, Appendix H contains several model forms, model clauses and samples that creditors may use to comply with the disclosures required under current Sec. 226.18 for transactions secured by real property or a dwelling. Current Model H-2 illustrates the format and content of disclosures currently required under Sec. 226.18 for mortgages. Current Model Clause H-6 contains a model clause for an assumption policy. Current Samples H-13 and H-15 are sample disclosures illustrating a mortgage with a demand feature and a graduated-payment mortgage, respectively.

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As discussed under proposed Sec. 226.38, the Board proposes a new disclosure regime for transactions secured by real property or a dwelling. Accordingly, the Board proposes to add new Model Forms, Model

Clauses, and Sample Forms H-19 through H-23 that creditors may use to comply with the requirements in proposed Sec. 226.38(a) through (j).

The Board proposes to add Models H-19(A) through H-19(C) to illustrate the format and content of disclosures required under proposed Sec. 226.38 for fixed-rate, hybrid adjustable-rate, and payment option mortgages, respectively. In addition, the Board would add Model Clauses

H-20 and H-21 to provide guidance to creditors on how to disclose a balloon payment or introductory rate feature, respectively. Model

Clause H-22 would be added to provide model clauses relating to key questions about risk disclosures required under proposed Sec. 226.38(d)(2). Model Clause H-23 would be added to provide model clauses for the following disclosures required under proposed Sec. 226.38(j)(2)-(6) for transactions secured by real property or a dwelling: rebate; late payment; property insurance; contract reference; and assumption policy. Under the proposal, current Samples H-13 and H- 15 would be rendered unnecessary and therefore, are deleted and reserved. Model Clause H-6, which contains the current model clause for assumption, would be deleted because assumption policies are only applicable to transactions secured by real property or a dwelling; H-6 would be reserved.

In addition, the Board proposes to add several sample forms to provide examples of how creditors can provide certain disclosures required under proposed Sec. 226.38 in the tabular format or scaled graph, as applicable, for various transaction types secured by real property or a dwelling. Specifically, proposed Samples H-19(D) through

H-19(I) illustrate disclosures required under proposed Sec. 226.38 for the following transaction-types, respectively: a fixed mortgage with balloon payment; an interest only, fixed mortgage; a step-payment mortgage; a hybrid adjustable-rate mortgage; an interest-only ARM; and a payment option ARM.

The Board also proposes to add or revise commentary to provide guidance to creditors on the purpose of the sample forms, and how to use Model Forms, Model Clauses, and Sample Forms H-19 through H-23 for transactions secured by real property or a dwelling. Current comment app. H-12 provides guidance to creditors regarding the purpose of sample forms generally. Under the proposal, the Board would update the cross-references contained in current comment app. H-12 to clarify that the commentary applies to proposed Sample H-4(D) through-4(F) for ARM loan program disclosures required under proposed Sec. 226.19(b);

Samples H-4(I) and H-4(J) for ARM adjustment notice disclosures required under Sec. 226.20(c); Sample H-17(D) for credit insurance, debt cancellation or debt suspension disclosures required under Sec. 226.4(d)(1), (d)(3) and 226.38(h); and Samples H-19(D) through H-19(I) for disclosures required under Sec. 226.38 for transactions secured by real property or a dwelling.

Current comment app. H-16 provides guidance regarding the sample forms that creditors may use to illustrate required disclosures for mortgages subject to RESPA and would be updated to include cross- references to proposed Samples H-19(D) through H-19(I), and to the itemization of amount financed disclosure under proposed Sec. 226.38(j)(1)(iii). Under the proposal, guidance contained in current comment app. H-17 regarding disclosure of a mortgage with a demand feature under Sec. 226.18 would be deleted as unnecessary. As noted above, commentary regarding disclosures required under Sec. 226.32(c) for HOEPA loans would be moved from comment app. H-20 to comment app.

H-17.

In addition, under the proposal, current comment app. H-18, which contains guidance relating to variable-rate disclosures required under current Sec. 226.19(b), would be deleted. New commentary would be added to comment app. H-18 to provide format details about proposed sample forms that illustrate the disclosures required for transactions secured by real property or a dwelling under proposed Sec. 226.19(b) or 226.38, as applicable. For example, the commentary indicates that

Samples H-4(D) through H-4(F), and H-19(D) through H-19(I) are designed to be printed on an 8\1/2\x11 inch sheet of paper. In addition, the following formatting techniques were used in presenting the information in the table to ensure that the information was readable: 1. A readable font style and font size (10-point Ariel font style, except for the APR which is shown in 16-point type). 2. Sufficient spacing between lines of the text. That is, words were not compressed to appear smaller than 10-point type, except for headings used to provide interest rate and payment summary disclosures required under proposed Sec. 226.28(c), in the tabular format, which are shown in 9-point type. 3. Standard spacing between words and characters. 4. Sufficient white space around the text of the information in each row, by providing sufficient margins above, below and to the sides of the text. 5. Sufficient contrast between the text and the background. Black text was used on white paper.

Although the Board is not requiring creditors to use the above formatting techniques in presenting information in the table (except for the 10-point and 16-point font size), the Board encourages creditors to consider these techniques when disclosing information in the tabular format, or scaled graph, to ensure that the information is presented in a readable format.

Under the proposal, commentary currently contained in comment app.

H-19 regarding the terms of a graduated-payment mortgage would be deleted, and would instead indicate the terms of the fixed-rate mortgage illustrated in Sample H-19(D). As noted above, guidance contained in current app. H-20 regarding disclosures required under

Sec. 226.32(c) would be moved to comment app. H-17. The Board proposes to add new commentary to comment app. H-20 to indicate the terms of the interest-only, fixed-rate mortgage illustrated in Sample H-19(E). The

Board also proposes to add comments app. H-21 through -24 to indicate the terms of the following transaction types, which are illustrated in

Samples H-19(F) through 19(I), respectively: a step-payment mortgage; a hybrid ARM; an interest-only ARM; and a payment option ARM. The transactions discussed in revised comments app. H-19 and H-20, and new comments app. H-21 through -24, all assume the average prime offer rates (APORs) that would be used in providing the disclosures required under proposed Sec. 226.38(b), and are not representative of the actual APORs for the respective weeks.

Further, the Board proposes to add comments app. H-25 through -28 relating to the following, respectively: the disclosure required under proposed Sec. 226.38(c) for a balloon payment feature; the disclosure required under proposed Sec. 226.38(c)(2)(iii) for transactions that have an initial discounted rate that later adjusts; disclosures required under proposed Sec. 226.19(d)(2) for key questions about risk that would be provided only as applicable; and disclosures required under proposed Sec. 226.38(j)(2)-(6) that would be provided separately from disclosures required under proposed Sec. 226.38(a)-(j). In a technical revision,

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current comments app. H-21 through -24, which contain guidance relating to forms issued by the U.S. Department of Health and Human Services and approved for certain student loans, would be redesignated as comments app. H-29 through -32, respectively; no substantive change is intended.

VII. Paperwork Reduction Act

In accordance with the Paperwork Reduction Act (PRA) of 1995 (44

U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the proposed rule under the authority delegated to the Board by the Office of Management and Budget (OMB). The collection of information that is required by this proposed rule is found in 12 CFR part 226. The Board may not conduct or sponsor, and an organization is not required to respond to, this information collection unless the information collection displays a currently valid OMB control number. The OMB control number is 7100-0199.

This information collection is required to provide benefits for consumers and is mandatory (15 U.S.C. 1601 et seq.). Since the Board does not collect any information, no issue of confidentiality arises.

The respondents/recordkeepers are creditors and other entities subject to Regulation Z.

TILA and Regulation Z are intended to ensure effective disclosure of the costs and terms of credit to consumers. For open-end credit, creditors are required to, among other things, disclose information about the initial costs and terms and to provide periodic statements of account activity, notice of changes in terms, and statements of rights concerning billing error procedures. Regulation Z requires specific types of disclosures for credit and charge card accounts and home equity plans. For closed-end loans, such as mortgage and installment loans, cost disclosures are required to be provided prior to consummation. Special disclosures are required in connection with certain products, such as reverse mortgages, certain variable-rate loans, and certain mortgages with rates and fees above specified thresholds. TILA and Regulation Z also contain rules concerning credit advertising. Creditors are required to retain evidence of compliance for two years, Sec. 226.25, but Regulation Z identifies only a few specific types of records that must be retained.\92\

\92\ See comments 25(a)-3 and -4 and proposed comment 25(a)-5.

Under the PRA, the Board accounts for the paperwork burden associated with Regulation Z for the State member banks and other creditors supervised by the Federal Reserve that engage in consumer credit activities covered by Regulation Z and, therefore, are respondents under the PRA. Appendix I of Regulation Z defines the

Federal Reserve-regulated institutions as: State member banks, branches and agencies of foreign banks (other than federal branches, federal agencies, and insured State branches of foreign banks), commercial lending companies owned or controlled by foreign banks, and organizations operating under section 25 or 25A of the Federal Reserve

Act. Other federal agencies account for the paperwork burden imposed on the entities for which they have administrative enforcement authority.

The current total annual burden to comply with the provisions of

Regulation Z is estimated to be 734,127 hours for the 1,138 Federal

Reserve-regulated institutions that are deemed to be respondents for the purposes of the PRA. To ease the burden and cost of complying with

Regulation Z (particularly for small entities), the Board provides model forms, which are appended to the regulation.

As discussed in the preamble, the Board proposes changes to format, timing, and content requirements for the four main types of credit disclosures for closed-end mortgages governed by Regulation Z: (1)

Disclosures at or before application; (2) disclosures within three days after application; (3) disclosures before consummation; and (4) disclosures after consummation. The proposed rule would impose a one- time increase in the total annual burden under Regulation Z for all respondents regulated by the Federal Reserve by 227,600 hours, from 734,127 to 961,727 hours. In addition, the Board estimates that, on a continuing basis, the proposed revisions to the rules would increase the total annual burden on a continuing basis from 734,127 to 1,280,367 hours.

The total estimated burden increase, as well as the estimates of the burden increase associated with each major section of the proposed rule as set forth below, represents averages for all respondents regulated by the Federal Reserve. The Board expects that the amount of time required to implement each of the proposed changes for a given institution may vary based on the size and complexity of the respondent. Furthermore, the burden estimate for this rulemaking does not include the burden of complying with proposed disclosure and timing requirements that apply to private educational lenders making private education loans as announced in a separate proposed rulemaking (Docket

No. R-1353) or the proposed disclosure and timing requirements of the

Board's separate notice published simultaneously with this proposal for open-end credit plans secured by real property.

The Board estimates that 1,138 respondents regulated by the Federal

Reserve would take, on average, 200 hours (five business weeks) to update their systems, internal procedure manuals, and provide training for relevant staff to comply with the proposed disclosure requirements in Sec. Sec. 226.38 and 226.20(d), and revisions to existing disclosure requirements in Sec. Sec. 226.19(b) and 226.20(c). This one-time revision would increase the burden by 227,600 hours. On a continuing basis the Board estimates that 1,138 respondents regulated by the Federal Reserve would take, on average, 40 hours a month to comply with the closed-end disclosure requirements and would increase the ongoing burden from 304,756 hours to 546,240 hours. To ease the burden and cost of complying with the new and proposed requirements under Regulation Z the Board proposes to revise or add several model forms, model clauses and sample forms to Appendix H.

The other federal financial agencies: Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS), the Federal

Deposit Insurance Corporation (FDIC), and the National Credit Union

Administration (NCUA) are responsible for estimating and reporting to

OMB the total paperwork burden for the domestically chartered commercial banks, thrifts, and federal credit unions and U.S. branches and agencies of foreign banks for which they have primary administrative enforcement jurisdiction under TILA Section 108(a), 15.

U.S.C. 1607(a). These agencies are permitted, but are not required, to use the Board's burden estimation methodology. Using the Board's method, the total current estimated annual burden for the approximately 17,200 domestically chartered commercial banks, thrifts, and federal credit unions and U.S. branches and agencies of foreign banks supervised by the Federal Reserve, OCC, OTS, FDIC, and NCUA under TILA would be approximately 13,568,725 hours. The proposed rule would impose a one-time increase in the estimated annual burden for such institutions by 3,440,000 hours to 17,765,525 hours. On a continuing basis the proposed rule would impose an increase in the estimated annual burden by 8,256,000 to 21,824,725 hours. The above estimates represent an average across all respondents; the Board expects

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variations between institutions based on their size, complexity, and practices.

Comments are invited on: (1) Whether the proposed collection of information is necessary for the proper performance of the Board's functions; including whether the information has practical utility; (2) the accuracy of the Board's estimate of the burden of the proposed information collection, including the cost of compliance; (3) ways to enhance the quality, utility, and clarity of the information to be collected; and (4) ways to minimize the burden of information collection on respondents, including through the use of automated collection techniques or other forms of information technology.

Comments on the collection of information should be sent to Cynthia

Ayouch, Acting Federal Reserve Board Clearance Officer, Division of

Research and Statistics, Mail Stop 95-A, Board of Governors of the

Federal Reserve System, Washington, DC 20551, with copies of such comments sent to the Office of Management and Budget, Paperwork

Reduction Project (7100-0199), Washington, DC 20503.

VIII. Initial Regulatory Flexibility Analysis

In accordance with section 3(a) of the Regulatory Flexibility Act

(RFA), 5 U.S.C. 601-612, the Board is publishing an initial regulatory flexibility analysis for the proposed amendments to Regulation Z. The

RFA requires an agency either to provide an initial regulatory flexibility analysis with a proposed rule or to certify that the proposed rule will not have a significant economic impact on a substantial number of small entities. Under regulations issued by the

Small Business Administration, an entity is considered ``small'' if it has $175 million or less in assets for banks and other depository institutions; and $7 million or less in revenues for non-bank mortgage lenders and mortgage brokers.\93\

\93\ 13 CFR 121.201.

Based on its analysis and for the reasons stated below, the Board believes that this proposed rule will have a significant economic impact on a substantial number of small entities. A final regulatory flexibility analysis will be conducted after consideration of comments received during the public comment period. The Board requests public comment in the following areas.

A. Reasons for the Proposed Rule

Congress enacted TILA based on findings that economic stability would be enhanced and competition among consumer credit providers would be strengthened by the informed use of credit resulting from consumers' awareness of the cost of credit. One of the stated purposes of TILA is to provide a meaningful disclosure of credit terms to enable consumers to compare credit terms available in the marketplace more readily and avoid the uninformed use of credit. In this regard, the goal of the proposed amendments to Regulation Z is to improve the effectiveness of the disclosures that creditors provide to consumers beginning before application and throughout the life of a closed-end mortgage transaction. Accordingly, the Board is proposing changes to format, timing, and content requirements for closed-end disclosures required by

Regulation Z: (1) Program and other educational information provided before application; (2) transaction-specific disclosures provided at or shortly after application; (3) transaction-specific disclosures provided at or three business days before consummation; and notices of changes to the transaction's terms and regarding certain payment options provided during the life of the credit.

Congress enacted HOEPA in 1994 as an amendment to TILA. TILA is implemented by the Board's Regulation Z. HOEPA imposed additional substantive protections on certain high-cost mortgage transactions.

HOEPA also charged the Board with prohibiting acts or practices in connection with mortgage loans that are unfair, deceptive, or designed to evade the purposes of HOEPA, and acts or practices in connection with refinancing of mortgage loans that are associated with abusive lending or are otherwise not in the interest of borrowers.

The proposed regulations would revise and enhance many of the closed-end disclosure requirements of Regulation Z for transactions secured by real property or a dwelling. The Board's proposal also would require TILA disclosures for closed-end mortgages to be provided to the consumer earlier in the loan process and would expand on the post- consummation notification requirements concerning changes in mortgage terms. These amendments are proposed in furtherance of the Board's responsibility to prescribe regulations to carry out the purposes of

TILA, including promoting consumers' awareness of the cost of credit and their informed use thereof. Finally, the proposal would restrict certain loan originator compensation practices for closed-end mortgage loans to address problems that have been observed in the mortgage market. These restrictions are proposed pursuant to the Board's statutory responsibility to prohibit unfair and deceptive acts and practices in connection with mortgage loans.

B. Statement of Objectives and Legal Basis

The SUPPLEMENTARY INFORMATION contains this information. In summary, the proposed amendments to Regulation Z are designed to achieve three goals: (1) Revise the disclosures required for closed-end mortgage loans; (2) restrict certain loan originator compensation practices for mortgage loans; and (3) require disclosures for closed- end mortgage loans to be provided earlier in the transaction and additional post-consummation disclosures for certain changes in terms.

The legal basis for the proposed rule is in Sections 105(a), 105(f), and 129(l)(2) of TILA. 15 U.S.C. 1604(a), 1604(f), and 1639(l)(2). A more detailed discussion of the Board's rulemaking authority is set forth in part IV of the SUPPLEMENTARY INFORMATION.

C. Description of Small Entities to Which the Proposed Rule Would Apply

The proposed regulations would apply to all institutions and entities that engage in originating or extending closed-end, home- secured credit. The Board is not aware of a reliable source for the total number of small entities likely to be affected by the proposal, and the credit provisions of TILA and Regulation Z have broad applicability to individuals and businesses that originate, extend and service even small numbers of home-secured credit. See Sec. 226.1(c)(1).\94\ All small entities that originate, extend, or service closed-end loans secured by real property or a dwelling potentially could be subject to at least some aspects of the proposed rule.

\94\ Regulation Z generally applies to ``each individual or business that offers or extends credit when four conditions are met:

(i) The credit is offered or extended to consumers; (ii) the offering or extension of credit is done regularly, (iii) the credit is subject to a finance charge or is payable by a written agreement in more than four installments, and (iv) the credit is primarily for personal, family, or household purposes.'' Sec. 226.1(c)(1).

The Board can, however, identify through data from Reports of

Condition and Income (``call reports'') approximate numbers of small depository institutions that would be subject to the proposed rules.

Based on December 2008 call report data, approximately 9,418 small institutions would be subject to the proposed rule. Approximately 16,345 depository institutions in the United States filed call report data, approximately 11,907 of which had total

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domestic assets of $175 million or less and thus were considered small entities for purposes of the Regulatory Flexibility Act. Of 4,231 banks, 565 thrifts and 7,111 credit unions that filed call report data and were considered small entities, 4,091 banks, 530 thrifts, and 4,797 credit unions, totaling 9,418 institutions, extended mortgage credit.

For purposes of this analysis, thrifts include savings banks, savings and loan entities, co-operative banks and industrial banks.

The Board cannot identify with certainty the number of small non- depository institutions that would be subject to the proposed rule.

Home Mortgage Disclosure Act (HMDA) \95\ data indicate that 1,752 non- depository institutions filed HMDA reports in 2007.\96\ Based on the small volume of lending activity reported by these institutions, most are likely to be small.

\95\ The 8,610 lenders (both depository institutions and mortgage companies) covered by HMDA in 2007 accounted for an estimated 80% of all home lending in the United States (2008 HMDA data are not yet available). Under HMDA, lenders use a ``loan/ application register'' (HMDA/LAR) to report information annually to their Federal supervisory agencies for each application and loan acted on during the calendar year. Lenders must make their HMDA/LARs available to the public by March 31 following the year to which the data relate, and they must remove the two date-related fields to help preserve applicants' privacy. Only lenders that have offices

(or, for non-depository institutions, are deemed to have offices) in metropolitan areas are required to report under HMDA. However, if a lender is required to report, it must report information on all of its home loan applications and loans in all locations, including non-metropolitan areas.

\96\ The 2007 HMDA Data, http://www.federalreserve.gov/pubs/ bulletin/2008/articles/hmda/default.htm.

The proposal's restrictions on compensation of loan originators would apply to mortgage brokers. Loan originators other than mortgage brokers that would be affected by the proposal are employees of creditors (or of brokers) and, as such, are not business entities in their own right. In its 2008 proposed rule under HOEPA, 73 FR 1672, 1720; Jan. 9, 2008, the Board noted that, according to the National

Association of Mortgage Brokers (NAMB), in 2004 there were 53,000 mortgage brokerage companies that employed an estimated 418,700 people.\97\ The Board estimated that most of these companies are small entities. On the other hand, the U.S. Census Bureau's 2002 Economic

Census indicates that there were only 17,041 ``mortgage and nonmortgage loan brokers'' in the United States at that time.\98\

\97\ http://www.namb.org/namb/Industry_

Facts.asp?SnID=719224934. This page of the NAMB Web site, however, no longer provides an estimate of the number of mortgage brokerage companies.

\98\ http://www.census.gov/prod/ec02/ec0252a1us.pdf (NAICS code 522310). Data on this industry sector are not yet available from the 2007 Economic Census.

D. Projected Reporting, Recordkeeping, and Other Compliance

Requirements

The compliance requirements of the proposed rules are described in parts V and VI of the SUPPLEMENTARY INFORMATION. The effect of the proposed revisions to Regulation Z on small entities is unknown. Some small entities would be required, among other things, to modify their home-secured credit disclosures and processes for delivery thereof to comply with the revised rules. The precise costs to small entities of updating their systems and disclosures are difficult to predict. These costs will depend on a number of unknown factors, including, among other things, the specifications of the current systems used by such entities to prepare and provide disclosures and to administer and maintain accounts, the complexity of the terms of credit products that they offer, and the range of such product offerings.

Additionally, the proposed rules could affect how loan originators are compensated and would impose certain related recordkeeping requirements on creditors. The precise costs that the proposed rule would impose on mortgage creditors and loan originators are also difficult to ascertain. Nevertheless, the Board believes that these costs will have a significant economic effect on small entities, including small mortgage creditors and brokers. The Board seeks information and comment on any costs, compliance requirements, or changes in operating procedures arising from the application of the proposed rule to small businesses.

E. Identification of Duplicative, Overlapping, or Conflicting Federal

Rules

Other Federal Rules

The Board has not identified any federal rules that conflict with the proposed revisions to Regulation Z.

Overlap With SAFE Act

The proposed rule's required disclosure contents for closed-end mortgage transactions would overlap with the Secure and Fair

Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) by requiring that the disclosure include the loan originator's unique identifier, as defined by that Act, if applicable.

Overlap With RESPA

Certain terms defined in the proposed rule, such as ``total settlement charges'' cross-reference definitions under the U.S.

Department of Housing and Urban Development's (HUD's) Regulation X under the Real Estate Settlement Procedures Act (RESPA). The proposed rule also would modify the existing prerequisites for use of the RESPA good faith estimate of settlement costs and HUD-1 settlement statement in lieu of the itemization of the amount financed under Regulation Z.

Overlap With HUD's Guidance

The Board recognizes that HUD has issued policy statements regarding creditor payments to mortgage brokers under RESPA and guidance as to disclosure of such payments on the Good Faith Estimate and HUD-1 Settlement Statement. HUD also has published revised disclosures for broker compensation under RESPA to become effective

January 1, 2010. The Board intends that its proposal would complement

HUD's final rule. The proposed provision regarding creditor payments to loan originators is intended to be consistent with HUD's existing guidance regarding broker compensation under Section 8 of RESPA. The proposed provision regarding record retention to evidence compliance with the provision regarding creditor payments to loan originators would cross-reference the HUD-1 settlement statement as an acceptable record of such compensation paid in a given transaction.

F. Identification of Duplicative, Overlapping, or Conflicting State

Laws

State Laws Regulating Creditor Payments to Loan Originators

The Board is aware that many states regulate loan originators, especially mortgage brokers, and their compensation in various respects. Under TILA Section 111, the proposed rule would not preempt such State laws except to the extent they are inconsistent with the proposal's requirements. 15 U.S.C. 1610.

State Equivalents to TILA and HOEPA

Many states regulate consumer credit through statutory disclosure schemes similar to TILA. Similarly to State laws regulating loan originator compensation, such state disclosure laws would be preempted only to the extent they are inconsistent with the proposal's requirements. Id.

The Board also is aware that many states regulate ``high-cost'' or

``high-priced'' mortgage loans, under laws that

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resemble HOEPA. Many such State laws set their coverage tests in part on the APR of the transaction. The proposed rule would overlap with these laws indirectly by virtue of the proposal to modify the definition of the finance charge for closed-end mortgage transactions, which would result in APRs being higher generally and potentially more loans being covered under such State laws.

The Board seeks comment regarding any State or local statutes or regulations that would duplicate, overlap, or conflict with the proposed rule.

G. Discussion of Significant Alternatives

The Board considered whether improved disclosures could protect consumers against unfair loan originator compensation practices for mortgages as well as the proposed rule. While the Board is proposing improvements to mortgage loan disclosures, it does not appear that better disclosures would address loan originator compensation practices adequately.

The Board welcomes comments on any significant alternatives, consistent with the requirements of TILA, that would minimize the impact of the proposed rule on small entities.

List of Subjects in 12 CFR Part 226

Advertising, Consumer protection, Federal Reserve System,

Mortgages, Reporting and recordkeeping requirements, Truth in lending.

Text of Proposed Revisions

Certain conventions have been used to highlight the proposed revisions. New language is shown inside bold arrows, and language that would be deleted is shown inside bold brackets.

Authority and Issuance

For the reasons set forth in the preamble, the Board proposes to amend Regulation Z, 12 CFR part 226, as set forth below:

PART 226--TRUTH IN LENDING (REGULATION Z) 1. The authority citation for part 226 continues to read as follows:

Authority: 12 U.S.C. 3806; 15 U.S.C. 1604, 1637(c)(5), and 1639(l); Public Law 111-24 Sec. 2, 123 Stat. 1734.

Subpart A--General 2. Section 226.1, as amended on January 29, 2009 (74 FR 5397) is amended by revising paragraphs (b) and (d)(5) to read as follows:

Sec. 226.1 Authority, purpose, coverage, organization, enforcement and liability.

* * * * *

(b) Purpose. The purpose of this regulation is to promote the informed use of consumer credit by requiring disclosures about its terms and cost. The regulation also gives consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling, regulates certain credit card practices, and provides a means for fair and timely resolution of credit billing disputes. The regulation does not govern charges for consumer credit.

The regulation requires a maximum interest rate to be stated in variable-rate contracts secured by the consumer's dwelling. It also imposes limitations on home-equity plans that are subject to the requirements of Sec. 226.5b and mortgages that are subject to the requirements of Sec. 226.32. The regulation prohibits certain acts or practices in connection with credit secured by [rtrif]real property or[ltrif] a consumer's [principal] dwelling [rtrif]in Sec. 226.36, and credit secured by a consumer's principal dwelling in Sec. 226.35.[ltrif]

* * * * *

(d) * * *

(5) Subpart E contains special rules for mortgage transactions.

Section 226.32 requires certain disclosures and provides limitations for [rtrif]closed-end[ltrif] loans that have rates and fees above specified amounts. Section 226.33 requires disclosures, including the total annual loan cost rate, for reverse mortgage transactions. Section 226.34 prohibits specific acts and practices in connection with

rtrif closed-end[ltrif] mortgage transactions that are subject to

Sec. 226.32. Section 226.35 prohibits specific acts and practices in connection with [rtrif]closed-end[ltrif] higher-priced mortgage loans, as defined in Sec. 226.35(a). Section 226.36 prohibits specific acts and practices in connection with [rtrif]extensions of[ltrif] credit secured by [rtrif]real property or[ltrif] a consumer's [principal] dwelling. [rtrif]Section 226.37 provides general disclosure requirements for closed-end extensions of credit secured by real property or a consumer's dwelling. Section 38 provides the content of disclosures for closed-end extensions of credit secured by real property or a consumer's dwelling.[ltrif]

* * * * * 3. Section 226.4, as amended on January 29, 2009 (74 FR 5399) is revised to read as follows:

Sec. 226.4 Finance charge.

(a) Definition. The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.

It does not include any charge of a type payable in a comparable cash transaction.

(1) Charges by third parties. The finance charge includes fees and amounts charged by someone other than the creditor, unless otherwise excluded under this section, if the creditor:

(i) Requires the use of a third party as a condition of or an incident to the extension of credit, even if the consumer can choose the third party; or

(ii) Retains a portion of the third-party charge, to the extent of the portion retained.

(2) Special rule; closing agent charges. [rtrif]Except as provided in Sec. 226.4(g), fees[ltrif] [Fees] charged by a third party that conducts the loan closing (such as a settlement agent, attorney, or escrow or title company) are finance charges only if the creditor:

(i) Requires the particular services for which the consumer is charged;

(ii) Requires the imposition of the charge; or

(iii) Retains a portion of the third-party charge, to the extent of the portion retained.

(3) Special rule; mortgage broker fees. Fees charged by a mortgage broker (including fees paid by the consumer directly to the broker or to the creditor for delivery to the broker) are finance charges even if the creditor does not require the consumer to use a mortgage broker and even if the creditor does not retain any portion of the charge.

(b) Examples of finance charge. The finance charge includes the following types of charges, except for charges specifically excluded by paragraphs (c) through (e) of this section:

(1) Interest, time price differential, and any amount payable under an add-on or discount system of additional charges.

(2) Service, transaction, activity, and carrying charges, including any charge imposed on a checking or other transaction account to the extent that the charge exceeds the charge for a similar account without a credit feature.

(3) Points, loan fees, assumption fees, finder's fees, and similar charges.

(4) Appraisal, investigation, and credit report fees.

(5) Premiums or other charges for any guarantee or insurance protecting the creditor against the consumer's default or other credit loss.

(6) Charges imposed on a creditor by another person for purchasing or accepting a consumer's obligation, if the consumer is required to pay the charges in cash, as an addition to the obligation,

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or as a deduction from the proceeds of the obligation.

(7) Premiums or other charges for credit life, accident, health, or loss-of-income insurance, written in connection with a credit transaction.

(8) Premiums or other charges for insurance against loss of or damage to property, or against liability arising out of the ownership or use of property, written in connection with a credit transaction.

(9) Discounts for the purpose of inducing payment by a means other than the use of credit.

(10) Charges or premiums paid for debt cancellation or debt suspension coverage written in connection with a credit transaction, whether or not the debt cancellation coverage is insurance under applicable law.

(c) Charges excluded from the finance charge. [rtrif]Except as provided in Sec. 226.4(g), the[ltrif] [The] following charges are not finance charges:

(1) Application fees charged to all applicants for credit, whether or not credit is actually extended.

(2) Charges for actual unanticipated late payment, for exceeding a credit limit, or for delinquency, default, or a similar occurrence.

(3) Charges imposed by a financial institution for paying items that overdraw an account, unless the payment of such items and the imposition of the charge were previously agreed upon in writing.

(4) Fees charged for participation in a credit plan, whether assessed on an annual or other periodic basis.

(5) Seller's points.

(6) Interest forfeited as a result of an interest reduction required by law on a time deposit used as security for an extension of credit.

(7) Real-estate related fees. The following fees in [rtrif]an open- end credit plan[ltrif] [a transaction] secured by real property or in

rtrif an open-end[ltrif] [a] residential mortgage transaction, if the fees are bona fide and reasonable in amount:

(i) Fees for title examination, abstract of title, title insurance, property survey, and similar purposes.

(ii) Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or settlement documents.

(iii) Notary and credit report fees.

(iv) Property appraisal fees or fees for inspections to assess the value or condition of the property if the service is performed prior to closing, including fees related to pest infestation or flood hazard determinations.

(v) Amounts required to be paid into escrow or trustee accounts if the amounts would not otherwise be included in the finance charge.

(8) Discounts offered to induce payment for a purchase by cash, check, or other means, as provided in section 167(b) of the Act.

(d) Insurance and debt cancellation and debt suspension coverage.

(1) Voluntary credit insurance premiums. [rtrif]Except as provided in

Sec. 226.4(g), premiums[ltrif] [Premiums] for credit life, accident, health, or loss-of-income insurance may be excluded from the finance charge if the following conditions are met:

(i) The insurance coverage is not required by the creditor, and this fact is disclosed in writing.

(ii) The premium for the initial term of insurance coverage is disclosed in writing. If the term of insurance is less than the term of the transaction, the term of insurance also shall be disclosed. The premium may be disclosed on a unit-cost basis only in open-end credit transactions, closed-end credit transactions by mail or telephone under

Sec. 226.17(g), and certain closed-end credit transactions involving an insurance plan that limits the total amount of indebtedness subject to coverage.

(iii) The consumer signs or initials an affirmative written request for the insurance after receiving the disclosures specified in this paragraph, except as provided in paragraph (d)(4) of this section. Any consumer in the transaction may sign or initial the request.

rtrif

(iv) The creditor determines at the time of enrollment that the consumer meets any applicable age or employment eligibility criteria for insurance coverage.[ltrif]

(2) Property insurance premiums. Premiums for insurance against loss of or damage to property, or against liability arising out of the ownership or use of property, including single interest insurance if the insurer waives all right of subrogation against the consumer,\5\ may be excluded from the finance charge if the following conditions are met:

\5\ [Reserved].

(i) The insurance coverage may be obtained from a person of the consumer's choice,\6\ and this fact is disclosed. (A creditor may reserve the right to refuse to accept, for reasonable cause, an insurer offered by the consumer.)

\6\ [Reserved].

(ii) If the coverage is obtained from or through the creditor, the premium for the initial term of insurance coverage shall be disclosed.

If the term of insurance is less than the term of the transaction, the term of insurance shall also be disclosed. The premium may be disclosed on a unit-cost basis only in open-end credit transactions, closed-end credit transactions by mail or telephone under Sec. 226.17(g), and certain closed-end credit transactions involving an insurance plan that limits the total amount of indebtedness subject to coverage.

(3) Voluntary debt cancellation or debt suspension fees.

rtrif

Except as provided in Sec. 226.4(g), charges[ltrif] [Charges] or premiums paid for debt cancellation coverage for amounts exceeding the value of the collateral securing the obligation or for debt cancellation or debt suspension coverage in the event of the loss of life, health, or income or in case of accident may be excluded from the finance charge, whether or not the coverage is insurance, if the following conditions are met:

(i) The debt cancellation or debt suspension agreement or coverage is not required by the creditor, and this fact is disclosed in writing.

(ii) The fee or premium for the initial term of coverage is disclosed in writing. If the term of coverage is less than the term of the credit transaction, the term of coverage also shall be disclosed.

The fee or premium may be disclosed on a unit-cost basis only in open- end credit transactions, closed-end credit transactions by mail or telephone under Sec. 226.17(g), and certain closed-end credit transactions involving a debt cancellation agreement that limits the total amount of indebtedness subject to coverage.

(iii) The following are disclosed, as applicable, for debt suspension coverage: That the obligation to pay loan principal and interest is only suspended, and that interest will continue to accrue during the period of suspension.

(iv) The consumer signs or initials an affirmative written request for coverage after receiving the disclosures specified in this paragraph, except as provided in paragraph (d)(4) of this section. Any consumer in the transaction may sign or initial the request.

rtrif

(v) The creditor determines at the time of enrollment that the consumer meets any applicable age or employment eligibility criteria for the debt cancellation or debt suspension agreement or coverage.[ltrif]

(4) Telephone purchases. If a consumer purchases credit insurance or debt cancellation or debt suspension coverage for an open-end [(not home-secured)] plan by telephone, the creditor must make the disclosures under

Page 43323

paragraphs (d)(1)(i) and (ii) or (d)(3)(i) through (iii) of this section, as applicable, orally. In such a case, the creditor shall:

(i) Maintain evidence that the consumer, after being provided the disclosures orally, affirmatively elected to purchase the insurance or coverage; and

(ii) Mail the disclosures under paragraphs (d)(1)(i) and (ii) or

(d)(3)(i) through (iii) of this section, as applicable, within three business days after the telephone purchase.

(e) Certain security interest charges. [rtrif]Except as provided in

Sec. 226.4(g), if[ltrif] [If] itemized and disclosed, the following charges may be excluded from the finance charge:

(1) Taxes and fees prescribed by law that actually are or will be paid to public officials for determining the existence of or for perfecting, releasing, or satisfying a security interest.

(2) The premium for insurance in lieu of perfecting a security interest to the extent that the premium does not exceed the fees described in paragraph (e)(1) of this section that otherwise would be payable.

(3) Taxes on security instruments. Any tax levied on security instruments or on documents evidencing indebtedness if the payment of such taxes is a requirement for recording the instrument securing the evidence of indebtedness.

(f) Prohibited offsets. Interest, dividends, or other income received or to be received by the consumer on deposits or investments shall not be deducted in computing the finance charge.

rtrif

(g) Special rule; closed-end mortgage transactions.

Paragraphs (a)(2) and (c) through (e) of this section, other than

Sec. Sec. 226.4(c)(2), 226.4(c)(5) and 226.4(d)(2), do not apply to closed-end transactions secured by real property or a dwelling.[ltrif]

Subpart C--Closed-End Credit 4. Section 226.17 is revised to read as follows:

Sec. 226.17 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. [rtrif]In addition, transactions secured by real property or a dwelling are subject to the requirements under Sec. 226.37.[ltrif] 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.). [rtrif]For transactions secured by real property or a dwelling, disclosures required by Sec. 226.19(b) or (c) must be provided in electronic form in specified circumstances.[ltrif] The disclosures required by Sec. Sec. 226.17(g), 226.19(b),[rtrif] 226.19(c),[ltrif] and 226.24 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 [rtrif]required by Sec. 226.18 or

Sec. 226.38[ltrif] shall be grouped together, shall be segregated from everything else, and shall not contain any information not directly related \37\ to the disclosures required under Sec. 226.18

\38\[rtrif]or Sec. 226.38; however, the disclosures may include an acknowledgement 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 variable-rate example under Sec. 226.18(f)(4), insurance, debt cancellation, or debt suspension under Sec. 226.18(n), and certain security interest charges under Sec. 226.18(o)[ltrif]. The itemization of the amount financed under Sec. 226.18(c)(1) must be separate from the other disclosures under that section.

\37\ [rtrif][Reserved][ltrif][The disclosures may include an acknowledgment of receipt, the date of the transaction, and the consumer's name, address, and account number.]

\38\ [rtrif][Reserved][ltrif][The following disclosures may be made together with or separately from other required disclosures: the creditor's identity under Sec. 226.18(a), the variable-rate example under Sec. 226.18(f)(1)(iv), insurance or debt cancellation under Sec. 226.18(n), and certain security interest charges under

Sec. 226.18(o).]

(2)[rtrif]Except for transactions secured by real property or a dwelling subject to Sec. 226.38, t[ltrif][T]he terms finance charge and annual percentage rate, when required to be disclosed under Sec. 226.18(d) and (e) together with a corresponding amount or percentage rate, shall be more conspicuous than any other disclosure, except the creditor's identity under Sec. 226.18(a).

(b) Time of disclosures. The creditor shall make disclosures before consummation of the transaction. [In certain mortgage transactions, special timing requirements are set forth in Sec. 226.19(a). In certain variable-rate transactions, special timing requirements for variable-rate disclosures are set forth in Sec. 226.19(b) and Sec. 226.20(c).] [rtrif]Special disclosure timing requirements for transactions secured by real property or a dwelling are set forth in

Sec. 226.19(a). Additional disclosure timing requirements for adjustable-rate transactions secured by real property or a dwelling are set forth in Sec. 226.19(b) and Sec. 226.20(c).[ltrif] 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.

(c) Basis of disclosures and use of estimates. (1) [rtrif]Legal obligation.[ltrif] The disclosures [rtrif]required by this subpart[ltrif] shall reflect the terms of the legal obligation between the parties.

rtrif

(i) Buydowns. The creditor shall disclose an annual percentage rate that is a composite rate based on the interest rate in effect during the initial period of the term of the loan and the interest rate in effect for the remainder of the term, if the consumer's interest rate or payments are reduced for all or part of the loan term based on payments made by:

(A) The seller or another third party, if the legal obligation reflects such an arrangement; or

(B) The consumer.

(ii) Wrap-around financing. If a transaction involves combining the outstanding balance on an existing loan with additional funds advanced to a consumer without paying off the outstanding balance, the amount financed shall equal the sum of the outstanding balance and the new funds advanced.

(iii) Variable- or adjustable-rate transactions. The creditor shall base disclosures for a variable- or adjustable-rate transaction on the full term of the transaction. Except as otherwise provided in Sec. 226.38(a)(3) and (c) for adjustable-rate mortgage transactions secured by real property or a dwelling:

(A) If the initial interest rate for a transaction with a variable or adjustable rate is determined using the index or formula used to adjust the interest rate, the disclosures shall reflect the terms in effect at the time of consummation.

(B) If the initial interest rate for a transaction with a variable or adjustable rate is not determined using the index or formula used to adjust the interest rate, the disclosures shall reflect a composite annual percentage rate based on the initial rate for the time it is in effect and, for the remainder of the term, the rate that would have applied if such index or formula had been used at the time of consummation.

(iv) Repayment upon occurrence of future event. If disbursements for a transaction secured by real property or a dwelling are made during a specified period but repayment is required only upon the occurrence of a future event, the creditor shall base disclosures on

Page 43324

the assumption that repayment will occur when disbursements end.

(v) Tax refund-anticipation loans. For a tax refund-anticipation loan, the creditor shall estimate the time a tax refund will be delivered to the consumer and shall include in the finance charge any repayment amount that exceeds the loan amount that is not otherwise excluded from the finance charge under Sec. 226.4.

(vi) Pawn transactions. For a pawn transaction, the creditor shall disclose:

(A) The initial sum paid to the consumer as the amount financed;

(B) A finance charge that includes the difference between the initial sum paid to the consumer and the price at which the item is pledged or sold; and

(C) The annual percentage rate is determined using the earliest date on which the item pledged or sold may be redeemed as the end of the loan term.[ltrif]

(2)[rtrif]Estimates.[ltrif] (i) [rtrif]Reasonably available information.[ltrif] If any information necessary for an accurate disclosure is unknown to the creditor, the creditor shall make the disclosure based on the best information reasonably available at the time the disclosure is provided to the consumer[,] and shall state clearly that the disclosure is an estimate[rtrif](except that Sec. 226.19(a) limits the circumstances in which creditors may provide estimated disclosures, for mortgage transactions secured by real property or a dwelling)[ltrif].

(ii)[rtrif]Per-diem interest.[ltrif] For a transaction in which a portion of the interest is determined on a per-diem basis and collected at consummation, any disclosure affected by the per-diem interest shall be considered accurate if the disclosure is based on the information known to the creditor at the time that the disclosure documents are prepared for consummation of the transaction.

(3)[rtrif]Disregarded effects.[ltrif] The creditor may disregard the effects of the following in making calculations and disclosures:

(i) That payments must be collected in whole cents.

(ii) That dates of scheduled payments and advances may be changed because the scheduled date is not a business day.

(iii) That months have different numbers of days.

(iv) The occurrence of leap year.

(4)[rtrif]Disregarded irregularities.[ltrif] In making calculations and disclosures, the creditor may disregard any irregularity in the first period that falls within the limits described below and any

payment schedule

irregularity [rtrif]in the payment schedule, in a transaction not secured by real property or a dwelling, or payment summary, in a transaction secured by real property or a dwelling,[ltrif] that results from the irregular first period:

(i) For transactions in which the term is less than 1 year, a first period not more than 6 days shorter or 13 days longer than a regular period;

(ii) For transactions in which the term is at least 1 year and less than 10 years, a first period not more than 11 days shorter or 21 days longer than a regular period; and

(iii) For transactions in which the term is at least 10 years, a first period shorter than or not more than 32 days longer than a regular period.

(5)[rtrif]Demand obligations.[ltrif] If an obligation is payable on demand, the creditor shall make the disclosures based on an assumed maturity of 1 year. If an alternate maturity date is stated in the legal obligation between the parties, the disclosures shall be based on that date.

(6) Multiple advance loans. (i)[rtrif]Series of advances.[ltrif] A series of advances under an agreement to extend credit up to a certain amount may be considered as one transaction.

(ii)[rtrif]Multiple-advance construction loan.[ltrif] When a multiple-advance loan to finance the construction of a dwelling may be permanently financed by the same creditor, the construction phase and the permanent phase may be treated as either one transaction or more than one transaction.

(d) Multiple creditors; multiple consumers. If a transaction involves more than one creditor, only one set of disclosures shall be given and the creditors shall agree among themselves which creditor must comply with the requirements that this regulation imposes on any or all of them. If there is more than one consumer, the disclosures may be made to any consumer who is primarily liable on the obligation. If the transaction is rescindable under Sec. 226.23, however, the disclosures shall be made to each consumer who has the right to rescind.

(e) Effect of subsequent events. If a disclosure becomes inaccurate because of an event that occurs after the creditor delivers the required disclosures, the inaccuracy is not a violation of this regulation, although new disclosures may be required under paragraph

(f) of this section, Sec. 226.19, or Sec. 226.20.

(f) Early disclosures. If disclosures required by this subpart are given before the date of consummation of a transaction and a subsequent event makes them inaccurate, the creditor shall disclose before consummation ([subject to the provisions of][rtrif]except that additional timing requirements apply under[ltrif] Sec. 226.19(a)(2) and [rtrif]alternative timing requirements apply under[ltrif] Sec. 226.19(a)[(5)][rtrif](4)[ltrif](iii)): \39\

\39\ [Reserved.]

(1) Any changed term unless the term was based on an estimate in accordance with Sec. 226.17(c)(2) and was labelled an estimate;

(2) All changed terms, if the annual percentage rate at the time of consummation varies from the annual percentage rate disclosed earlier by more than \1/8\ of 1 percentage point in a regular transaction, or more than \1/4\ of 1 percentage point in an irregular transaction, as defined in Sec. 226.22(a).

(g) Mail or telephone orders--delay in disclosures. [rtrif]Except for transactions secured by real property or a dwelling subject to

Sec. 226.38, i[ltrif][I]f a creditor receives a purchase order or a request for an extension of credit by mail, telephone, or facsimile machine without face-to-face or direct telephone solicitation, the creditor may delay the disclosures until the due date of the first payment, if the following information for representative amounts or ranges of credit is made available in written form or in electronic form to the consumer or to the public before the actual purchase order or request:

(1) The cash price or the principal loan amount.

(2) The total sale price.

(3) The finance charge.

(4) The annual percentage rate, and if the rate may increase after consummation, the following disclosures:

(i) The circumstances under which the rate may increase.

(ii) Any limitations on the increase.

(iii) The effect of an increase.

(5) The terms of repayment.

(h) Series of sales--delay in disclosures. If a credit sale is one of a series made under an agreement providing that subsequent sales may be added to an outstanding balance, the creditor may delay the required disclosures until the due date of the first payment for the current sale, if the following two conditions are met:

(1) The consumer has approved in writing the annual percentage rate or rates, the range of balances to which they apply, and the method of treating any unearned finance charge on an existing balance.

(2) The creditor retains no security interest in any property after the creditor has received payments equal to the cash price and any finance charge attributable to the sale of that property. For purposes of this provision, in the case of items purchased on different

Page 43325

dates, the first purchased is deemed the first item paid for; in the case of items purchased on the same date, the lowest priced is deemed the first item paid for.

(i) Interim student credit extensions. For each transaction involving an interim credit extension under a student credit program, the creditor need not make the following disclosures: the finance charge under Sec. 226.18(d), the payment schedule under Sec. 226.18(g), the total of payments under Sec. 226.18(h), or the total sale price under Sec. 226.18(j). 5. Section 226.18 is revised to read as follows:

Sec. 226.18 General disclosure requirements.

For each transaction, the creditor shall disclose the following information as applicable[rtrif], except that for each transaction secured by real property or a dwelling, the creditor shall make the disclosures required by Sec. 226.38[ltrif]:

(a) Creditor. The identity of the creditor making the disclosures.

(b) Amount financed. The amount financed, using that term, and a brief description such as the amount of credit provided to you or on your behalf. The amount financed is calculated by:

(1) Determining the principal loan amount or the cash price

(subtracting any downpayment);

(2) Adding any other amounts that are financed by the creditor and are not part of the finance charge; and

(3) Subtracting any prepaid finance charge.

(c) Itemization of amount financed. (1) A separate written itemization of the amount financed, including: \40\

\40\ [rtrif][Reserved][ltrif][Good faith estimates of settlement costs provided for transactions subject to the Real Estate

Settlement Procedures Act (12 U.S.C. 2601 et seq.) may be substituted for the disclosures required by paragraph (c) of this section.]

(i) The amount of any proceeds distributed directly to the consumer.

(ii) The amount credited to the consumer's account with the creditor.

(iii) Any amounts paid to other persons by the creditor on the consumer's behalf. The creditor shall identify those persons[rtrif],[ltrif][.]\41\ [rtrif]except that the following payees may be described using generic or other general terms and need not be further identified: public officials or government agencies, credit reporting agencies, appraisers, and insurance companies.[ltrif]

\41\ [rtrif][Reserved][ltrif][The following payees may be described using generic or other general terms and need not be further identified: public officials or government agencies, credit reporting agencies, appraisers, and insurance companies.]

(iv) The prepaid finance charge.

(2) The creditor need not comply with paragraph (c)(1) of this section if the creditor provides a statement that the consumer has the right to receive a written itemization of the amount financed, together with a space for the consumer to indicate whether it is desired, and the consumer does not request it.

(d) Finance charge. The finance charge, using that term, and a brief description such as ``the dollar amount the credit will cost you.''

(1) Mortgage loans. In a transaction secured by real property or a dwelling, the disclosed finance charge and other disclosures affected by the disclosed finance charge (including the amount financed and the annual percentage rate) shall be treated as accurate if the amount disclosed as the finance charge--

(i) Is understated by no more than $100; or

(ii) Is greater than the amount required to be disclosed.

(2) Other credit. In any other transaction, the

rtrifThe[ltrif] amount disclosed as the finance charge shall be treated as accurate if[,][rtrif]:

(1)[ltrif]In a transaction involving an amount financed of $1,000 or less, it is not more than $5 above or below the amount required to be disclosed; or[,]

rtrif

(2)[ltrif] In a transaction involving an amount financed of more than $1,000, it is not more than $10 above or below the amount required to be disclosed.

(e) Annual percentage rate. The annual percentage rate, using that term, and a brief description such as ``the cost of your credit as a yearly rate.'' \42\ [rtrif]For any transaction involving a finance charge of $5 or less on an amount financed of $75 or less, or a finance charge of $7.50 or less on an amount financed of more than $75, the creditor need not disclose the annual percentage rate.[ltrif]

\42\ [rtrif][Reserved][ltrif] [For any transaction involving a finance charge of $5 or less on an amount financed of $75 or less, or a finance charge of $7.50 or less on an amount financed of more than $75, the creditor need not disclose the annual percentage rate.]

(f) Variable-rate loan [with term of one year or less][rtrif]not secured by real property or a dwelling[ltrif].

(1)

If the annual percentage rate may increase after consummation in a transaction not secured by [the consumer's principal dwelling or a transaction secured by the consumer's principal dwelling with a term of one year or less][rtrif]real property or a dwelling[ltrif], the following disclosures: \43\

\43\ [rtrif][Reserved][ltrif][Information provided in accordance with Sections 226.18(f)(2) and 226.19(b), may be substituted for the disclosures required by paragraph (f)(1) of this section.]

(i)

rtrif(1)[ltrif] The circumstances under which the interest rate may increase.

(ii)

rtrif(2)[ltrif] Any limitations on the increase.

(iii)

rtrif(3)[ltrif] The effect of an increase.

(iv)

rtrif(4)[ltrif] An example of the payment terms that would result from an increase.

(2) If the annual percentage rate may increase after consummation in a transaction secured by the consumer's principal dwelling with a term greater than one year, a following disclosures:

(i) The fact that the transaction contains a variable-rate feature.

(ii) A statement that variable-rate disclosure have been provided earlier.

(g) Payment schedule. The number, amounts, and timing of payments scheduled to repay the obligation.

(1) In a demand obligation with no alternate maturity date, the creditor may comply with this paragraph by disclosing the due dates or payment periods of any scheduled interest payments for the first year.

(2) In a transaction in which a series of payments varies because a finance charge is applied to the unpaid principal balance, the creditor may comply with this paragraph by disclosing the following information:

(i) The dollar amounts of the largest and smallest payments in the series.

(ii) A reference to the variations in the other payments in the series.

(h) Total of payments. The ``total of payments,'' using that term, and a descriptive explanation such as ``the amount you will have paid when you have made all scheduled payments.'' \44\ [rtrif]In any transaction involving a single payment, the creditor need not disclose the total of payments.[ltrif]

\44\ [rtrif][Reserved][ltrif] [In any transaction involving a single payment, the creditor need not disclose the total of payments.]

(i) Demand feature. If the obligation has a demand feature, that fact shall be disclosed. When the disclosures are based on an assumed maturity of 1 year as provided in Sec. 226.17(c)(5), that fact shall also be disclosed.

(j) Total sale price. In a credit sale, the total sale price, using that term, and a descriptive explanation (including the amount of any downpayment) such as ``the total price of your purchase on credit, including your downpayment of $------.'' The total sale price is the sum of the cash price, the items described in paragraph (b)(2), and the finance charge disclosed under paragraph (d) of this section.

(k) Prepayment. (1) When an obligation includes a finance charge computed from time to time by application of a rate to the unpaid principal balance, a statement indicating whether or not a penalty may

Page 43326

be imposed if the obligation is prepaid in full.

(2) When an obligation includes a finance charge other than the finance charge described in paragraph (k)(1) of this section, a statement indicating whether or not the consumer is entitled to a rebate of any finance charge if the obligation is prepaid in full.

(l) Late payment. Any dollar or percentage charge that may be imposed before maturity due to a late payment, other than a deferral or extension charge.

(m) Security interest. The fact that the creditor has or will acquire a security interest in the property purchased as part of the transaction, or in other property identified by item or type.

(n) Insurance[rtrif],[ltrif] [and] debt cancellation [rtrif], and debt suspension[ltrif]. The items required by Sec. 226.4(d) in order to exclude certain insurance premiums[rtrif],[ltrif] and debt- cancellation [rtrif]or debt suspension[ltrif] fees from the finance charge.

(o) Certain security interest charges. The disclosures required by

Sec. 226.4(e) in order to exclude from the finance charge certain fees prescribed by law or certain premiums for insurance in lieu of perfecting a security interest.

(p) Contract reference. A statement that the consumer should refer to the appropriate contract document for information about nonpayment, default, the right to accelerate the maturity of the obligation, and prepayment rebates and penalties. At the creditor's option, the statement may also include a reference to the contract for further information about security interests and, in a residential mortgage transaction, about the creditor's policy regarding assumption of the obligation.

(q) [Assumption policy. In a residential mortgage transaction, a statement whether or not a subsequent purchaser of the dwelling from the consumer may be permitted to assume the remaining obligation on its original terms.] [rtrif][Reserved.][ltrif]

(r) Required deposit. If the creditor requires the consumer to maintain a deposit as a condition of the specific transaction, a statement that the annual percentage rate does not reflect the effect of the required deposit.\45\ [rtrif]A required deposit need not include:

\45\ [rtrif][Reserved][ltrif] [A required deposit need not include, for example: (1) An escrow account for items such as taxes, insurance or repairs; (2) a deposit that earns not less than 5 percent per year; or (3) payments under a Morris Plan.]

(1) An escrow account for items such as taxes, insurance or repairs; or

(2) A deposit that earns not less than 5 percent per year.[ltrif] 6. Section 226.19 is revised to read as follows:

Sec. 226.19 [Certain mortgage and variable-rate transactions.][rtrif]Early disclosures and adjustable-rate disclosures for transactions secured by real property or a dwelling.

In connection with a closed-end transaction secured by real property or a dwelling, subject to paragraph (a)(4) of this section, the following requirements shall apply:[ltrif]

(a) Mortgage transactions [subject to RESPA]--(1)(i) Time of

rtrif good faith estimates of[ltrif] disclosures. [In a mortgage transaction subject to the Real Estate Settlement Procedures Act (12

U.S.C. 2601 et seq.) that is secured by the consumer's dwelling, other than a home equity line of credit subject to Sec. 226.5b or mortgage transaction subject to paragraph (a)(5) of this section, t][rtrif]T[ltrif]he creditor shall make good faith estimates of the disclosures required by [Sec. 226.18][rtrif]Sec. 226.38[ltrif] and shall deliver or place them in the mail not later than the third business day after the creditor receives the consumer's written application.

(ii) Imposition of fees. Except as provided in paragraph

(a)(1)(iii) of this section, neither a creditor nor any other person may impose a fee on a consumer in connection with the consumer's application for a mortgage transaction subject to paragraph (a)(1)(i) of this section before the consumer has received the disclosures required by paragraph (a)(1)(i) of this section. If the disclosures are mailed to the consumer [rtrif]or delivered to the consumer by means other than delivery in person[ltrif], the consumer is considered to have received them three business days after they are mailed [rtrif]or delivered[ltrif].

(iii) Exception to fee restriction. A creditor or other person may impose a fee for obtaining the consumer's credit history before the consumer has received the disclosures required by paragraph (a)(1)(i) of this section, provided the fee is bona fide and reasonable in amount.

(2) Waiting periods for early disclosures and corrected disclosures. (i)

rtrif(2)(i) Seven-business-day waiting period.[ltrif] The creditor shall deliver or place in the mail the good faith estimates required by paragraph (a)(1)(i) of this section not later than the seventh business day before consummation of the transaction.

rtrif

(ii) Three-business-day waiting period. After providing the disclosures required by paragraph (a)(1)(i) of this section, the creditor shall provide the disclosures required by Sec. 226.38 before consummation. The consumer must receive the new disclosures no later than three business days before consummation. Only the disclosures required by Sec. Sec. 226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C), 226.38(c)(6)(i) and 226.38(e)(5)(i) may be estimated disclosures.[ltrif]

Alternative 1--Paragraph (a)(2)(iii)

(ii) If the annual percentage rate disclosed under paragraph

(a)(1)(i) of this section becomes inaccurate, as defined in Sec. 226.22, the creditor shall provide corrected disclosures with all changed terms.

rtrif(iii) Additional three-business-day waiting period. If a subsequent event makes the disclosures required by paragraph (a)(2)(ii) inaccurate, the creditor shall provide corrected disclosures, subject to paragraph (a)(2)(iv) of this section.[ltrif]

The consumer must receive the corrected disclosures no later than three business days before consummation. [rtrif] Only the disclosures required by Sec. Sec. 226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C), 226.38(c)(6)(i) and 226.38(e)(5)(i) may be estimated disclosures.[ltrif] [If the corrected disclosures are mailed to the consumer or delivered to the consumer by means other than delivery in person, the consumer is deemed to have received the corrected disclosures three business days after they are mailed or delivered.]

Alternative 2--Paragraph (a)(2)(iii)

(ii)

rtrif(iii) Additional three-business-day waiting period.[ltrif] If the annual percentage rate disclosed under paragraph

(a)(1)(i)

rtrif(a)(2)(ii)[ltrif] of this section becomes inaccurate, as defined in Sec. 226.22, [rtrif]or a transaction that was disclosed as a fixed-rate transaction becomes an adjustable-rate transaction,[ltrif] the creditor shall provide corrected disclosures with all changed terms[rtrif], subject to paragraph (a)(2)(iv) of this section[ltrif]. The consumer must receive the corrected disclosures no later than three business days before consummation. [rtrif] Only the disclosures required by Sec. Sec. 226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C), 226.38(c)(6)(i) and 226.38(e)(5)(i) may be estimated disclosures.[ltrif] [If the corrected disclosures are mailed to the consumer or delivered to the consumer by means other than delivery in person, the consumer is deemed to have received the corrected disclosures three business days after they are mailed or delivered.]

rtrif

(iv) Annual percentage rate accuracy. An annual percentage rate disclosed under paragraph (a)(2)(ii) or (a)(2)(iii) shall be considered accurate as provided by Sec. 226.22, except that even if one of the following subsequent events makes the disclosed annual percentage rate inaccurate under

Page 43327

Sec. 226.22, the APR shall be considered accurate for purposes of paragraph (a)(2)(ii) and (a)(2)(iii) of this section:

(A) A decrease in the loan's annual percentage rate due to a discount the creditor gives the consumer to induce periodic payments by automated debit from a consumer's deposit or other account.

(B) A decrease in the loan's annual percentage rate due to a discount a title insurer gives the consumer on voluntary owners' title insurance.

(v) Timing of receipt. If the disclosures required by paragraph

(a)(2)(ii) or paragraph (a)(2)(iii) of this section are mailed to the consumer or delivered by means other than delivery in person, the consumer is considered to have received the disclosures three business days after they are mailed or delivered.[ltrif]

(3) Consumer's waiver of waiting period before consummation. If the consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency, the consumer may modify or waive the seven-business-day waiting period or [the][rtrif]a[ltrif] three-business-day waiting period required by paragraph (a)(2) of this section, after receiving the disclosures required by [Sec. 226.18][rtrif]Sec. 226.38[ltrif]. To modify or waive a waiting period, the consumer shall give the creditor a dated written statement that describes the emergency, specifically modifies or waives the waiting period, and bears the signature of all the consumers who are primarily liable on the legal obligation. Printed forms for this purpose are prohibited.

(4) Notice. Disclosures made pursuant to paragraph (a)(1) or paragraph (a)(2) of this section shall contain the following statement:

``You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.'' The disclosure required by this paragraph shall be grouped together with the disclosures required by paragraph (a)(1) or (a)(2) of this section.

(5)

rtrif(4)[ltrif] Timeshare plans. In a mortgage transaction

subject to the Real Estate Settlement Procedures Act (12 U.S.C. 2601 et seq.)

that is secured by a consumer's interest in a timeshare plan described in 11 U.S.C. 101(53(D)):

(i) The requirements of paragraphs (a)(1) through

(a)(4)

rtrif(a)(3)[ltrif] of this section do not apply;

(ii) The creditor shall make good faith estimates of the disclosures required by [Sec. 226.18] [rtrif]Sec. 226.38[ltrif] before consummation, or shall deliver or place them in the mail not later than three business days after the creditor receives the consumer's written application, whichever is earlier; and

(iii) If the annual percentage rate at the time of consummation varies from the annual percentage rate disclosed under paragraph

(a)[(5)][rtrif](4)[ltrif](ii) of this section by more than \1/8\; of 1 percentage point in a regular transaction or [frac14] of 1 percentage point in an irregular transaction, the creditor shall disclose all the changed terms no later than consummation or settlement.

(b) Certain variable-rate transactions.\45a\ If the annual percentage rate may increase after consummation in a transaction secured by the consumer's principal dwelling with a term greater than one year, the following disclosures must be provided at the time an application form is provided or before the consumer pays a non- refundable fee, whichever is earlier: \45b\

\45a\ [rtrif

Reserved.[ltrif][Information provided in accordance with variable-rate regulations of other Federal agencies may be substituted for the disclosures required by paragraph (b) of this section.]

\45b\ [rtrif]Reserved.[ltrif][Disclosures may be delivered or placed in the mail not later than three business days following receipt of a consumer's application when the application reaches the creditor by telephone, or through an intermediary agent or broker.]

(1) The booklet titled Consumer Handbook on Adjustable Rate

Mortgages published by the Board and the Federal Home Loan Bank Board, or a suitable substitute.

(2) A loan program disclosure for each variable-rate program in which the consumer expresses an interest. The following disclosures, as applicable, shall be provided:

(i) The fact that the interest rate, payment, or term of the loan can change.

(ii) The index or formula used in making adjustments, and a source of information about the index or formula.

(iii) An explanation of how the interest rate and payment will be determined, including an explanation of how the index is adjusted, such as by the addition of a margin.

(iv) A statement that the consumer should ask about the current margin value and current interest rate.

(vii) Any rules relating to changes in the index, interest rate, payment amount, and outstanding loan balance including, for example, an explanation of interest rate or payment limitations, negative amortization, and interest rate carryover.

(viii) At the option of the creditor, either of the following:

(A) A historical example, based on a $10,000 loan amount, illustrating how payments and the loan balance would have been affected by interest rate changes implemented according to the terms of the loan program disclosure. The example shall reflect the most recent 15 years of index values. The example shall reflect all significant loan program terms, such as negative amortization, interest rate carryover, interest rate discounts, and interest rate and payment limitations, that would have been affected by the index movement during the period.

(B) The maximum interest rate and payment for a $10,000 loan originated at the initial interest rate (index value plus margin, adjusted by the amount of any discount or premium) in effect as of an identified month and year for the loan program disclosure assuming the maximum periodic increases in rates and payments under the program; and the initial interest rate and payment for that loan and a statement that the periodic payment may increase or decrease substantially depending on changes in the rate.

(ix) An explanation of how the consumer may calculate the payments for the loan amount to be borrowed based on either:

(A) The most recent payment shown in the historical example in paragraph (b)(2)(viii)(A) of this section; or

(B) The initial interest rate used to calculate the maximum interest rate and payment in paragraph (b)(2)(viii)(B) of this section.

(x) The fact that the loan program contains a demand feature.

(xi) The type of information that will be provided in notices of adjustments and the timing of such notices.

(xii) A statement that disclosure forms are available for the creditor's other variable-rate loan programs.]

rtrif

(b) Adjustable-rate loan program disclosures. For adjustable-rate mortgages described in Sec. 226.38(a)(3) secured by real property or a consumer's dwelling, the creditor shall provide to the consumer an adjustable-rate loan program disclosure for each loan program in which the consumer expresses an interest. The creditor shall disclose the heading ``Adjustable-Rate Mortgage'' or ``ARM'' in accordance with Sec. 226.19(b)(4)(iii). The creditor shall provide disclosures under this paragraph (b) in circumstances where an open-end credit account converts to a closed-end mortgage transaction under a written agreement with the consumer. The creditor need not provide such disclosures in circumstances where the consumer assumes an adjustable- rate mortgage originated to another consumer.

(1) Interest rate and payment. As applicable, the creditor shall disclose the information required in paragraph

Page 43328

(b)(1) of this section, grouped together under the heading ``Interest

Rate and Payment,'' using that term:

(i) Introductory period. The time period for which the interest rate or payment remains fixed, a statement that the interest rate or payment may increase after that period, and an explanation of the effect on the interest rate of having an initial interest rate that is not determined using the index or formula that applies for interest rate adjustments.

(ii) Frequency of rate and payment change. The frequency of interest rate and payment changes permitted under the legal obligation.

(iii) Index. The index or formula used in making adjustments, a source of information about the index or formula, and an explanation of how the interest rate will be determined [rtrif]when adjusted[ltrif], including an explanation of how the index is adjusted, such as by the addition of a margin.

(iv) Limit on rate changes. An explanation of interest rate or payment limitations and interest rate carryover.

(v) Conversion feature. An explanation of any fixed-rate conversion feature that describes any limitations on the period during which the loan may be converted, a statement that the fixed interest rate may be higher than the adjustable rate at the time of conversion, a statement that conversion fees may be charged, and any interest rate and payment limitations that apply if the consumer exercises the conversion option.

(vi) Preferred rate. An explanation of the events that will cause the interest rate on an adjustable rate mortgage with a preferred rate to increase, a statement of the increase in the interest rate, and a statement that fees may be charged if one or more of the events occurs.

(2) Key questions about risk. The creditor shall disclose the information required in paragraphs (b)(2)(i) and (b)(2)(ii) of this section, grouped together under the heading ``Key Questions About

Risk,'' using that term:

(i) Required disclosures. The creditor shall disclose the following information--

(A) Rate increases. A statement that the interest rate may increase, along with a statement indicating when the first interest rate increase may occur and the frequency with which the interest rate may increase.

(B) Payment increases. A statement indicating whether or not the periodic payment on the loan may increase. If the periodic payment may increase, a statement that if the interest rate increases, the periodic payment will increase. For a pay option loan, if the periodic payment may increase, a statement indicating when the first minimum payment may increase.

(C) Prepayment penalty. If the obligation includes a finance charge computed from time to time by application of a rate to the unpaid principal balance, a statement indicating whether or not a penalty could be imposed if the obligation is prepaid in full. If the creditor could impose a prepayment penalty, a statement of the circumstances under which and period in which the creditor could impose the penalty.

(ii) Additional disclosures. The creditor shall disclose the following information as applicable:

(A) Interest-only payments. A statement that periodic payments will be applied only toward interest on the loan, along with a statement of any limitation on the number of periodic payments that will be applied only toward interest on the loan, that such payments will cover the interest owed each month, but none of the principal, and that making these periodic payments means the loan amount will stay the same and the consumer will not have paid any of the loan amount. For payment- option loans, a statement that the loan gives the consumer the choice to make periodic payments that cover the interest owed each month, but none of the principal, and that making these periodic payments means the loan amount will stay the same and the consumer will not have paid any of the loan amount.

(B) Negative amortization. A statement that the loan balance may increase even if the consumer makes the periodic payments, along with a statement that the minimum payment covers only a part of the interest the consumer owes each period and none of the principal, that the unpaid interest will be added to the consumer's loan amount, and that over time this will increase the total amount the consumer is borrowing and cause the consumer to lose equity in the home.

(C) Balloon payment. A statement that the consumer will owe a balloon payment, along with a statement of when it will be due.

(D) Demand feature. A statement that the creditor may demand full repayment of the loan, along with a statement of the timing of any advance notice the creditor will give the consumer before the creditor exercises such right.

(E) No-documentation or low-documentation loans. A statement that the consumer's loan could have a higher rate or fees if the consumer does not document employment, income or other assets, along with a statement that if the consumer provides more documentation, the consumer could decrease the interest rate or fees.

(F) Shared-equity or shared-appreciation. A statement that any future equity or appreciation in the real property or dwelling that secures the loan must be shared, along with a statement of the percentage of future equity or appreciation to which the creditor is entitled, and the events that may trigger such an obligation.

(3) Additional information and Web site. The creditor shall disclose a statement that the consumer may obtain additional information about adjustable-rate mortgages and a list of licensed housing counselors at the Web site of the Federal Reserve Board, and a reference to that Web site.

(4) Format requirements. (i) Application of Sec. 226.37. Except as otherwise provided by this paragraph (b)(4), the format requirements in

Sec. 226.37 apply to loan program disclosures made under this section.

(ii) Prominent location. The disclosures required by paragraphs

(b)(1) through (b)(3) of this section shall be grouped together and placed in a prominent location.

(iii) Disclosure of heading. The disclosure of the heading required by paragraph (b) of this section shall be more conspicuous than, and shall precede, the other disclosures required by paragraph (b) and shall be located outside of the tables required by paragraph

(b)(4)(iv). The creditor may make the heading disclosure using the name of the creditor and the name of the loan program.

(iv) Form of disclosures; tabular format. The creditor shall provide the disclosures required by paragraphs (b)(1) and (b)(2) of this section in the form of two tables with headings, content, and format substantially similar to Form H-4(B) in Appendix H to this part.

The table shall contain only the information required or permitted by paragraphs (b)(1) and (b)(2). The table containing the disclosures required by paragraph (b)(1) shall precede the table containing the disclosures required by paragraph (b)(2).

(v) Question and answer format. The creditor shall provide the disclosures required by paragraph (b)(2) of this section grouped together and presented in the format of question and answer, in a manner substantially similar to Form H-4(B) in Appendix H to this part.

(vi) Highlighting. Each affirmative answer for a feature required to be disclosed under paragraph (b)(2) shall be disclosed in bold text and in all capitalized letters. Any negative answer shall be in nonbold text.

Page 43329

(vii) Order of key questions disclosure. The key questions disclosure shall be provided, as applicable, in the following order: rate increases under Sec. 226.19(b)(2)(i)(A), payment increases under

Sec. 226.19(b)(2)(i)(B), interest-only payments under Sec. 226.19(b)(2)(ii)(A), negative amortization under Sec. 226.19(b)(2)(ii)(B), balloon payment under Sec. 226.19(b)(2)(ii)(C), prepayment penalty under Sec. 226.19(b)(2)(i)(C), demand feature under

Sec. 226.19(b)(2)(ii)(D), no-documentation or low-documentation loans under Sec. 226.19(b)(2)(ii)(E), shared-equity or shared-appreciation under Sec. 226.19(b)(2)(ii)(F).

(viii) Disclosure of additional information and Web site. The disclosure and Web site information required by paragraph (b)(3) of this section shall be located outside and beneath the tables required by paragraph (b)(4)(iv).

(c) Publications for transactions secured by real property or a dwelling. In a closed-end consumer credit transaction secured by real property or a dwelling, the creditor shall provide the following Board publications:

(1) The publication entitled ``Key Questions to Ask about Your

Mortgage,'' as published by the Board.

(2) The publication entitled ``Fixed vs. Adjustable Rate

Mortgages,'' as published by the Board.

(d) Timing of disclosures. (1) General. Except as otherwise provided by this paragraph (d), the creditor shall provide the disclosures and publications required by paragraphs (b) and (c) of this section at the time an application form is provided to the consumer or before the consumer pays a non-refundable fee, including a fee for obtaining the consumer's credit history, whichever is earlier.[ltrif]

(c)

rtrif(2)[ltrif] Electronic disclosures. For an application that is accessed by the consumer in electronic form, the disclosures and publications required by paragraph (b) [rtrif]and (c)[ltrif] of this section may be provided to the consumer in electronic form on or with the application.

rtrif

(i) Except as provided in paragraph (d)(2)(ii), if a consumer accesses an ARM loan application electronically, the creditor shall provide the disclosures and publications required under paragraphs (b) and (c) of this section in electronic form.

(ii) If a consumer who is physically present in the creditor's office accesses a loan application electronically, the creditor may provide disclosures and publications required under paragraphs (b) and

(c) of this section in either electronic or paper form.

(3) Applications made by telephone or through intermediary. If the creditor receives the consumer's application through an intermediary agent or broker or by telephone, the creditor satisfies the requirements of paragraph (b) or paragraph (c) of this section if the creditor delivers the disclosures and publications or places them in the mail not later than three business days after the creditor receives the consumer's application.

(4) Adjustable-rate feature added after application. If the consumer first expresses interest in an adjustable-rate mortgage transaction after an application form has been provided or accessed or the consumer has paid a non-refundable fee, the creditor shall provide to the consumer the disclosures required by paragraph (b) of this section within three business days after the creditor is informed of such interest by the consumer or by an intermediary broker or agent.

(5) Terms not usually offered. If the consumer expresses an interest in negotiating loan terms that are not generally offered, the creditor need not provide the disclosures required by paragraph (b) of this section before an application form is provided but shall provide such disclosures as soon as reasonably possible after the terms to be disclosed have been determined and not later than the time the consumer pays a non-refundable fee. In all cases the creditor shall provide the disclosures required by paragraph (c) of this section at the time an application form is provided or before the consumer pays a non- refundable fee, including a fee for obtaining a consumer's credit history, whichever is earlier.

(6) Additional loan program disclosures. If, after an application form is provided or the consumer pays a non-refundable fee, a consumer expresses an interest in an adjustable-mortgage loan program for which the creditor has not provided the disclosures required by paragraph (b) of this section, the creditor shall provide such disclosures within a reasonable time after the consumer expresses such interest. [ltrif] 7. Section 226.20 is revised to read as follows:

Sec. 226.20 Subsequent disclosure requirements.

(a) Refinancings. A refinancing occurs when an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation undertaken by the same consumer. A refinancing is a new transaction requiring new disclosures to the consumer. The new finance charge shall include any unearned portion of the old finance charge that is not credited to the existing obligation. The following shall not be treated as a refinancing:

(1) A renewal of a single payment obligation with no change in the original terms.

(2) A reduction in the annual percentage rate with a corresponding change in the payment schedule.

(3) An agreement involving a court proceeding.

(4) A change in the payment schedule or a change in collateral requirements as a result of the consumer's default or delinquency, unless the rate is increased, or the new amount financed exceeds the unpaid balance plus earned finance charge and premiums for continuation of insurance of the types described in Sec. 226.4(d).

(5) The renewal of optional insurance purchased by the consumer and added to an existing transaction, if disclosures relating to the initial purchase were provided as required by this subpart.

(b) Assumptions. An assumption occurs when a creditor expressly agrees in writing with a subsequent consumer to accept that consumer as a primary obligor on an existing [residential mortgage transaction][rtrif]closed-end credit transaction secured by real property or a dwelling[ltrif]. Before the assumption occurs, the creditor shall make new disclosures to the subsequent consumer, based on the remaining obligation. If the finance charge originally imposed on the existing obligation was an add-on or discount finance charge, the creditor need only disclose:

(1) The unpaid balance of the obligation assumed.

(2) The total charges imposed by the creditor in connection with the assumption.

(3) The information required to be disclosed under [Sec. 226.18(k), (l), (m), and (n)] [rtrif]Sec. 226.38 (a)(5), (f)(2), (h),

(j)(2), (j)(3), and (j)(4)[ltrif].

(4) The annual percentage rate originally imposed on the obligation.

(5) The [payment schedule under Sec. 226.18(g)] [rtrif]interest rate and payment summary under Sec. 226.38(c)[ltrif] and the total

of

payments under [Sec. 226.18(h)], [rtrif]Sec. 226.38(e)(5)[ltrif] based on the remaining obligation.

(c) [Variable-rate adjustments.] [rtrif]Rate adjustments.[ltrif]

\45c\ An adjustment to the interest rate with or without a corresponding adjustment to the payment in [a variable-rate][rtrif]an adjustable-rate[ltrif] mortgage subject to

Page 43330

Sec. 226.19(b) is an event requiring new disclosures to the consumer.

rtrif

An adjustment to the interest rate with a corresponding adjustment to the payment due to the conversion of an adjustable-rate mortgage subject to Sec. 226.19(b) to a fixed-rate mortgage also is an event requiring new disclosures to the consumer.[ltrif][At least once each year during which an interest rate adjustment is implemented without an accompanying payment change, and at least 25, but no more than 120, calendar days before a payment at a new level is due, the following disclosures, as applicable, must be delivered or placed in the mail:

\45c\ [rtrif]Reserved.[ltrif][Information provided in accordance with variable-rate subsequent disclosure regulations of other

Federal agencies may be substituted for the disclosure required by paragraph (c) of this section.]

(1) The current and prior interest rates.

(2) The index values upon which the current and prior interest rates are based.

(3) The extent to which the creditor has foregone any increase in the interest rate.

(4) The contractual effects of the adjustment, including the payment due after the adjustment is made, and a statement of the loan balance.

(5) The payment, if different from that referred to in paragraph

(c)(4) of this section, that would be required to fully amortize the loan at the new interest rate over the remainder of the loan term.]

rtrif

(1) Timing of disclosures. (i) Payment change. If an interest rate adjustment is accompanied by a payment change, the creditor shall deliver or place in the mail the disclosures required by paragraph (c)(2) of this section at least 60, but no more than 120, calendar days before a payment at a new level is due.

(ii) No payment change. At least once each year during which an interest rate adjustment is implemented without an accompanying payment change, the creditor shall deliver or place in the mail the disclosures required by paragraph (c)(3) of this section.

(2) Content of payment change disclosures. The creditor must provide the following information on the notice provided pursuant to paragraph (c)(1)(i) of this section:

(i) A statement that changes are being made to the interest rate, the date such change is effective, and a statement that more detailed information is available in the loan agreement(s).

(ii) A table containing the following disclosures--

(A) The current and new interest rates.

(B) If payments on the loan may be interest-only or negatively amortizing, the amount of the current and new payment allocated to pay principal, interest, and taxes and insurance in escrow, as applicable.

The current payment allocation disclosed shall be based on the payment allocation in the last payment period during which the current interest rate applies. The new payment allocation disclosed shall be based on the payment allocation in the first payment period during which the new interest rate applies.

(C) The current and new payment and the due date for the new payment.

(iii) A description of the change in the index or formula and any application of previously foregone interest.

(iv) The extent to which the creditor has foregone any increase in the interest rate and the earliest date the creditor may apply foregone interest to future adjustments, subject to rate caps.

(v) Limits on interest rate or payment increases at each adjustment, if any, and the maximum interest rate or payment over the life of the loan.

(vi) A statement of whether or not part of the new payment will be allocated to pay the loan principal and a statement of the payment required to fully amortize the loan at the new interest rate over the remainder of the loan term or to fully amortize the loan without extending the loan term, if different from the new payment disclosed pursuant to paragraph (c)(2)(ii)(C) of this section.

(vii) A statement of the loan balance as of the date the interest rate change will become effective.

(3) Content of annual interest rate notice. The creditor shall provide the following information on the annual notice provided pursuant to paragraph (c)(1)(ii) of this section, as applicable:

(i) The specific time period covered by the disclosure, and a statement that the interest rate on the loan has changed during the past year without changing required payments.

(ii) The highest and lowest interest rates that applied during the period specified under paragraph (c)(3)(i) of this section.

(iii) Any foregone increase in the interest rate or application of previously foregone interest.

(iv) The maximum interest rate that may apply over the life of the loan.

(v) A statement of the loan balance as of the last day of the time period required to be disclosed by paragraph (c)(3)(i) of this section.

(4) Additional information. In addition to the disclosures provided under paragraph (c)(2) or (c)(3) of this section, the creditor shall provide the following information:

(i) If the creditor may impose a penalty if the obligation is prepaid in full, a statement of the circumstances under which and period in which the creditor may impose the penalty and the amount of the maximum penalty possible during the period between the date the creditor delivers or mails the disclosures required by this paragraph

(c) and the last day the creditor may impose the penalty.

(ii) A telephone number the consumer may call to obtain additional information about the consumer's loan.

(iii) A telephone number and Internet Web site for housing counseling resources maintained by the Department of Housing and Urban

Development.

(5) Format of disclosures. (i) The disclosures required by this paragraph (c) shall be provided in the form of tables with headings, content and format substantially similar to Form H-4(G) in Appendix H to this part, where an interest rate adjustment is accompanied by a payment change, or Form H-4(K) in Appendix H to this part, where a creditor provides an annual notice of interest rate adjustments without an accompanying payment change. The disclosures required by paragraph

(c)(2) or (c)(3) of this section shall be grouped together with the disclosures required by paragraph (c)(4) of this section, and shall be in a prominent location.

(ii) The disclosures required by paragraph (c)(2)(i) or paragraph

(c)(3)(i) of this section shall precede the other disclosures required by paragraph (c)(2) or (c)(3). The disclosures required by paragraph

(c)(4) shall be located directly beneath the disclosures required by paragraph (c)(2) or (c)(3).

(iii) The disclosures required by paragraph (c)(2)(ii) shall be in the form of a table with headings, content, and format substantially similar to Form H-4(G) in Appendix H to this part. The disclosures required by paragraphs (c)(2)(iii) through (c)(2)(vii) of this section shall be located directly below the table required by paragraph

(c)(2)(ii).

(d) Periodic statement. (1) Timing and content of disclosures. If a mortgage transaction secured by real property or a dwelling provides a consumer with multiple payment options that include a payment that results in negative amortization, for each period after consummation and not later than fifteen days before payment is due, subject to paragraph (c) of this section, the creditor shall mail or deliver to the consumer a periodic statement that discloses the following information, as applicable:

(i) Payment. Based on the interest rate in effect at the time the disclosure is made, the payment amount required to--

(A) Pay off the loan balance in full by the end of the term through regular

Continued on page 43331

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

]

pp. 43331-43380

Truth in Lending

Continued from page 43330

Page 43331

periodic payments without a balloon payment, with a statement that the payment is ``recommended to reduce loan balance,'' using that term;

(B) Prevent negative amortization, if the legal obligation explicitly permits the consumer to elect to pay interest only without paying principal; and

(C) Pay the minimum amount required under the legal obligation.

(ii) Effects. A statement of the interest and principal, if any, covered by the payment amounts disclosed under paragraph (d)(1)(i) of this section, a statement describing the effects of making such payments, and the earliest date payments at a higher level may be due.

(iii) Unpaid interest. The amount that will be added to the loan balance each period due to unpaid interest.

(2) Format of disclosures. (i) Form of a table. The disclosures required by paragraph (d)(1) of this section shall be in the form of a table with headings, content and format substantially similar to Form

H-4(L) in Appendix H to this part.

(ii) Location of disclosures. The disclosures required by this paragraph (d) shall be placed in a prominent location, except that if the disclosures are made concurrently with the disclosures required by paragraph (c) of this section, the disclosures required by paragraph

(c) shall precede the disclosures required by this paragraph (d).

(iii) Segregation of disclosures. The table described in paragraph

(d)(2)(i) of this section shall contain only the information required by paragraph (d)(1). Other information may be presented with the table, provided such information appears outside the required table.

(e) Creditor-placed property insurance. (1) ``Creditor-placed property insurance'' means property insurance coverage obtained by the creditor when the property insurance required by the credit agreement has lapsed.

(2) A creditor may not charge a consumer for obtaining property insurance on property securing a credit transaction, unless:

(i) The creditor has made a reasonable determination that the required property insurance has lapsed;

(ii) The creditor has mailed or delivered a written notice to the consumer with the disclosures set forth in paragraph (e)(3) of this section at least 45 days before a charge is imposed on the consumer for creditor-placed property insurance; and

(iii) During the 45-day notice period, the consumer has not provided the creditor with evidence of adequate property insurance.

(3) The creditor must provide the following information, clearly and conspicuously, on the notice required in paragraph (e)(2)(ii) of this section:

(i) The creditor's name and contact information, the loan number, and the address or description of the property securing the credit transaction;

(ii) That the consumer is obligated to maintain property insurance on the property securing the credit transaction;

(iii) That the required property insurance has lapsed;

(iv) That the creditor is authorized to obtain the property insurance on the consumer's behalf;

(v) The date the creditor can charge the consumer for the cost of creditor-placed property insurance;

(vi) How the consumer may provide evidence of property insurance;

(vii) The cost of creditor-placed property insurance stated as an annual premium, and that this premium is likely significantly higher than a premium for property insurance purchased by the consumer; and

(viii) That creditor-placed property insurance may not provide as much coverage as homeowner's insurance.

(4) Within 15 days after a creditor charges the consumer for creditor-placed property insurance, the creditor must mail or deliver to the consumer a copy of the individual policy, certificate or other evidence of the creditor-placed property insurance.[ltrif]

Subpart E--Special Rules for Certain Home Mortgage Transactions 8. Section 226.32 is amended by revising paragraphs (b)(1), (c)(1), and (c)(5), to read as follows:

Sec. 226.32 Requirements for certain closed-end home mortgages.

* * * * *

(b) * * *

(1) For purposes of paragraph (a)(1)(ii) of this section, points and fees means [rtrif]all items included in the finance charge, pursuant to Sec. 226.4, except interest or the time-price differential.[ltrif] [:]

(i) All items required to be disclosed under Sec. 226.4(a) and 226.4(b), except interest or the time-price differential;

(ii) All compensation paid to mortgage brokers;

(iii) All items listed in Sec. 226.4(c)(7) (other than amounts held for future payment of taxes) unless the charge is reasonable, the creditor receives no direct or indirect compensation in connection with the charge, and the charge is not paid to an affiliate of the creditor; and

(iv) Premiums or other charges for credit life, accident, health, or loss-of-income insurance, or debt-cancellation coverage (whether or not the debt-cancellation coverage is insurance under applicable law) that provides for cancellation of all or part of the consumer's liability in the event of the loss of life, health, or income or in the case of accident, written in connection with the credit transaction.]

* * * * *

(c) * * *

(1) Notices. The following statement [rtrif]in bold text and minimum 10-point font[ltrif]: [``You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.''][rtrif]``If you are unable to make the payments on this loan, you could lose your home. You have no obligation to accept this loan.

Your signature below only confirms that you have received this form.''[ltrif]

* * * * *

(5) Amount borrowed. For a mortgage refinancing, the total amount the consumer will borrow, as reflected by the [face] amount of the note

rtrif or other loan agreement[ltrif]; and where the amount borrowed includes premiums or other charges for optional credit insurance or debt-cancellation [rtrif]or debt suspension[ltrif] coverage, that fact shall be stated, grouped together with the disclosure of the amount borrowed. The disclosure of the amount borrowed shall be treated as accurate if it is not more than $100 above or below the amount required to be disclosed.

* * * * * 9. Section 226.36, as added on July 30, 2008 (73 FR 44604), is amended by:

A. Revising the section heading,

B. Revising paragraph (a),

C. Revising paragraphs (b)(1) introductory text, (b)(1)(i)(A) through (D), (b)(1)(ii)(A) and (D), and (b)(2),

D. Revising the introductory text of paragraph (c)(1),

E. Redesignating paragraph (d) as paragraph (f), and

F. Adding new paragraphs (d) and (e).

The additions and revisions read as follows:

Sec. 226.36 Prohibited acts or practices in connection with credit secured by [rtrif]real property or a dwelling[ltrif] [a consumer's principal dwelling].

(a) [rtrif]Loan originator and[ltrif] mortgage broker defined.

rtrif

(1) Loan originator. For purposes of this section, the term

``loan originator'' means with respect to

Page 43332

a particular transaction, a person[ltrif] [For purposes of this section

``mortgage broker'' means a person, other than an employee of a creditor,] who for compensation or other monetary gain, or in expectation of compensation or other monetary gain, arranges, negotiates, or otherwise obtains an extension of consumer credit for another person. [The term includes a person meeting this definition, even if the consumer credit obligation is initially payable to such person, unless the person provides] [rtrif]The term ``loan originator'' includes employees of the creditor. The term includes the creditor if the creditor does not provide[ltrif] the funds for the transaction at consummation out of the [rtrif]creditor's[ltrif] [person's] own resources, out of deposits held by the [rtrif]creditor[ltrif] [person], or by drawing on a bona fide warehouse line of credit.

rtrif

(2) Mortgage broker. For purposes of this section, a mortgage broker with respect to a particular transaction is any loan originator that is not an employee of the creditor.[ltrif]

(b) Misrepresentation of value of consumer's dwelling--(1) Coercion of appraiser. In connection with a consumer credit transaction secured by [rtrif]real property or[ltrif] a [consumer's principal] dwelling, no creditor or mortgage broker, and no affiliate of a creditor or mortgage broker, shall directly or indirectly coerce, influence, or otherwise encourage an appraiser to misstate or misrepresent the value of such dwelling.

(i) * * *

(A) Implying to an appraiser that current or future retention of the appraiser depends on the amount at which the appraiser values a

consumer's principal

dwelling;

(B) Excluding an appraiser from consideration for future engagement because the appraiser reports a value of a [consumer's principal] dwelling that does not meet or exceed a minimum threshold;

(C) Telling an appraiser a minimum reported value of a [consumer's principal] dwelling that is needed to approve the loan;

(D) Failing to compensate an appraiser because the appraiser does not value a [consumer's principal] dwelling at or above a certain amount; and

* * * * *

(ii) * * *

(A) Asking an appraiser to consider additional information about a

consumer's principal

dwelling or about comparable properties;

* * * * *

(D) Obtaining multiple appraisals of a [consumer's principal] dwelling, so long as the creditor adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value;

* * * * *

(2) When extension of credit prohibited. In connection with a consumer credit transaction secured by [rtrif]real property or[ltrif] a

consumer's principal

dwelling, a creditor who knows, at or before loan consummation, of a violation of paragraph (b)(1) of this section in connection with an appraisal shall not extend credit based on such appraisal unless the creditor documents that it has acted with reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the value of such dwelling.

* * * * *

(c) Servicing practices. (1) In connection with a consumer credit transaction secured by [rtrif]real property or[ltrif] a [consumer's principal] dwelling, no servicer shall--

* * * * *

ALTERNATIVE 1--PARAGRAPH (d).

rtrif

(d) Prohibited payments to loan originators. (1) Payments based on transaction terms and conditions. In connection with a consumer credit transaction secured by real property or a dwelling, no loan originator shall receive and no person shall pay to a loan originator, directly or indirectly, compensation in an amount that is based on any of the transaction's terms or conditions. For purposes of this paragraph, the principal amount of credit extended is deemed to be a transaction term. This paragraph (d)(1) shall not apply to any transaction in which paragraph (d)(2) of this section applies.

(2) Payments by persons other than consumer. If a loan originator receives compensation directly from the consumer in a transaction secured by real property or a dwelling:

(i) The loan originator shall not receive compensation, directly or indirectly, from any person other than the consumer in connection with the transaction; and

(ii) No person who knows or has reason to know of the consumer-paid compensation to the loan originator, other than the consumer, shall pay any compensation to the loan originator, directly or indirectly, in connection with the transaction.

(3) Affiliates. For purposes of paragraph (d) of this section, affiliated entities shall be treated as a single ``person.''[ltrif]

ALTERNATIVE 2--PARAGRAPH (d).

rtrif

(d) Prohibited payments to loan originators. (1) Payments based on terms and conditions. In connection with a consumer credit transaction secured by real property or a dwelling, no loan originator shall receive and no person shall pay to a loan originator, directly or indirectly, compensation in an amount that is based on any of the transaction's terms or conditions. For purposes of this paragraph the principal amount of credit extended is not deemed to be a transaction term or condition. This paragraph (d)(1) shall not apply to any transaction in which paragraph (d)(2) applies.

(2) Payments by persons other than consumer. If a loan originator receives compensation directly from the consumer in a transaction secured by real property or a dwelling:

(i) The loan originator shall not receive compensation, directly or indirectly, from any person other than the consumer in connection with the transaction; and

(ii) No person who knows or has reason to know of the consumer-paid compensation to the loan originator, other than the consumer, shall pay any compensation to the loan originator, directly or indirectly, in connection with the transaction.

(3) Affiliates. For purposes of paragraph (d) of this section, affiliated entities shall be treated as a single ``person.''[ltrif]

OPTIONAL PROPOSAL--PARAGRAPH (e).

rtrif

(e) Prohibition on steering. (1) General. In connection with a credit transaction secured by real property or a dwelling, a loan originator shall not direct or ``steer'' a consumer to consummate a transaction based on the fact that the originator will receive greater compensation from the creditor in that transaction than in other transactions the originator offered or could have offered to the consumer, unless the transaction is in the consumer's interest.

(2) Permissible transactions. A transaction does not violate paragraph (e)(1) of this section if the loan was chosen by the consumer from at least three loan options for each type of transaction in which the consumer expressed an interest, and the conditions specified in paragraph (e)(3) of this section are met. For purposes of paragraph (e) of this section, the phrase ``type of transaction'' refers to whether a loan has:

(i) An annual percentage rate that cannot increase after consummation, or

(ii) An annual percentage rate that may increase after consummation.

(3) Loan options presented. A transaction satisfies paragraph

(e)(2) of this section only if the loan originator

Page 43333

presents the loan options required by that paragraph and all of the following conditions are met:

(i) The loan originator obtains loan options from a significant number of the creditors with which the originator regularly does business and, for each type of transaction in which the consumer expressed an interest the originator must present and permit the consumer to choose from at least three loans that include:

(A) The loan with the lowest interest rate;

(B) The loan with the second lowest interest rate; and

(C) The loan with the lowest total dollar amount for origination points or fees and discount points, as offered by the creditors.

(ii) The loan originator must have a good faith belief that the options presented to the consumer pursuant to paragraph (e)(3)(i) of this section are loans for which the consumer likely qualifies.

(iii) For each type of transaction, if the originator presents to the consumer more than three loans, the originator must highlight the loans that satisfy the criteria specified in paragraph (e)(3)(i) of this section.[ltrif]

rtrif

(f)[ltrif] [(d)] This section does not apply to a home equity line of credit subject to Sec. 226.5b. 10. A new Sec. 226.37 is added to Subpart E to read as follows:

rtrif

Sec. 226.37 Special disclosure requirements for closed-end mortgages.

(a) Form of disclosures--(1) General. The creditor shall make the disclosures required by Sec. Sec. 226.19, 226.20(c), 226.20(d) and 226.38 clearly and conspicuously in writing, in a form that the consumer may keep.

(2) Grouped and segregated. The disclosures required by Sec. 226.19, as applicable, Sec. 226.20(c), Sec. 226.20(d), or Sec. 226.38 shall be grouped together and segregated from everything else, except as provided in paragraph (b) of this section, and shall not contain any information not directly related to the disclosures required under Sec. Sec. 226.19, 226.20(c), 226.20(d), or 226.38, except:

(i) The disclosures may include the date of the transaction and the consumer's name, address, and account number; and

(ii) The following disclosures may be made together with or separately from other required disclosures under Sec. 226.38: the tax deductibility disclosure under Sec. 226.38(f)(4); and insurance, debt cancellation, or debt suspension disclosure under Sec. 226.38(h).

(b) Separate disclosures. The following disclosures must be provided separately from other required disclosures under Sec. 226.38: itemization of amount financed under Sec. 226.38(j)(1); rebate under

Sec. 226.38(j)(2); late payment under Sec. 226.38(j)(3); property insurance under Sec. 226.38(j)(4); contract reference under Sec. 226.38(j)(5); and assumption under Sec. 226.38(j)(6).

(c) Terminology. (1) Terminology used in providing the disclosures required by Sec. Sec. 226.19, 226.20(c), 226.20(d) and 226.38 shall be consistent.

(2) The term annual percentage rate, when required to be disclosed under Sec. 226.38(b)(1) together with a corresponding percentage rate, shall be more conspicuous than any other required disclosure, disclosed in at least a 16-point font, and be placed in a prominent location and in close proximity to a scaled graph in accordance with the requirements under Sec. 226.38(b)(2).

(d) Specific formats. (1) The disclosures required by Sec. 226.38(a)(1) through (5) shall be provided in accordance with the requirements of Sec. 226.38(a), and precede all other disclosures, except the identification required by Sec. 226.38(g) and the disclosures permitted under paragraph (a)(2)(i) of this section;

(2) The disclosures required by Sec. 226.38(b)(2) shall be provided in the form of a graph with shading, scaling and content in accordance with the requirements of Sec. 228.38(b)(2), placed in a prominent location and in close proximity to the disclosures required by Sec. Sec. 226.38(b)(1), 226.38(b)(3) and 226.38(b)(4);

(3) The disclosures required by Sec. 226.38(c), as applicable, shall be provided in a tabular format in accordance with the requirements of Sec. 226.38(c), and placed in a prominent location;

(4) The disclosure required by Sec. 226.38(c)(2)(iii) shall be outlined in a box and placed directly beneath the table required by

Sec. 226.38(c)(1) in accordance with the requirements of Sec. 226.38(c)(2)(iii);

(5) The disclosures required by Sec. 226.38(d) shall be provided in a question and answer format in a tabular format in accordance with the requirements of Sec. 226.38(d), and shall not precede the disclosures required by Sec. 226.38(a) through (c).

(6) The disclosures required by Sec. 226.38(e) shall be provided in a tabular format in accordance with the requirements of Sec. 226.38(e), and precede any information not directly related to the disclosures required by Sec. 226.38.

(7) The disclosures required by Sec. 226.38(f) shall be provided in accordance with the requirements of Sec. 226.38(f), and precede the disclosures required by Sec. 226.38(j).

(8) The loan program disclosures required by Sec. 226.19(b) for an adjustable-rate mortgage shall be provided in a tabular format in accordance with the requirements of Sec. 226.19(b).

(9) The disclosures required by Sec. 226.20(c)(2)-(4) for an adjustable-rate adjustment notice shall be provided in a tabular format in accordance with the requirements of Sec. 226.20(c)(2)-(5).

(10) The disclosures required by Sec. 226.20(d)(1) for loans with negative amortization shall be provided in a tabular format in accordance with the requirements of Sec. 226.20(d).

(e) Electronic disclosures. The disclosures required by Sec. 226.38 may be provided to the consumer in electronic form in accordance with the requirements under Sec. 226.17(a)(1).[ltrif] 11. A new Sec. 226.38 is added to Subpart E to read as follows:

rtrif

Sec. 226.38 Content of disclosures for closed-end mortgages.

In connection with a closed-end transaction secured by real property or a dwelling, the creditor shall disclose the following information:

(a) Loan summary. A separate section, labeled ``Loan Summary.''

(1) Loan amount. The principal amount the consumer will borrow as reflected in the loan contract.

(2) Loan term. The period of time to repay the obligation in full.

(3) Loan type and features. The loan types and loan features described in this section.

(i) Loan type. The loan type, as applicable:

(A) Adjustable-rate mortgage. If the annual percentage rate may increase after consummation, the creditor shall disclose that the loan is an ``adjustable-rate mortgage,'' using that term.

(B) Step-rate mortgage. If the interest rate will change after consummation, and the rates and periods in which they will apply are known, the creditor shall disclose that the loan is a ``step-rate mortgage,'' using that term.

(C) Fixed-rate mortgage. If the transaction is not an adjustable- rate mortgage or a step-rate mortgage, the creditor shall disclose that the loan is a ``fixed-rate mortgage,'' using that term.

(ii) Loan features. No more than two loan features, as applicable:

(A) Step-payments. If, under the terms of the legal obligation, the regular periodic payments will gradually increase by a set amount at predetermined times, the creditor shall disclose that the loan has a

``step-payment'' feature, using that term; and

Page 43334

(B) Payment option. If, under the terms of the legal obligation, the consumer may choose to make one or more regular periodic payments that may cause the loan balance to increase, the creditor shall disclose that the loan has a ``payment option'' feature, using that term;

(C) Negative amortization. If, under the terms of the legal obligation, the regular periodic payments will cause the loan balance to increase and the loan is not a loan described in paragraphs

(a)(3)(ii)(B) or (a)(3)(ii)(D) of this section, the creditor shall disclose that the loan has a ``negative amortization'' feature, using that term; or

(D) Interest-only payments. If, under the terms of the legal obligation, one or more regular periodic payments may be applied to interest accrued only and not to loan principal, and the loan is not a loan described in paragraphs (a)(3)(ii)(A) or (a)(3)(ii)(B) of this section, the creditor shall disclose that the loan has an ``interest- only payment'' feature, using that term.

(4) Total settlement charges. The ``total settlement charges,'' using that term, as disclosed under Regulation X, 12 CFR part 3500. As applicable, a statement of the amount of the charges already included in the loan amount and a statement that the total does not include a down payment, with a reference to the Good Faith Estimate or HUD-1 for details.

(5) Prepayment penalty. If the obligation includes a finance charge computed from time to time by application of a rate to the unpaid principal balance and permits the creditor to impose a penalty if the obligation is prepaid in full, a statement indicating the amount of the maximum penalty and the circumstances and period in which the creditor may impose the penalty.

(6) Form of disclosures; tabular format. The disclosures required by paragraphs (a)(1) through (5) of this section shall be in the form of a table, with headings, content and format substantially similar to

Forms H-19(A), H-19(B), or H-19(C) in Appendix H to this part. The table shall contain only the information required or permitted by paragraphs (a)(1) through (5).

(b) Annual percentage rate. The disclosures specified in paragraph

(b)(1)-(4) of this section shall be grouped together with headings, content and format substantially similar to Forms H-19(A), H-19(B), or

H-19(C) in Appendix H to this part.

(1) The ``annual percentage rate,'' using that term, and the following description: ``overall cost of this loan including interest and settlement charges.''

(2) A graph depicting the annual percentage rate (APR) disclosed under paragraph (b)(1) of this section and how it relates to a range of rates including the average prime offer rate as defined in Sec. 226.35(a)(2) for the week in which the disclosure required under this section is provided, and the higher-priced mortgage loan threshold as defined in Sec. 226.35(a)(1).

(i) The graph shall consist of a horizontal line or axis, with a shaded bar extending above and below the line. The horizontal axis shall be used to depict a range of APRs and the shaded bar shall use lighter shading on the left and darker shading on the right to distinguish between the rates on the graph that are below and above the

APR representing the higher-priced mortgage loan threshold.

(ii) The lighter shaded area shall comprise the first two-thirds of the graph to represent the rates that are below the higher-priced mortgage loan threshold. On the horizontal axis, a range of APRs shall be plotted in the lighter shaded area, starting with the average prime offer rate depicted as the lowest APR on the left, and increasing in increments of .50 percentage points, up to the APR that is the higher- priced mortgage loan threshold. The average prime offer rate shall be plotted as the lowest APR on the horizontal axis and shall be labeled as ``Average Best APR'' or ``Avg. Best APR.''

(iii) The darker shaded area to the right side of the APR representing the higher-priced mortgage loan threshold shall comprise the last third of the graph, shall contain the words ``high cost zone'' and the APR that is 4 percentage points higher than the higher-priced mortgage threshold shall be plotted as the highest APR on the horizontal axis. Ellipses shall separate the APR representing the higher-priced mortgage threshold and the highest APR on the graph.

(iv) The graph shall include the APR disclosed under paragraph

(b)(1) of this section and:

(A) Identify its location on the horizontal axis, which shall be labeled ``this loan: ----% APR,'' or

(B) If the APR disclosed under paragraph (b)(1) exceeds the highest

APR on the axis, identify its location beyond the rightmost edge of the shaded graph, or

(C) If the APR disclosed under paragraph (b)(1) is below the average prime offer rate, identify its location beyond the leftmost edge of the shaded graph.

(v) The lighter and darker shaded areas shall each extend past the lowest and highest APRs depicted on the axis, with a left pointing arrow to the left of lowest APR and a right-pointing arrow to the right of the highest APR.

(3) A statement of the average prime offer rate as defined in Sec. 226.35(a)(2), and the higher-priced mortgage loan threshold, as defined in Sec. 226.35(a)(1), current as of the week the disclosure is produced.

(4) The average per-period savings from a 1 percentage point reduction in the APR, which shall be calculated as follows:

(i) Reduce the interest rate by 1 percentage point and compute the total of payments that would result from the reduced interest rate;

(ii) Compute the difference between the total of payments in paragraph (b)(4)(i) of this section and the total of payments for the loan disclosed under Sec. 226.38(e)(5)(i), and divide the difference by the total number of payments required to pay the loan off by its maturity.

(5) Exemptions. The following transactions are exempt from the disclosures required under paragraphs (b)(2) and (b)(3) of this section:

(i) A transaction to finance the initial construction of a dwelling;

(ii) A temporary or ``bridge'' loan with a term of twelve months or less, such as a loan to purchase a new dwelling where the consumer plans to sell a current dwelling within twelve months; and

(iii) A reverse-mortgage transaction subject to Sec. 226.33.

(c) Interest rate and payment summary. The creditor shall disclose the following information about the interest rate and periodic payments:

(1) The information in paragraphs (c)(2)-(4) of this section shall be in the form of a table, with no more than five columns, with headings, content and format substantially similar to Forms H-19(A), H- 19(B), or H-19(C) in Appendix H to this part. The table shall contain only the information required in paragraphs (c)(2)-(4).

(2) Interest rates--(i) Amortizing loans. (A) For fixed-rate mortgages, the interest rate at consummation.

(B) For an adjustable-rate mortgage or a step-rate mortgage--

(1) The interest rate at consummation and the period of time until the first interest rate adjustment, labeled as the ``introductory rate and monthly payment'';

(2) The maximum possible interest rate at the first scheduled interest rate adjustment and the date on which the

Page 43335

adjustment will occur, labeled as ``maximum at first adjustment''; and

(3) The maximum possible interest rate at any time and the earliest date on which that rate may apply, labeled as ``maximum ever.''

(C) If the loan provides for payment increases in paragraph

(c)(3)(i)(B) of this section, the interest rate in effect at the time the first payment increase is scheduled to occur and the date on which the increase will occur.

(ii) Negative amortization loans. The creditor shall disclose--

(A) The interest rate at consummation and if it will adjust after consummation, the length of time until it will adjust and the label

``introductory'';

(B) The maximum possible interest rate that could apply when the consumer must begin making fully amortizing payments under the terms of the legal obligation;

(C) If the minimum required payment will increase before the consumer must begin making fully amortizing payments, the maximum possible interest rate that would be in effect at the first payment increase and the date the increase is scheduled to occur; and

(D) If a second payment increase in the minimum required payment may occur before the consumer must begin making fully amortizing payments, the maximum possible interest rate that would in effect at the second payment increase and the date the increase is scheduled to occur.

(iii) Introductory rate disclosure for amortizing adjustable-rate mortgage. If the interest rate at consummation is less than the fully- indexed rate--

(A) The interest rate that applies at consummation and the period of time the interest rate applies;

(B) A statement that even if market rates do not change, the interest rate will increase at the first adjustment and the date of such rate adjustment; and

(C) The fully-indexed rate.

(3) Payments for amortizing loans--(i) Principal and interest payments. If all regular periodic payments will be applied to the interest accrued and the principal, for each interest rate disclosed under paragraph (c)(2)(i) of this section--

(A) The corresponding regular periodic payment of principal and interest, labeled as ``principal and interest;''

(B) If the regular periodic payment may increase without regard to an interest rate adjustment, the payment that corresponds to the first increase and the earliest date on which the increase could occur;

(C) That an escrow account is required, if applicable, and an estimate of the amount of taxes and insurance, including any mortgage insurance;

(D) The sum of the amounts disclosed under paragraph (c)(3)(i)(A)-

(C) of this section, with a description such as ``total estimated monthly payment.''

(ii) Interest-only payments. If the loan is an interest-only loan, for each interest rate disclosed under paragraph (c)(2)(i) of this section, the corresponding payment and--

(A) If the payment will be applied to only the interest accrued, the amount applied to interest and an indication that none of the payment is being applied to principal;

(B) If the payment will be applied to interest accrued and principal, the earliest date that payment will be required and the payment amount itemized by the amount applied to interest accrued and the amount applied to principal;

(C) The escrow information in paragraph (c)(3)(i)(C) of this section; and

(D) The sum of all amounts required to be disclosed under paragraph

(c)(3)(i)(A)-(C) of this section, with a description such as ``total estimated monthly payment.''

(4) Payments for negative amortization loans. (i) The minimum payment--

(A) Required until the first payment increase or interest rate increase;

(B) That would be due at the first payment increase and the second, if any, in paragraphs (c)(2)(ii)(C) and (D) of this section; and

(C) A statement that the minimum payment covers only some interest, does not cover any principal, and will cause the loan amount to increase.

(ii) The fully amortizing payment amount at the earliest time when such a payment must be made; and, if applicable,

(iii) In addition to the payments in paragraphs (c)(4)(i) and (ii) of this section, for each interest rate required under paragraph

(c)(2)(ii) of this section, the amount of the fully amortizing payment, labeled as the ``full payment option,'' and a statement that payments cover all principal and interest.

(5) Balloon payments. (i) Except as provided in paragraph

(c)(5)(ii) of this section, if the transaction will require a balloon payment, defined as a payment that is more than two times a regular periodic payment, the balloon payment must be disclosed separately from other regular periodic payments disclosed under this paragraph (c), in a manner substantially similar to Model Clause H-20 in Appendix H to this part.

(ii) If the balloon payment is scheduled to occur at the same time as another required payment in paragraph (c)(3) or (c)(4) of this section, then the balloon payment must be disclosed in the table.

(6) Special disclosures for loans with negative amortization. The following information, in close proximity to the table required in paragraph (c)(1) of this section, with headings, content and format substantially similar to Form H-19(C) in Appendix H to this part:

(i) The maximum possible interest rate, the period of time in which the interest rate could reach its maximum, the amount of estimated taxes and insurance included in each payment disclosed, and a statement that the loan offers payment options, two of which are shown.

(ii) The dollar amount of the increase in the loan's principal balance if the consumer makes only the minimum required payments for the maximum possible time, and the earliest date on which the consumer must make a fully amortizing payment, assuming that the interest rate reaches its maximum at the earliest possible time.

(7) Definitions. For the purposes of this paragraph (c):

(i) The terms ``adjustable-rate mortgage,'' ``step-rate mortgage,''

``fixed-rate mortgage,'' and ``interest-only'' shall have the meaning given to them in paragraphs (a)(3)(i) and (a)(3)(ii)(D) of this section;

(ii) The term ``amortizing loan'' means a loan in which the regular periodic payments cannot cause the principal balance to increase under the terms of the legal obligation; the term ``negative amortization'' means a loan in which the regular periodic payments may or will cause the principal balance to increase under the terms of the legal obligation; and

(iii) The term ``fully indexed rate'' means the interest rate calculated using the index value and margin at the time of consummation.

(d) Key questions about risk. The creditor shall disclose the information required in paragraphs (d)(1) and (d)(2) of this section, grouped together under the heading ``Key Questions About Risk,'' using that term:

(1) Required disclosures. The creditor shall disclose the following information--

(i) Rate increases. A statement indicating whether or not the interest rate on the loan may increase. If the interest rate on the loan may increase, a statement indicating the frequency with which the interest rate may increase and the date on which the first interest rate increase may occur.

(ii) Payment increases. A statement indicating whether or not the periodic payment on the loan may increase. If the

Page 43336

periodic payment on the loan may increase, a statement indicating the date on which the first payment increase may occur. For a payment option loan, if the periodic payment on the loan may increase, statements indicating the dates on which the full and minimum payments may increase.

(iii) Prepayment penalty. If the obligation includes a finance charge computed from time to time by application of a rate to the unpaid principal balance, a statement indicating whether or not a penalty will be imposed if the obligation is prepaid in full. If the creditor may impose a prepayment penalty, a statement of the circumstances under which and period in which the creditor may impose the penalty and the amount of the maximum penalty.

(2) Additional disclosures. The creditor shall disclose the following information, as applicable--

(i) Interest-only payments. A statement that periodic payments will be applied only toward interest on the loan, along with a statement of any limitation on the number of periodic payments that will be applied only toward interest on the loan, that such payments will cover the interest owed each month, but none of the principal, and that making these periodic payments means the loan amount will stay the same and the consumer will not have paid any of the loan amount. For payment- option loans, a statement that the loan gives the consumer the choice to make periodic payments that cover the interest owed each month, but none of the principal, and that making these periodic payments means the loan amount will stay the same and the consumer will not have paid any of the loan amount.

(ii) Negative amortization. A statement that the loan balance may increase even if the consumer makes the periodic payments, along with a statement that the minimum payment covers only a part of the interest the consumer owes each period and none of the principal, that the unpaid interest will be added to the consumer's loan amount, and that over time this will increase the total amount the consumer is borrowing and cause the consumer to lose equity in the home.

(iii) Balloon payment. A statement that the consumer will owe a balloon payment, along with a statement of the amount that will be due and the date on which it will be due.

(iv) Demand feature. A statement that the creditor may demand full repayment of the loan, along with a statement of the timing of any advance notice the creditor will give the consumer before the creditor exercises such right.

(v) No-documentation or low-documentation loans. A statement that the consumer's loan will have a higher rate or fees because the consumer did not document employment, income or other assets, along with a statement that if the consumer provides more documentation, the consumer could decrease the interest rate or fees.

(vi) Shared-equity or shared-appreciation. A statement that any future equity or appreciation in the real property or dwelling that secures the loan must be shared, along with a statement of the percentage of equity or appreciation to which the creditor is entitled, and the events that may trigger such obligation.

(3) Format requirements. (i) Form of disclosures; tabular format.

The creditor shall provide the disclosures required by paragraphs

(d)(1) and (2) of this section, as applicable, in the form of a table with headings, content and format substantially similar to Forms H- 19(A), H-19(B), or H-19(C) in Appendix H to this part. The table shall contain only the information required or permitted by paragraphs (d)(1) and (2).

(ii) Question and answer format. The creditor shall provide the disclosures required by paragraphs (d)(1) through (d)(2) of this section grouped together and presented in the format of question and answer, in a manner substantially similar to Forms H-19(A), H-19(B), or

H-19(C) in Appendix H to this part.

(iii) Highlighting. Each affirmative answer for a feature required to be disclosed under paragraphs (d)(1) and (2) of this section shall be disclosed in bold text and in all capitalized letters. Any negative answer shall be in nonbold text.

(iv) Order. The disclosures shall be provided, as applicable, in the following order: rate increases under Sec. 226.38(d)(1)(i), payment increases under Sec. 226.38(d)(1)(ii), interest-only payments under Sec. 226.38(d)(2)(i), negative amortization under Sec. 226.38(d)(2)(ii), balloon payment under Sec. 226.38(d)(2)(iii), prepayment penalty under Sec. 226.38(d)(1)(iii), demand feature under

Sec. 226.38(d)(2)(iv), no-documentation or low-documentation loans under Sec. 226.38(d)(2)(v), and shared-equity or shared-appreciation under Sec. 226.38(d)(2)(vi).

(e) Information about payments. A creditor shall disclose the following information, grouped together under the heading ``More

Information About Your Payments'':

(1) Rate calculation. For an adjustable-rate mortgage, a statement labeled ``Rate Calculation'' that describes the method used to calculate the interest rate and the frequency of interest rate adjustments. If the interest rate that applies at consummation is not based on the index and margin that will be used to make later interest rate adjustments, the statement must include the time period when the initial interest rate expires.

(2) Rate and payment change limits. (i) For an adjustable-rate mortgage, any limitations on the increase in the interest rate labeled in bold type ``Rate Change Limits,'' together with a statement of the maximum rate that may apply pursuant to such limitations during the transaction's term to maturity.

(ii) If the regular periodic payment required under the terms of the legal obligation may cause the principal balance to increase, any limitations on the increase in the minimum payment amount and an identification of the circumstances under which the minimum required payment may recast to a fully amortizing payment labeled, in bold type,

``Payment Change Limits.''

(3) Escrow. If applicable, a statement, labeled in bold type

``Escrow,'' that explains that an escrow account is required for property taxes and insurance, that the escrow payment is an estimate that can change at any time, and that the consumer should consult the good faith estimate of settlement costs and HUD-1 settlement statement for more details. If no escrow is required, a statement of that fact and that the consumer will have to pay property taxes, homeowners', and other insurance directly.

(4) Mortgage insurance. If applicable, a statement, labeled in bold type, ``Private Mortgage Insurance,'' that private mortgage insurance is required and, if applicable, whether such insurance is included in any escrow account. If other mortgage insurance is required, for example, for a transaction insured by a government entity, the statement shall be labeled, in bold type, ``Mortgage Insurance.''

(5) Total payments. A creditor shall disclose the following information, grouped together under the subheading ``Total Payments,'' using that term:

(i) Total payments. The total payments amount, calculated based on the number and amount of scheduled payments in accordance with the requirements of Sec. 226.18(g), together with a statement that the total payments is calculated on the assumption that market rates do not change, if applicable, and that the consumer makes all payments as scheduled. The statement must also specify the total

Page 43337

number of payments and whether the total payments amount includes estimated escrow.

(ii) Interest and settlement charges. The interest and settlement charges, using that term, calculated as the finance charge in accordance with the requirements of Sec. 226.4 and expressed as a dollar figure, together with a brief statement that the interest and settlement charges amount represents part of the total payments amount.

The disclosed interest and settlement charges, and other disclosures affected by the disclosed interest and settlement charges (including the amount financed and annual percentage rate), shall be treated as accurate if the amount disclosed as the interest and settlement charges--

(A) Is understated by no more than $100;

(B) Is greater than the amount required to be disclosed.

(iii) Amount financed. The amount financed, using that term and expressed as a dollar figure, together with a brief statement that the interest and settlement charges and the amount financed are used to calculate the annual percentage rate. The amount financed is calculated by subtracting all prepaid finance charges from the loan amount required to be disclosed under Sec. 226.38(a)(1).

(6) Form of disclosures; tabular format. The creditor must provide the disclosures required by paragraphs (e)(1) through (5) of this section in the form of a table, with headings, content, and format substantially similar to Forms H-19(A), H-19(B), or H-19(C) in Appendix

H to this part. The table shall contain only the information required or permitted by paragraphs (e)(1) through (e)(5).

(f) Additional disclosures. The creditor shall disclose the following information, grouped together:

(1) No obligation statement. A statement that the consumer has no obligation to accept the loan. If the creditor provides space for a consumer's signature, a statement that a signature by the consumer only confirms receipt of the disclosure statement.

(2) Security interest. A statement that the consumer could lose the home if he or she is unable to make payments on the loan.

(3) No guarantee to refinance statement. A statement that there is no guarantee the consumer can refinance the transaction to lower the interest rate or monthly payments.

(4) Tax deductibility. For a transaction secured by a dwelling, if the extension of credit may exceed the fair market value of the dwelling, the creditor shall disclose that:

(i) The interest on the portion of the credit extension that is greater than the fair market value of the dwelling may not be tax deductible for Federal income tax purposes; and

(ii) The consumer should consult a tax adviser for further information regarding the deductibility of interest and charges.

(5) Additional information and Web site. A statement that if the consumer does not understand any disclosure required by this section the consumer should ask questions, a statement that the consumer may obtain additional information at the Web site of the Federal Reserve

Board, and a reference to that Web site.

(6) Format--(i) Location. The statements required by paragraph

(f)(1) of this section must be disclosed together. The disclosure required by paragraph (f)(2) of this section must be made together with the disclosure paragraph (f)(3) of this section. The statements required by paragraph (f)(5) of this section must be made together.

(ii) Highlighting. The first statement required to be disclosed by paragraphs (f)(1) and (f)(5) of this section, and the statement required to be disclosed by paragraph (f)(2), must be disclosed in bold text.

(iii) Form of disclosures. The creditor must provide the disclosures required by paragraphs (f)(1) through (5) of this section in a manner substantially similar to Forms H-19(A), H-19(B), or H-19(C) in Appendix H to this part.

(g) Identification of creditor and loan originator--(1) Creditor.

The identity of the creditor making the disclosures.

(2) Loan originator. The loan originator's unique identifier, as defined by the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 Sections 1503(3) and (12), 12 U.S.C. 5102(3) and (12).

(h) Credit insurance and debt cancellation and debt suspension coverage. The disclosures specified in paragraphs (h)(1)-(10) of this section, which shall be grouped together and substantially similar in headings, content and format to Model Clauses H-17(A) and H-17(C) in

Appendix H to this part.

(1)(i) If the product is optional, the term ``OPTIONAL COSTS,'' in capitalized and bold letters, along with the name of the program, in bold letters; or

(ii) If the product is required, the name of the program, in bold letters.

(2) If the product is optional, the term ``STOP,'' in capitalized and bold letters, along with a statement that the consumer does not have to buy the product to get the loan. The term ``not'' shall be in bold text and underlined.

(3) A statement that if the consumer already has insurance, then the policy or coverage may not provide the consumer with additional benefits.

(4) A statement that other types of insurance may give the consumer similar benefits and are often less expensive.

(5) (i) If the eligibility restrictions are limited to age and/or employment, a statement that based on the creditor's review of the consumer's age and/or employment status at this time, the consumer would be eligible to receive benefits.

(ii) If there are other eligibility restrictions in addition to age and/or employment, a statement that based on the creditor's review of the consumer's age and/or employment status at this time, the consumer may be eligible to receive benefits.

(6) If there are other eligibility restrictions in addition to age and/or employment, such as pre-existing health conditions, a statement that the consumer may not qualify to receive any benefits because of other eligibility restrictions.

(7) If the product is a debt suspension agreement, a statement that the obligation to pay loan principal and interest is only suspended, and that interest will continue to accrue during the period of suspension.

(8) A statement that the consumer may obtain additional information about the product at the Web site of the Federal Reserve Board, and reference to that Web site.

(9)(i) If the product is optional, a statement of the consumer's request to purchase or enroll in the optional product and a statement of the cost of the product expressed as a dollar amount per month or per year, as applicable, together with the loan amount and the term of the product in years; or

(ii) If the product is required, a statement that the product is required, along with a statement of the cost of the product expressed as a dollar amount per month or per year, as applicable, together with the loan amount and the term of the product in years.

(iii) The cost, month or year, loan amount, and term of the product shall be underlined.

(10) A designation for the signature of the consumer and the date of the signing.

(i) Required deposit. If the creditor requires the consumer to maintain a deposit as a condition of the specific transaction, a statement that the annual

Page 43338

percentage rate does not reflect the effect of the required deposit. A required deposit need not include:

(1) An escrow account for items such as taxes, insurance or repairs; or

(2) A deposit that earns not less than 5 percent per year.

(j) Separate disclosures. The following information must be provided separately from the other information required to be disclosed under this section.

(1) Itemization of amount financed. The creditor shall provide one of the following disclosures:

(i) A separate written itemization of the amount financed, including:

(A) The amount of any proceeds distributed directly to the consumer.

(B) The amount credited to the consumer's account with the creditor.

(C) Any amounts paid to other persons by the creditor on the consumer's behalf. The creditor shall identify those persons, except that the following payees may be described using general terms and need not be further identified: Public officials or government agencies, credit reporting agencies, appraisers, and insurance companies.

(D) The prepaid finance charge.

(ii) A statement that the consumer has the right to receive a written itemization of the amount financed, together with a space for the consumer to indicate whether it is desired. If the consumer requests it, the creditor shall provide an itemization that satisfies paragraph (j)(1)(i) of this section at the same time as the other disclosures required by this section.

(iii) A good faith estimate of settlement costs provided under the

Real Estate Settlement Procedures Act, 12 U.S.C. 2601 et seq. (RESPA), in connection with disclosures under this section delivered within three business days of application pursuant to Sec. 226.19(a)(1), or the HUD-1 settlement statement provided under RESPA, in connection with disclosures under this section delivered three business days before consummation pursuant to Sec. 226.19(a)(2). The alternative provided by this paragraph (j)(1)(iii) is available whether or not those disclosures are required by RESPA, but the HUD-1 settlement statement satisfies this requirement only if it is provided to the consumer at the time required by Sec. 226.19(a)(2).

(2) Rebate. If the obligation includes a finance charge other than one computed from time to time by application of a rate to the unpaid principal balance, a statement indicating whether or not the consumer is entitled to a rebate of any finance charge if the obligation is prepaid in full.

(3) Late payment. Any dollar or percentage charge that may be imposed before maturity due to a late payment, other than a deferral or extension charge.

(4) Property insurance. A statement that the consumer may obtain property insurance from any insurer that is acceptable to the creditor.

(5) Contract reference. A statement that the consumer should refer to the appropriate contract document for information about nonpayment, default, the right to accelerate the maturity of the obligation, and prepayment rebates and penalties. At the creditor's option, the statement may also include a reference to the contract for further information about security interests and about the creditor's policy regarding assumption of the obligation.

(6) Assumption policy. A statement whether or not a subsequent purchaser of the real property or dwelling from the consumer may be permitted to assume the remaining obligation on its original terms. 12. Appendix G to Part 226, as amended on January 29, 2009 (74 FR 5422) is amended by:

A. Adding entries for G-16(C) and G-16(D) to the table of contents at the beginning of the appendix; and

B. Adding new Model Clause G-16(C) and new Sample G-16(D) in numerical order.

Appendix G to Part 226--Open-End Model Forms and Clauses

* * * * *

rtrif

G-16(C) Credit Insurance, Debt Cancellation or Debt Suspension

Model Clause (Sec. 226.4(d)(1) and (d)(3))

G-16(D) Credit Insurance, Debt Cancellation or Debt Suspension Sample

(Sec. 226.4(d)(1) and (d)(3))[ltrif]

* * * * *

rtrif

G-16(C) Credit Insurance, Debt Cancellation or Debt Suspension

Model Clause

OPTIONAL COSTS

(Name of Program)

STOP. You do not have to buy this product to get this loan.

If you have insurance already, this policy may not provide you with any additional benefits.

Other types of insurance can give you similar benefits and are often less expensive.

Based on our review of your age and/or employment status at this time, you [would][may] be eligible to receive benefits.

However, you may not qualify to receive any benefits because of other eligibility restrictions.

To learn more about [credit insurance][debt cancellation coverage][debt suspension coverage], go to (Board's Web site).

ballot

Yes, I want to purchase optional (name of program) at an additional cost of (cost) per (month or year) for a loan of (loan amount) with a [policy/coverage] term of (term in years) years.

Signature of Borrower(s)

Date

G-16(D) Credit Insurance, Debt Cancellation or Debt Suspension Sample

OPTIONAL COSTS

Credit Life Insurance

STOP. You do not have to buy this product to get this loan.

If you have insurance already, this policy may not provide you with any additional benefits.

Other types of insurance can give you similar benefits and are often less expensive.

Based on our review of your age and/or employment status at this time, you may be eligible to receive benefits.

However, you may not qualify to receive any benefits because of other eligibility restrictions.

To learn more about credit insurance, go to http://www.xxx.gov.

ballot

Yes, I want to purchase optional credit life insurance at an additional cost of $72 per month for a loan of $100,000 with a policy term of 10 years.

Signature of Borrower(s)

Date[ltrif] 13. Appendix H to Part 226, as amended on January 29, 2009 (74

FR 5441) is amended by:

A. Revising the table of contents at the beginning of the appendix;

B. Republishing H-4(A);

C. Removing H-4(B), H-4(C) and H-4(D);

D. Republishing H-5;

E. Removing and reserving H-6;

F. Republishing H-7;

G. Removing and reserving H-13 through H-15;

H. Revising H-16; and

I. Adding new H-4(B) through H-4(L), H-17(C) and H-17(D), and H- 18 through H-23 in numerical order.

Appendix H to Part 226--Closed-End Model Forms and Clauses

* * * * *

H-4(A)--Variable-Rate Model Clauses (Sec. 226.18(f)[(1)])

H-4(B)--[Variable-Rate Model Clauses (Sec. 226.18(f)(2)][rtrif]Adjustable-Rate Loan Program Model Form (Sec. 226.19(b))[ltrif]

H-4(C)--[Variable-Rate Model Clauses (Sec. 226.19(b))][rtrif]Adjustable-Rate Loan Program Model Clauses (Sec. 226.19(b))[ltrif]

H-4(D)--[Variable-Rate Model Clauses (Sec. 226.20(c))][rtrif]Adjustable-Rate Loan Program Sample (Hybrid ARM)

(Sec. 226.19(b))[ltrif]

rtrif

H-4(E)--Adjustable-Rate Loan Program Sample (Interest Only

ARM) (Sec. 226.19(b))

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H-4(F)--Adjustable-Rate Loan Program Sample (Payment Option ARM)

(Sec. 226.19(b))

H-4(G)--Adjustable-Rate Adjustment Notice Model Form (Sec. 226.20(c))

H-4(H)--Adjustable-Rate Adjustment Notice Model Clauses (Sec. 226.20(c))

H-4(I)--Adjustable-Rate Adjustment Notice Sample (Interest Only ARM)

(Sec. 226.20(c))

H-4(J)--Adjustable-Rate Adjustment Notice Sample (Hybrid ARM) (Sec. 226.20(c))

H-4(K)--Adjustable-Rate Annual Notice Model Form (Sec. 226.20(c))

H-4(L)--Negative Amortization Monthly Disclosure Model Form (Sec. 226.20(d))[ltrif]

* * * * *

H-6--[Assumption Policy Model Clause (Sec. 226.18(q))][rtrif]Reserved[ltrif]

* * * * *

H-13--[Mortgage with Demand Feature Sample][rtrif]Reserved[ltrif]

H-14--[Variable-Rate Mortgage Sample (Sec. 226.19(b))][rtrif]Reserved[ltrif]

H-15--[Graduated-Payment Mortgage Sample][rtrif]Reserved[ltrif]

H-16--[Mortgage Sample (Sec. 226.32)][rtrif]Section 32 Loan Model

Clauses (Sec. 226.32(c))[ltrif]

* * * * *

rtrif

H-17(C)--Credit Insurance, Debt Cancellation or Debt

Suspension Model Clause (Sec. 226.4(d)(1), (d)(3) and Sec. 226.38(h))

H-17(D)--Credit Insurance, Debt Cancellation or Debt Suspension

Sample (Sec. 226.4(d)(1), (d)(3), and Sec. 226.38(h))

H-18--Creditor-Placed Property Insurance Model Clause (Sec. 226.20(e))

H-19(A)--Fixed Rate Mortgage Model Form (Sec. 226.38)

H-19(B)--Adjustable-Rate Mortgage Model Form (Sec. 226.38)

H-19(C)--Mortgage with Negative Amortization Model Form (Sec. 226.38)

H-19(D)--Fixed Rate Mortgage with Balloon Payment Sample (Sec. 226.38)

H-19(E)--Fixed Rate Mortgage with Interest Only Sample (Sec. 226.38)

H-19(F)--Step-Payment Mortgage Sample (Sec. 226.38)

H-19(G)--Hybrid Adjustable-Rate Mortgage Sample (Sec. 226.38)

H-19(H)--Adjustable-Rate Mortgage with Interest Only Sample (Sec. 226.38)

H-19(I)--Adjustable-Rate Mortgage with Payment Options Sample (Sec. 226.38)

H-20--Balloon Payment Model Clause (Sec. 226.38(c)(5))

H-21--Introductory Rate Model Clause (Sec. 226.38(c)(2)(iii))

H-22--Key Questions About Risk Model Clauses (Sec. 226.38(d))

H-23--Separate Disclosure Model Clauses (Sec. 226.38(j)(2)-

(6))[ltrif]

* * * * *

H-4(A)--Variable Rate Model Clauses

The annual percentage rate may increase during the term of this transaction if:

the prime interest rate of (creditor) increases.

the balance in your deposit account falls below $--------.

you terminate your employment with (employer).

The interest rate will not increase above----%.

The maximum interest rate increase at one time will be----%.

The rate will not increase more than once every (time period).

Any increase will take the form of:

higher payment amounts.

more payments of the same amount.

a larger amount due at maturity.

Example based on the specific transaction

If the interest rate increases by----% in (time period),

[your regular payments will increase to $--------.

you will have to make----additional payments.

your final payment will increase to $--------.

Example based on a typical transaction

If your loan were for $--------at----% for (term) and the rate increased to----% in (time period),

[your regular payments would increase by $--------.

you would have to make----additional payments.

your final payment would increase by $--------.

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H-4(C)--Adjustable-Rate Loan Program Model Clauses

Interest Rate and Payment

(a) Limits on rate or payment changes

If a rate cap prevents us from adding part of an interest rate, we can add that increase at a later adjustment date.

(b) Conversion feature

Conversion Feature

You have the option to convert your loan to a fixed rate loan for (length of time). If you convert your loan to a fixed rate loan, the [rate

payment may not increase more than (frequency)[ or ----

% overall]. [You may have a higher interest rate when you convert to a fixed rate loan.]

You may have to pay fees when you convert to a fixed rate loan.

(c) Preferred rate

Preferred Rate

The interest rate is a preferred rate that could [increase

decrease

by----% if (description of event).] [You could pay fees if [one or more] (description of event(s)) occur(s).]

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H-4(H) Adjustable-Rate Adjustment Notice Model Clauses

Disclosure of New Monthly Payment

Your new payment covers all of the interest that you owe this month, but none of the principal, and therefore will not reduce your loan balance. The payment needed to fully pay off your loan by the end of the loan term at the new interest rate is $--------.

Your new payment covers only part of the interest that you owe this month, and therefore unpaid interest will be added to your loan balance. The payment needed to fully pay off your loan by the end of the loan term at the new interest rate is $--------.

Your new payment covers only part of the interest that you owe this month, and therefore the term of your loan will increase. The payment needed to fully pay off your loan by the end of the previous loan term at the new interest rate is $--------.

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* * * * *

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* * * * *

H-5--Demand Feature Model Clauses

This obligation [is payable on demand.][has a demand feature.]

All disclosures are based on an assumed maturity of one year.

H-6--[Assumption Policy Model Clause][rtrif]Reserved[ltrif]

Assumption: Someone buying your house [may, subject to conditions, be allowed to

cannot assume the remainder of the mortgage on the original terms.]

H-7--Required Deposit Model Clause

The annual percentage rate does not take into account your required deposit.

* * * * *

H-13--[Mortgage With Demand Feature Sample][rtrif]Reserved[ltrif]

H-14--[Variable-Rate Mortgage Sample][rtrif]Reserved[ltrif]

H-15--[Graduated-Payment Mortgage Sample][rtrif]Reserved[ltrif]

H-16--[Mortgage Sample][rtrif]Section 32 Loan Model Clauses[ltrif]

You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application.

If you obtain this loan, the lender will have a mortgage on your home.

YOU COULD LOSE YOUR HOME, AND ANY MONEY YOU HAVE PUT INTO IT, IF

YOU DO NOT MEET YOUR OBLIGATIONS UNDER THE LOAN.

rtrif

IF YOU ARE UNABLE TO MAKE THE PAYMENTS ON THIS LOAN, YOU

COULD LOSE YOUR HOME.

You have no obligation to accept this loan. Your signature below only confirms that you have received this form.[ltrif]

You are borrowing $-------- (optional credit insurance is

square

is not [square] included in this amount).

The annual percentage rate on your loan will be:--------%.

Your regular (frequency) payment will be: $--------.

At the end of your loan, will still owe use: $ (balloon payment).

Your interest rate may increase. Increase in the interest rate could increase your payment. The highest amount your payment could increase is to $--------.

* * * * *

rtrif

H-17(C)--Credit Insurance, Debt Cancellation or Debt Suspension

Model Clause

OPTIONAL COSTS

(Name of Program)

STOP. You do not have to buy this product to get this loan.

If you have insurance already, this policy may not provide you with any additional benefits.

Other types of insurance can give you similar benefits and are often less expensive.

Based on our review of your age and/or employment status at this time, you [would][may] be eligible to receive benefits.

However, you may not qualify to receive any benefits because of other eligibility restrictions.

To learn more about [credit insurance][debt cancellation coverage][debt suspension coverage], go to (Web site of the Federal

Reserve Board).

ballot

Yes, I want to purchase optional (name of program) at an additional cost of (cost) per (month or year) for a loan of (loan amount) with a (policy/coverage) term of (term in years) years.

(Name of program) is required and costs (cost) per (month or year) for a loan of (loan amount) with a [policy/coverage

term of

(term in years) years.]

Signature of Borrower(s)

Date

H-17(D)--Credit Insurance, Debt Cancellation or Debt Suspension Sample

OPTIONAL COSTS

Credit Life Insurance

STOP. You do not have to buy this product to get this loan.

If you have insurance already, this policy may not provide you with any additional benefits.

Other types of insurance can give you similar benefits and are often less expensive.

Based on our review of your age and/or employment status at this time, you may be eligible to receive benefits.

However, you may not qualify to receive any benefits because of other eligibility restrictions.

To learn more about credit insurance, go to www.xxx.gov.

ballot

Yes, I want to purchase optional credit life insurance at an additional cost of $72 per month for a loan of $100,000 with a policy term of 10 years.

Signature of Borrower(s)

Date

H-18--Creditor-Placed Property Insurance Model Clause

(Creditor name and contact information)

Re: (loan number) and (property address/description)

Under our agreement, you must maintain adequate insurance coverage on the property. Our records show that your insurance policy has expired or been cancelled, and we do not have evidence that you have obtained new insurance coverage. Under our agreement, we can buy property insurance on your behalf and charge you for the cost as early as (date). Therefore, we request that you provide us with proof of insurance by (description of procedure for providing proof of insurance).

Please consider the following facts about the insurance policy that we buy:

The cost of this insurance policy is $-------- per year and is probably significantly higher than the cost of insurance you can buy through your own insurance agent.

This insurance policy may not provide as much coverage as an insurance policy you buy through your own insurance agent].

If you have any questions, please contact us at (contact information).

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H-20--Balloon Payment Model Clause

Final Balloon Payment due (date): $--------

H-21--Introductory Rate Model Clause

Introductory Rate Notice

You have a discounted introductory rate of --------% that ends after

(period).

In the (date), even if market rates do not change, this rate will increase to----%.

H-22--Key Questions About Risk Model Clauses

(a) Interest only feature

Will any of my monthly payments be interest-only?

YES. Your (frequency) payments for the first (period) of the loan

This loan gives you the choice to make (frequency) payments that cover the interest you owe each month, but none of the principal. Making these (frequency) payments means your loan amount will stay the same and you will be no closer to having it paid off.]

(b) Negative amortization feature

Even if I make my monthly payments, could my loan balance increase?

YES. Your minimum payment covers only part of the interest you owe each (period) and none of the principal. The unpaid interest will be added to your loan amount, which over time will increase the total amount you are borrowing and cause you to lose equity in your home.

(c) Balloon payment feature

Will I owe a balloon payment?

YES. You will owe a balloon payment of $--------, due in (date of payment).

(d) Demand feature

Can my lender demand full repayment at any time?

YES. We can demand that you pay off the full amount of your loan. We will give you at least (period) notice.

(e) No-documentation or low-documentation feature

Will my loan have a higher rate or fees because I did not document my employment, income or other assets?

YES. If you provide more documentation, you could decrease your interest rate or fees.

(f) Shared-equity or shared-appreciation feature

Do I have to share any equity I gain?

YES. We are entitled to ----% of any gain you make when you sell or refinance this property.

H-23--Separate Disclosure Model Clauses

(a) Rebate

If you pay off or refinance your loan, or sell this property early, you will receive a refund of some of the interest and fees you have paid on your loan.

(b) Late Payment

If you make a payment more than (number of days) days late, you may be charged a penalty equal to [$--------

----%.]

(c) Property Insurance

You may get property insurance from any insurer that is acceptable to us.

(d) Contract Reference

Read your loan contract to find out what happens if you stop making payments, default, or pay off or refinance the loan early.

(e) Assumption Policy

If you sell your home after you take out this loan, we may permit the new buyer to take over the payments on your mortgage.

ltrif 14. In Supplement I to Part 226, as amended on July 30, 2008 (73

FR 44604), and on January 29, 2009 (74 FR 5450):

A. Under Section 226.2--Definitions and Rules of Construction, 2(a)(24) Residential mortgage transaction, paragraphs 1, 2, and 5(ii) and 5(iii) are revised.

B. Section 226.4--Finance Charge, Section 226.17--General

Disclosure Requirements, Section 226.18--Content of Disclosures,

Section 226.19--Certain Mortgage and Variable-Rate Transactions, and

Section 226.20--Subsequent Disclosure Requirements are revised.

C. Under Section 226.24--Advertising, 24(c) Advertisement of rate of finance charge, paragraph 4 is revised.

D. Under Section 226.25--Record Retention, 25(a) General rule, new paragraph 5 is added.

E. Under Section 226.30--Limitation on Rates, paragraph 1 is revised.

F. Under Section 226.32--Requirements for Certain Closed-End

Home Mortgages, 32(b) Definitions is removed, 32(c) Disclosures, paragraph 1 is removed, and 32(c)(5) Amount borrowed, paragraph 1 is revised.

G. Under Section 226.35--Prohibited Acts or Practices in

Connection With Higher-Priced Mortgage Loans, 35(a) Higher-priced mortgage loans, Paragraph 35(a)(2), paragraph 4 is revised and new paragraph 5 is added.

H. Under Section 226.36--Prohibited Acts or Practices in

Connection with Credit Secured by a Consumer's Principal Dwelling, the heading is revised, 36(a) Mortgage broker defined, the heading is revised, paragraph 1 is revised, and new paragraph 2 is added, 36(b) Misrepresentation of value of consumer's principal dwelling, the heading is revised, and new 36(d) Prohibited payments to loan originators and 36(e) Prohibition on steering are added.

I. New Section 226.37--Special Disclosure Requirements for

Closed-End Mortgages and Section 226.38--Content of Disclosures for

Closed-End Mortgages are added.

J. Under Appendices G and H--Open-End and Closed-End Model Forms and Clauses, paragraphs 1 and 2 are revised.

K. Appendix H--Closed-End Model Forms and Clauses is revised.

Supplement I to Part 226--Official Staff Interpretations

* * * * *

SUBPART A--GENERAL

* * * * *

Section 226.2--Definitions and Rules of Construction

* * * * * 2(a)(24) Residential mortgage transaction. 1. Relation to other sections. This term is important in

five

rtrifthree[ltrif] provisions in the regulation: i. Section 226.4(c)(7)--exclusions from the finance charge ii. Section 226.15(f)--exemption from the right of rescission

Section 226.18(q)--whether or not the obligation is assumable

Section 226.20(b)--disclosure requirements for assumptions

iii. Section 226.23(f)--exemption from the right of rescission 2. Lien status. The definition is not limited to first-lien transactions. [For example, a consumer might assume a paid-down first mortgage (or borrow part of the purchase price) and borrow the balance of the purchase price from a creditor who takes a second mortgage. The second mortgage transaction is a ``residential mortgage transaction'' if the dwelling purchased is the consumer's principal residence.]

* * * * * 5. Acquisition. * * * ii. Examples of new transactions involving a previously acquired dwelling include the financing of a balloon payment due under a land sale contract and an extension of credit made to a joint owner of property to buy out the other joint owner's interest. [In these instances, disclosures are not required under Sec. 226.18(q

(assumability policies). However, the][rtrif]The[ltrif] rescission rules of Sec. Sec. 226.15 and 226.23 do apply to these new transactions.

iii. In other cases, the disclosure and rescission rules do not apply. For example, where a buyer enters into a written agreement with the creditor holding the seller's mortgage, allowing the buyer to assume the mortgage, if the buyer had previously purchased the property and agreed with the seller to make the mortgage payments, Sec. 226.20(b) does not apply (assumptions involving residential mortgages).

* * * * *

Sec. 226.4--Finance Charge. 4(a) Definition. 1. Charges in comparable cash transactions. Charges imposed uniformly in cash and credit transactions are not finance charges. In determining whether an item is a finance charge, the creditor should compare the credit transaction in question with a similar cash transaction. A creditor financing the sale of property or services may compare charges with

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those payable in a similar cash transaction by the seller of the property or service. i. For example, the following items are not finance charges:

A. Taxes, license fees, or registration fees paid by both cash and credit customers.

B. Discounts that are available to cash and credit customers, such as quantity discounts.

C. Discounts available to a particular group of consumers because they meet certain criteria, such as being members of an organization or having accounts at a particular financial institution. This is the case even if an individual must pay cash to obtain the discount, provided that credit customers who are members of the group and do not qualify for the discount pay no more than the nonmember cash customers.

D. Charges for a service policy, auto club membership, or policy of insurance against latent defects offered to or required of both cash and credit customers for the same price. ii. In contrast, the following items are finance charges:

A. Inspection and handling fees for the staged disbursement of construction-loan proceeds.

B. Fees for preparing a Truth in Lending disclosure statement, if permitted by law (for example, the Real Estate Settlement Procedures

Act prohibits such charges in certain transactions secured by real property).

C. Charges for a required maintenance or service contract imposed only in a credit transaction. iii. If the charge in a credit transaction exceeds the charge imposed in a comparable cash transaction, only the difference is a finance charge. For example:

A. If an escrow agent is used in both cash and credit sales of real estate and the agent's charge is $100 in a cash transaction and $150 in a credit transaction, only $50 is a finance charge. 2. Costs of doing business. Charges absorbed by the creditor as a cost of doing business are not finance charges, even though the creditor may take such costs into consideration in determining the interest rate to be charged or the cash price of the property or service sold. However, if the creditor separately imposes a charge on the consumer to cover certain costs, the charge is a finance charge if it otherwise meets the definition. For example: i. A discount imposed on a credit obligation when it is assigned by a seller-creditor to another party is not a finance charge as long as the discount is not separately imposed on the consumer. (See Sec. 226.4(b)(6).) ii. A tax imposed by a State or other governmental body on a creditor is not a finance charge if the creditor absorbs the tax as a cost of doing business and does not separately impose the tax on the consumer. (For additional discussion of the treatment of taxes, see other commentary to Sec. 226.4(a).) 3. Forfeitures of interest. If the creditor reduces the interest rate it pays or stops paying interest on the consumer's deposit account or any portion of it for the term of a credit transaction (including, for example, an overdraft on a checking account or a loan secured by a certificate of deposit), the interest lost is a finance charge. (See the commentary to Sec. 226.4(c)(6).) For example: i. A consumer borrows $5,000 for 90 days and secures it with a

$10,000 certificate of deposit paying 15% interest. The creditor charges the consumer an interest rate of 6% on the loan and stops paying interest on $5,000 of the $10,000 certificate for the term of the loan. The interest lost is a finance charge and must be reflected in the annual percentage rate on the loan. ii. However, the consumer must be entitled to the interest that is not paid in order for the lost interest to be a finance charge. For example:

A. A consumer wishes to buy from a financial institution a $10,000 certificate of deposit paying 15% interest but has only $4,000. The financial institution offers to lend the consumer $6,000 at an interest rate of 6% but will pay the 15% interest only on the amount of the consumer's deposit, $4,000. The creditor's failure to pay interest on the $6,000 does not result in an additional finance charge on the extension of credit, provided the consumer is entitled by the deposit agreement with the financial institution to interest only on the amount of the consumer's deposit.

B. A consumer enters into a combined time deposit/credit agreement with a financial institution that establishes a time deposit account and an open-end line of credit. The line of credit may be used to borrow against the funds in the time deposit. The agreement provides for an interest rate on any credit extension of, for example, 1%. In addition, the agreement states that the creditor will pay 0% interest on the amount of the time deposit that corresponds to the amount of the credit extension(s). The interest that is not paid on the time deposit by the financial institution is not a finance charge (and therefore does not affect the annual percentage rate computation). 4. Treatment of transaction fees on credit card plans. Any transaction charge imposed on a cardholder by a card issuer is a finance charge, regardless of whether the issuer imposes the same, greater, or lesser charge on withdrawals of funds from an asset account such as a checking or savings account. For example: i. Any charge imposed on a credit cardholder by a card issuer for the use of an automated teller machine (ATM) to obtain a cash advance

(whether in a proprietary, shared, interchange, or other system) is a finance charge regardless of whether the card issuer imposes a charge on its debit cardholders for using the ATM to withdraw cash from a consumer asset account, such as a checking or savings account. ii. Any charge imposed on a credit cardholder for making a purchase or obtaining a cash advance outside the United States, with a foreign merchant, or in a foreign currency is a finance charge, regardless of whether a charge is imposed on debit cardholders for such transactions.

The following principles apply in determining what is a foreign transaction fee and the amount of the fee:

A. Included are fees imposed when transactions are made in a foreign currency and converted to U.S. dollars; fees imposed when transactions are made in U.S. dollars outside the U.S.; and fees imposed when transactions are made (whether in a foreign currency or in

U.S. dollars) with a foreign merchant, such as via a merchant's Web site. For example, a consumer may use a credit card to make a purchase in Bermuda, in U.S. dollars, and the card issuer may impose a fee because the transaction took place outside the United States.

B. Included are fees imposed by the card issuer and fees imposed by a third party that performs the conversion, such as a credit card network or the card issuer's corporate parent. (For example, in a transaction processed through a credit card network, the network may impose a 1 percent charge and the card-issuing bank may impose an additional 2 percent charge, for a total of a 3 percentage point foreign transaction fee being imposed on the consumer.)

C. Fees imposed by a third party are included only if they are directly passed on to the consumer. For example, if a credit card network imposes a 1 percent fee on the card issuer, but the card issuer absorbs the fee as a cost of doing business (and only passes it on to consumers in the general sense that the interest and fees are imposed on all its customers to recover its costs), then the fee is not a foreign transaction fee and

Page 43369

need not be disclosed. In another example, if the credit card network imposes a 1 percent fee for a foreign transaction on the card issuer, and the card issuer imposes this same fee on the consumer who engaged in the foreign transaction, then the fee is a foreign transaction fee and a finance charge.

D. A card issuer is not required to disclose a fee imposed by a merchant. For example, if the merchant itself performs the currency conversion and adds a fee, this fee need not be disclosed by the card issuer. Under Sec. 226.9(d), a card issuer is not obligated to disclose finance charges imposed by a party honoring a credit card, such as a merchant, although the merchant is required to disclose such a finance charge if the merchant is subject to the Truth in Lending Act and Regulation Z.

E. The foreign transaction fee is determined by first calculating the dollar amount of the transaction by using a currency conversion rate outside the card issuer's and third party's control. Any amount in excess of that dollar amount is a foreign transaction fee. Conversion rates outside the card issuer's and third party's control include, for example, a rate selected from the range of rates available in the wholesale currency exchange markets, an average of the highest and lowest rates available in such markets, or a government-mandated or government-managed exchange rate (or a rate selected from a range of such rates).

F. The rate used for a particular transaction need not be the same rate that the card issuer (or third party) itself obtains in its currency conversion operations. In addition, the rate used for a particular transaction need not be the rate in effect on the date of the transaction (purchase or cash advance). 5. Taxes. i. Generally, a tax imposed by a State or other governmental body solely on a creditor is a finance charge if the creditor separately imposes the charge on the consumer. ii. In contrast, a tax is not a finance charge (even if it is collected by the creditor) if applicable law imposes the tax:

A. Solely on the consumer;

B. On the creditor and the consumer jointly;

C. On the credit transaction, without indicating which party is liable for the tax; or

D. On the creditor, if applicable law directs or authorizes the creditor to pass the tax on to the consumer. (For purposes of this section, if applicable law is silent as to passing on the tax, the law is deemed not to authorize passing it on.) iii. For example, a stamp tax, property tax, intangible tax, or any other State or local tax imposed on the consumer, or on the credit transaction, is not a finance charge even if the tax is collected by the creditor. iv. In addition, a tax is not a finance charge if it is excluded from the finance charge by another provision of the regulation or commentary (for example, if the tax is imposed uniformly in cash and credit transactions).

rtrif 6. Transactions with no seller. In a transaction where there is no seller, such as a refinancing of an existing extension of credit described in Sec. 226.20(a), there is no comparable cash transaction.

Thus, the exclusion from the finance charge of charges of a type payable in a comparable cash transaction does not apply to such transactions.[ltrif] 4(a)(1) Charges by third parties. 1. Choosing the provider of a required service. An example of a third-party charge included in the finance charge is the cost of required mortgage insurance, even if the consumer is allowed to choose the insurer. 2. Annuities associated with reverse mortgages. Some creditors offer annuities in connection with a reverse-mortgage transaction. The amount of the premium is a finance charge if the creditor requires the purchase of the annuity incident to the credit. Examples include the following: i. The credit documents reflect the purchase of an annuity from a specific provider or providers. ii. The creditor assesses an additional charge on consumers who do not purchase an annuity from a specific provider. iii. The annuity is intended to replace in whole or in part the creditor's payments to the consumer either immediately or at some future date. 4(a)(2) Special rule; closing agent charges. 1. General. This rule applies to charges by a third party serving as the closing agent for the particular loan. An example of a closing agent charge included in the finance charge is a courier fee where the creditor requires the use of a courier. 2. Required closing agent. If the creditor requires the use of a closing agent, fees charged by the closing agent are included in the finance charge only if the creditor requires the particular service, requires the imposition of the charge, or retains a portion of the charge. Fees charged by a third-party closing agent may be otherwise excluded from the finance charge under Sec. 226.4. For example, a fee that would be paid in a comparable cash transaction may be excluded under Sec. 226.4(a). A charge for conducting or attending a closing is a finance charge and may be excluded only if the charge is included in and is incidental to a lump-sum fee excluded under Sec. 226.4(c)(7).

rtrif 3. Closed-end mortgage transactions. Comments 4(a)(2)-1 and 4(a)(2)-2 do not apply to closed-end transactions secured by real property or a dwelling, pursuant to Sec. 226.4(g).[ltrif] 4(a)(3) Special rule; mortgage broker fees. 1. General. A fee charged by a mortgage broker is excluded from the finance charge if it is the type of fee that is also excluded when charged by the creditor. For example, to exclude an application fee from the finance charge under Sec. 226.4(c)(1), a mortgage broker must charge the fee to all applicants for credit, whether or not credit is extended. 2. Coverage. This rule applies to charges paid by consumers to a mortgage broker in connection with a consumer credit transaction secured by real property or a dwelling. 3. Compensation by lender. The rule requires all mortgage broker fees to be included in the finance charge. Creditors sometimes compensate mortgage brokers under a separate arrangement with those parties. Creditors may draw on amounts paid by the consumer, such as points or closing costs, to fund their payment to the broker.

Compensation paid by a creditor to a mortgage broker under an agreement is not included as a separate component of a consumer's total finance charge (although this compensation may be reflected in the finance charge if it comes from amounts paid by the consumer to the creditor that are finance charges, such as points and interest). 4(b) Examples of finance charges. 1. Relationship to other provisions. Charges or fees shown as examples of finance charges in Sec. 226.4(b) may be excludable under

Sec. 226.4(c), (d), or (e). For example[: i. Premiums][rtrif], premiums[ltrif] for credit life insurance, shown as an example of a finance charge under Sec. 226.4(b)(7), may be excluded if the requirements of Sec. 226.4(d)(1) are met. [rtrif]They may not be excluded, however, in transactions subject to Sec. 226.4(g).[ltrif]

ii. Appraisal fees mentioned in Sec. 226.4(b)(4) are excluded for real property or residential mortgage transactions under Sec. 226.4(c)(7).

Paragraph 4(b)(2). 1. Checking account charges. A checking or transaction account charge imposed in connection with a credit feature is a finance charge under

Page 43370

Sec. 226.4(b)(2) to the extent the charge exceeds the charge for a similar account without a credit feature. If a charge for an account with a credit feature does not exceed the charge for an account without a credit feature, the charge is not a finance charge under Sec. 226.4(b)(2). To illustrate: i. A $5 service charge is imposed on an account with an overdraft line of credit (where the institution has agreed in writing to pay an overdraft), while a $3 service charge is imposed on an account without a credit feature; the $2 difference is a finance charge. (If the difference is not related to account activity, however, it may be excludable as a participation fee. See the commentary to Sec. 226.4(c)(4). ii. A $5 service charge is imposed for each item that results in an overdraft on an account with an overdraft line of credit, while a $25 service charge is imposed for paying or returning each item on a similar account without a credit feature; the $5 charge is not a finance charge.

Paragraph 4(b)(3). 1. Assumption fees. The assumption fees mentioned in Sec. 226.4(b)(3) are finance charges only when the assumption occurs and the fee is imposed on the new buyer. The assumption fee is a finance charge in the new buyer's transaction.

Paragraph 4(b)(5). 1. Credit loss insurance. Common examples of the insurance against credit loss mentioned in Sec. 226.4(b)(5) are mortgage guaranty insurance, holder in due course insurance, and repossession insurance.

Such premiums must be included in the finance charge only for the period that the creditor requires the insurance to be maintained. 2. Residual value insurance. Where a creditor requires a consumer to maintain residual value insurance or where the creditor is a beneficiary of a residual value insurance policy written in connection with an extension of credit (as is the case in some forms of automobile balloon-payment financing, for example), the premiums for the insurance must be included in the finance charge for the period that the insurance is to be maintained. If a creditor pays for residual value insurance and absorbs the payment as a cost of doing business, such costs are not considered finance charges. (See comment 4(a)-2.)

Paragraphs 4(b)(7) and (b)(8). 1. Pre-existing insurance policy. The insurance discussed in Sec. 226.4(b)(7) and (b)(8) does not include an insurance policy (such as a life or an automobile collision insurance policy) that is already owned by the consumer, even if the policy is assigned to or otherwise made payable to the creditor to satisfy an insurance requirement. Such a policy is not ``written in connection with'' the transaction, as long as the insurance was not purchased for use in that credit extension, since it was previously owned by the consumer. 2. Insurance written in connection with a transaction. Credit insurance sold before or after an open-end [(not home-secured)] plan is opened is considered ``written in connection with a credit transaction.'' Insurance sold after consummation in closed-end credit transactions [or after the opening of a home-equity plan subject to the requirements of Sec. 226.5b] is not considered ``written in connection with'' the credit transaction if the insurance is written because of the consumer's default (for example, by failing to obtain or maintain required property insurance) or because the consumer requests insurance after consummation [or the opening of a home-equity plan subject to the requirements of Sec. 226.5b] (although credit-sale disclosures may be required for the insurance sold after consummation if it is financed). 3. Substitution of life insurance. The premium for a life insurance policy purchased and assigned to satisfy a credit life insurance requirement must be included in the finance charge, but only to the extent of the cost of the credit life insurance if purchased from the creditor or the actual cost of the policy (if that is less than the cost of the insurance available from the creditor). If the creditor does not offer the required insurance, the premium to be included in the finance charge is the cost of a policy of insurance of the type, amount, and term required by the creditor. 4. Other insurance. Fees for required insurance not of the types described in Sec. 226.4(b)(7) and (b)(8) are finance charges and are not excludable. For example: i. The premium for a hospitalization insurance policy, if it is required to be purchased only in a credit transaction, is a finance charge.

Paragraph 4(b)(9). 1. Discounts for payment by other than credit. The discounts to induce payment by other than credit mentioned in Sec. 226.4(b)(9) include, for example, the following situation: i. The seller of land offers individual tracts for $10,000 each. If the purchaser pays cash, the price is $9,000, but if the purchaser finances the tract with the seller the price is $10,000. The $1,000 difference is a finance charge for those who buy the tracts on credit. 2. Exception for cash discounts. i. Creditors may exclude from the finance charge discounts offered to consumers for using cash or another means of payment instead of using a credit card or an open-end plan. The discount may be in whatever amount the seller desires, either as a percentage of the regular price (as defined in section 103(z) of the act, as amended) or a dollar amount. Pursuant to section 167(b) of the act, this provision applies only to transactions involving an open-end credit plan or a credit card (whether open-end or closed-end credit is extended on the card). The merchant must offer the discount to prospective buyers whether or not they are cardholders or members of the open-end credit plan. The merchant may, however, make other distinctions. For example:

A. The merchant may limit the discount to payment by cash and not offer it for payment by check or by use of a debit card.

B. The merchant may establish a discount plan that allows a 15% discount for payment by cash, a 10% discount for payment by check, and a 5% discount for payment by a particular credit card. None of these discounts is a finance charge. ii. Pursuant to section 171(c) of the act, discounts excluded from the finance charge under this paragraph are also excluded from treatment as a finance charge or other charge for credit under any

State usury or disclosure laws. 3. Determination of the regular price. i. The regular price is critical in determining whether the difference between the price charged to cash customers and credit customers is a discount or a surcharge, as these terms are defined in amended section 103 of the act. The regular price is defined in section 103 of the act as ``* * * the tag or posted price charged for the property or service if a single price is tagged or posted, or the price charged for the property or service when payment is made by use of an open-end credit plan or a credit card if either (1) no price is tagged or posted, or (2) two prices are tagged or posted * * *.'' ii. For example, in the sale of motor vehicle fuel, the tagged or posted price is the price displayed at the pump. As a result, the higher price (the open-end credit or credit card price) must be displayed at the pump, either alone or along with the cash price.

Service station operators may designate separate pumps or separate islands as being for either cash or credit purchases and display only the appropriate prices at the various pumps. If a pump is capable of displaying on its meter either a cash or a credit price depending upon the

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consumer's means of payment, both the cash price and the credit price must be displayed at the pump. A service station operator may display the cash price of fuel by itself on a curb sign, as long as the sign clearly indicates that the price is limited to cash purchases. 4(b)(10) Debt cancellation and debt suspension fees. 1. Definition. Debt cancellation coverage provides for payment or satisfaction of all or part of a debt when a specified event occurs.

The term ``debt cancellation coverage'' includes guaranteed automobile protection, or ``GAP,'' agreements, which pay or satisfy the remaining debt after property insurance benefits are exhausted. Debt suspension coverage provides for suspension of the obligation to make one or more payments on the date(s) otherwise required by the credit agreement, when a specified event occurs. The term ``debt suspension'' does not include loan payment deferral arrangements in which the triggering event is the bank's unilateral decision to allow a deferral of payment and the borrower's unilateral election to do so, such as by skipping or reducing one or more payments (``skip payments''). 2. Coverage written in connection with a transaction. Coverage sold after consummation in closed-end credit transactions [or after the opening of a home-equity plan subject to the requirements of Sec. 226.5b] is not ``written in connection with'' the credit transaction if the coverage is written because the consumer requests coverage after consummation [or the opening of a home-equity plan subject to the requirements of Sec. 226.5b] (although credit-sale disclosures may be required for the coverage sold after consummation if it is financed).

Coverage sold before or after an open-end [(not home-secured)] plan is opened is considered ``written in connection with a credit transaction.'' 4(c) Charges excluded from the finance charge.

Paragraph 4(c)(1). 1. Application fees. An application fee that is excluded from the finance charge is a charge to recover the costs associated with processing applications for credit. The fee may cover the costs of services such as credit reports, credit investigations, and appraisals.

The creditor is free to impose the fee in only certain of its loan programs, such as [rtrif]automobile[ltrif] [mortgage] loans. However, if the fee is to be excluded from the finance charge under Sec. 226.4(c)(1), it must be charged to all applicants, not just to applicants who are approved or who actually receive credit.

Paragraph 4(c)(2). 1. Late-payment charges. i. Late-payment charges can be excluded from the finance charge under Sec. 226.4(c)(2) whether or not the person imposing the charge continues to extend credit on the account or continues to provide property or services to the consumer. In determining whether a charge is for actual unanticipated late payment on a 30-day account, for example, factors to be considered include:

A. The terms of the account. For example, is the consumer required by the account terms to pay the account balance in full each month? If not, the charge may be a finance charge.

B. The practices of the creditor in handling the accounts. For example, regardless of the terms of the account, does the creditor allow consumers to pay the accounts over a period of time without demanding payment in full or taking other action to collect? If no effort is made to collect the full amount due, the charge may be a finance charge. ii. Section 226.4(c)(2) applies to late-payment charges imposed for failure to make payments as agreed, as well as failure to pay an account in full when due. 2. Other excluded charges. Charges for ``delinquency, default, or a similar occurrence'' include, for example, charges for reinstatement of credit privileges or for submitting as payment a check that is later returned unpaid.

Paragraph 4(c)(3). 1. Assessing interest on an overdraft balance. A charge on an overdraft balance computed by applying a rate of interest to the amount of the overdraft is not a finance charge, even though the consumer agrees to the charge in the account agreement, unless the financial institution agrees in writing that it will pay such items.

Paragraph 4(c)(4). 1. Participation fees--periodic basis. The participation fees described in Sec. 226.4(c)(4) do not necessarily have to be formal membership fees, nor are they limited to credit card plans. The provision applies to any credit plan in which payment of a fee is a condition of access to the plan itself, but it does not apply to fees imposed separately on individual closed-end transactions. The fee may be charged on a monthly, annual, or other periodic basis; a one-time, nonrecurring fee imposed at the time an account is opened is not a fee that is charged on a periodic basis, and may not be treated as a participation fee. 2. Participation fees--exclusions. Minimum monthly charges, charges for nonuse of a credit card, and other charges based on either account activity or the amount of credit available under the plan are not excluded from the finance charge by Sec. 226.4(c)(4). Thus, for example, a fee that is charged and then refunded to the consumer based on the extent to which the consumer uses the credit available would be a finance charge. (See the commentary to Sec. 226.4(b)(2). Also, see comment 14(c)-2 for treatment of certain types of fees excluded in determining the annual percentage rate for the periodic statement.)

Paragraph 4(c)(5). 1. Seller's points. The seller's points mentioned in Sec. 226.4(c)(5) include any charges imposed by the creditor upon the non- creditor seller of property for providing credit to the buyer or for providing credit on certain terms. These charges are excluded from the finance charge even if they are passed on to the buyer, for example, in the form of a higher sales price. Seller's points are frequently involved in real estate transactions guaranteed or insured by governmental agencies. A commitment fee paid by a non-creditor seller

(such as a real estate developer) to the creditor should be treated as seller's points. Buyer's points (that is, points charged to the buyer by the creditor), however, are finance charges. 2. Other seller-paid amounts. Mortgage insurance premiums and other finance charges are sometimes paid at or before consummation or settlement on the borrower's behalf by a non-creditor seller. The creditor should treat the payment made by the seller as seller's points and exclude it from the finance charge if, based on the seller's payment, the consumer is not legally bound to the creditor for the charge. A creditor who gives disclosures before the payment has been made should base them on the best information reasonably available.

Paragraph 4(c)(6). 1. Lost interest. Certain federal and State laws mandate a percentage differential between the interest rate paid on a deposit and the rate charged on a loan secured by that deposit. In some situations, because of usury limits the creditor must reduce the interest rate paid on the deposit and, as a result, the consumer loses some of the interest that would otherwise have been earned. Under Sec. 226.4(c)(6), such ``lost interest'' need not be included in the finance charge. This rule applies only to an interest reduction imposed because a rate differential is required by law and a usury limit precludes compliance by any other means. If the creditor imposes a differential that exceeds that required, only the lost interest attributable to the excess amount is a finance charge. (See the commentary to Sec. 226.4(a).)

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Paragraph 4(c)(7). 1. [Real estate or residential mortgage transaction] [rtrif]Open- end real-property-secured credit[ltrif]charges. The list of charges in

Sec. 226.4(c)(7) applies [rtrif]to open-end credit plans secured by real property and open-end residential mortgage transactions[ltrif]

both to residential mortgage transactions (which may include, for example, the purchase of a mobile home) and to other transactions secured by real estate.

The fees are excluded from the finance charge even if the services for which the fees are imposed are performed by the creditor's employees rather than by a third party. In addition, the cost of verifying or confirming information connected to the item is also excluded. For example, credit-report fees cover not only the cost of the report but also the cost of verifying information in the report.

In all cases, charges excluded under Sec. 226.4(c)(7) must be bona fide and reasonable. 2. Lump-sum charges. If a lump sum charged for several services includes a charge that is not excludable, a portion of the total should be allocated to that service and included in the finance charge.

However, a lump sum charged for conducting or attending a closing (for example, by a lawyer or a title company) is excluded from the finance charge if the charge is primarily for services related to items listed in Sec. 226.4(c)(7) (for example, reviewing or completing documents), even if other incidental services such as explaining various documents or disbursing funds for the parties are performed. The entire charge is excluded even if a fee for the incidental services would be a finance charge if it were imposed separately. 3. Charges assessed during the loan term. [rtrif]Charges[ltrif]

Real estate or residential mortgage transaction charges

excluded under Sec. 226.4(c)(7) are those charges imposed solely in connection with the initial decision to grant credit. This would include, for example, a fee to search for tax liens on the property or to determine if flood insurance is required. The exclusion does not apply to fees for services to be performed periodically during the loan term, regardless of when the fee is collected. For example, a fee for one or more determinations during the loan term of the current tax-lien status or flood-insurance requirements is a finance charge, regardless of whether the fee is imposed at closing, or when the service is performed. If a creditor is uncertain about what portion of a fee to be paid at consummation or loan closing is related to the initial decision to grant credit, the entire fee may be treated as a finance charge. 4(d) Insurance and debt cancellation and debt suspension coverage. 1. General. Section 226.4(d) permits insurance premiums and charges and debt cancellation and debt suspension charges to be excluded from the finance charge. The required disclosures must be made in writing, except as provided in Sec. 226.4(d)(4). The rules on location of insurance and debt cancellation and debt suspension disclosures for closed-end transactions are in Sec. 226.17(a). For purposes of Sec. 226.4(d), all references to insurance also include debt cancellation and debt suspension coverage unless the context indicates otherwise. 2. Timing of disclosures. If disclosures are given early, for example under Sec. 226.17(f)[or Sec. 226.19(a)], the creditor must redisclose if the actual premium is different at the time of consummation. If insurance disclosures are not given at the time of early disclosure and insurance is in fact written in connection with the transaction, the disclosures under Sec. 226.4(d) must be made in order to exclude the premiums from the finance charge. 3. Premium rate increases. The creditor should disclose the premium amount based on the rates currently in effect and need not designate it as an estimate even if the premium rates may increase. An increase in insurance rates after consummation of a closed-end credit transaction or during the life of an open-end credit plan does not require redisclosure in order to exclude the additional premium from treatment as a finance charge. 4. Unit-cost disclosures. i. Open-end credit. The premium or fee for insurance or debt cancellation or debt suspension for the initial term of coverage may be disclosed on a unit-cost basis in open-end credit transactions. The cost per unit should be based on the initial term of coverage, unless one of the options under comment 4(d)-12 is available. ii. Closed-end credit. One of the transactions for which unit-cost disclosures (such as 50 cents per year for each $100 of the amount financed) may be used in place of the total insurance premium involves a particular kind of insurance plan. For example, a consumer with a current indebtedness of $8,000 is covered by a plan of credit life insurance coverage with a maximum of $10,000. The consumer requests an additional $4,000 loan to be covered by the same insurance plan. Since the $4,000 loan exceeds, in part, the maximum amount of indebtedness that can be covered by the plan, the creditor may properly give the insurance-cost disclosures on the $4,000 loan on a unit-cost basis. 5. Required credit life insurance; debt cancellation or suspension coverage. Credit life, accident, health, or loss-of-income insurance, and debt cancellation and suspension coverage described in Sec. 226.4(b)(10), must be voluntary in order for the premium or charges to be excluded from the finance charge. Whether the insurance or coverage is in fact required or optional is a factual question. If the insurance or coverage is required, the premiums must be included in the finance charge, whether the insurance or coverage is purchased from the creditor or from a third party. If the consumer is required to elect one of several options--such as to purchase credit life insurance, or to assign an existing life insurance policy, or to pledge security such as a certificate of deposit--and the consumer purchases the credit life insurance policy, the premium must be included in the finance charge.

(If the consumer assigns a preexisting policy or pledges security instead, no premium is included in the finance charge. The security interest would be disclosed under Sec. 226.6(a)(4), Sec. 226.6(b)(5)(ii), or Sec. 226.18(m). See the commentary to Sec. 226.4(b)(7) and (b)(8).) 6. Other types of voluntary insurance. Insurance is not credit life, accident, health, or loss-of-income insurance if the creditor or the credit account of the consumer is not the beneficiary of the insurance coverage. If the premium for such insurance is not imposed by the creditor as an incident to or a condition of credit, it is not covered by Sec. 226.4. 7. Signatures. If the creditor offers a number of insurance options under Sec. 226.4(d), the creditor may provide a means for the consumer to sign or initial for each option, or it may provide for a single authorizing signature or initial with the options selected designated by some other means, such as a check mark. The insurance authorization may be signed or initialed by any consumer, as defined in Sec. 226.2(a)(11), or by an authorized user on a credit card account. 8. Property insurance. To exclude property insurance premiums or charges from the finance charge, the creditor must allow the consumer to choose the insurer and disclose that fact. This disclosure must be made whether or not the property insurance is available from or through the creditor. The requirement that an option be given does not require that the insurance be readily available from other sources. The premium or charge must be disclosed only if the consumer elects to purchase the insurance from [rtrif]or through[ltrif] the creditor; in such a case, the creditor must also disclose the term of the property insurance coverage if it is less

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than the term of the obligation. [rtrif]Insurance is available ``from or through a creditor'' if it is available from the creditor's affiliate, as defined under the Bank Holding Company Act, 12 U.S.C. 1841(k).[ltrif] 9. Single-interest insurance. Blanket and specific single-interest coverage are treated the same for purposes of the regulation. A charge for either type of single-interest insurance may be excluded from the finance charge if: i. The insurer waives any right of subrogation. ii. The other requirements of Sec. 226.4(d)(2) are met. This includes, of course, giving the consumer the option of obtaining the insurance from a person of the consumer's choice. The creditor need not ascertain whether the consumer is able to purchase the insurance from someone else. 10. Single-interest insurance defined. The term single-interest insurance as used in the regulation refers only to the types of coverage traditionally included in the term vendor's single-interest insurance (or VSI), that is, protection of tangible property against normal property damage, concealment, confiscation, conversion, embezzlement, and skip. Some comprehensive insurance policies may include a variety of additional coverages, such as repossession insurance and holder-in-due-course insurance. These types of coverage do not constitute single-interest insurance for purposes of the regulation, and premiums for them do not qualify for exclusion from the finance charge under Sec. 226.4(d). If a policy that is primarily VSI also provides coverages that are not VSI or other property insurance, a portion of the premiums must be allocated to the non-excludable coverages and included in the finance charge. However, such allocation is not required if the total premium in fact attributable to all of the non-VSI coverages included in the policy is $1.00 or less (or $5.00 or less in the case of a multiyear policy). 11. Initial term. i. The initial term of insurance or debt cancellation or debt suspension coverage determines the period for which a premium amount must be disclosed, unless one of the options discussed under comment 4(d)-12 is available. For purposes of Sec. 226.4(d), the initial term is the period for which the insurer or creditor is obligated to provide coverage, even though the consumer may be allowed to cancel the coverage or coverage may end due to nonpayment before that term expires. ii. For example:

A. The initial term of a property insurance policy on an automobile that is written for one year is one year even though premiums are paid monthly and the term of the credit transaction is four years.

B. The initial term of an insurance policy is the full term of the credit transaction if the consumer pays or finances a single premium in advance. 12. Initial term; alternative. i. General. A creditor has the option of providing cost disclosures on the basis of one year of insurance or debt cancellation or debt suspension coverage instead of a longer initial term (provided the premium or fee is clearly labeled as being for one year) if:

A. The initial term is indefinite or not clear, or

B. The consumer has agreed to pay a premium or fee that is assessed periodically but the consumer is under no obligation to continue the coverage, whether or not the consumer has made an initial payment. ii. Open-end plans. For open-end plans, a creditor also has the option of providing unit-cost disclosure on the basis of a period that is less than one year if the consumer has agreed to pay a premium or fee that is assessed periodically, for example monthly, but the consumer is under no obligation to continue the coverage. iii. Examples. To illustrate:

A. A credit life insurance policy providing coverage for a

rtrif seven-year automobile[ltrif] [30-year mortgage] loan has an initial term of [rtrif]seven[ltrif] [30] years, even though premiums are paid monthly and the consumer is not required to continue the coverage. Disclosures may be based on the initial term, but the creditor also has the option of making disclosures on the basis of coverage for an assumed initial term of one year. 13. Loss-of-income insurance. The loss-of-income insurance mentioned in Sec. 226.4(d) includes involuntary unemployment insurance, which provides that some or all of the consumer's payments will be made if the consumer becomes unemployed involuntarily.

rtrif 14. Age or employment eligibility criteria. A premium or charge for credit life, accident, health, or loss-of-income insurance, or debt cancellation or debt suspension coverage is voluntary and can be excluded from the finance charge only if the consumer meets the product's age or employment eligibility criteria at the time of enrollment. To exclude such a premium or charge from the finance charge, the creditor must determine at the time of enrollment that the consumer is eligible for the product under the product's age or employment eligibility restrictions. The creditor may use reasonably reliable evidence of the consumer's age or employment status to satisfy this condition. Reasonably reliable evidence of a consumer's age would include using the date of birth on the consumer's credit application, on the driver's license or other government-issued identification, or on the credit report. Reasonably reliable evidence of a consumer's employment status would include the consumer's information on a credit application, an Internal Revenue Service Form W-2, tax returns, payroll receipts, or other evidence such as a letter or e-mail from the consumer or the consumer's employer. If the consumer does not meet the product's age or employment eligibility criteria at the time of enrollment, then the premium or charge is not voluntary. In such circumstances, the premium or charge is a finance charge. If the creditor offers a bundled product (such as credit life insurance combined with credit involuntary unemployment insurance) and the consumer is not eligible for all of the bundled products, then the creditor must either: (1) treat the entire premium or charge for the bundled product as a finance charge, or (2) offer the consumer the option of selecting only the products for which the consumer is eligible and exclude the premium or charge from the finance charge if the consumer chooses an optional product for which the consumer meets the age or employment eligibility criteria at the time of enrollment.[ltrif] 4(d)(3) Voluntary debt cancellation or debt suspension fees. 1. General. Fees charged for the specialized form of debt cancellation agreement known as guaranteed automobile protection

(``GAP'') agreements must be disclosed according to Sec. 226.4(d)(3) rather than according to Sec. 226.4(d)(2) for property insurance. 2. Disclosures. Creditors can comply with Sec. 226.4(d)(3) by providing a disclosure that refers to debt cancellation or debt suspension coverage whether or not the coverage is considered insurance. Creditors may use the model credit insurance disclosures only if the debt cancellation or debt suspension coverage constitutes insurance under State law. (See Model Clauses and Samples at G-16 and

H-17 in Appendix G and Appendix H to part 226 for guidance on how to provide the disclosure required by Sec. 226.4(d)(3)(iii) for debt suspension products.) 3. Multiple events. If debt cancellation or debt suspension coverage for two or more events is provided at a single charge, the entire charge may be excluded from the finance charge if at least one of the events is accident or loss

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of life, health, or income and the conditions specified in Sec. 226.4(d)(3) or, as applicable, Sec. 226.4(d)(4), are satisfied. 4. Disclosures in programs combining debt cancellation and debt suspension features. If the consumer's debt can be cancelled under certain circumstances, the disclosure may be modified to reflect that fact. The disclosure could, for example, state (in addition to the language required by Sec. 226.4(d)(3)(iii)) that ``In some circumstances, my debt may be cancelled.'' However, the disclosure would not be permitted to list the specific events that would result in debt cancellation. 4(d)(4) Telephone purchases. 1. Affirmative request. A creditor would not satisfy the requirement to obtain a consumer's affirmative request if the

``request'' was a response to a script that uses leading questions or negative consent. A question asking whether the consumer wishes to enroll in the credit insurance or debt cancellation or suspension plan and seeking a yes-or-no response (such as ``Do you want to enroll in this optional debt cancellation plan?'') would not be considered leading. 4(e) Certain security interest charges. 1. Examples. i. Excludable charges. Sums must be actually paid to public officials to be excluded from the finance charge under Sec. 226.4(e)(1) and (e)(3). Examples are charges or other fees required for filing or recording security agreements, mortgages [rtrif](for open-end credit; but see Sec. 226.4(g) regarding closed-end mortgage credit)[ltrif], continuation statements, termination statements, and similar documents, as well as intangible property or other taxes even when the charges or fees are imposed by the state solely on the creditor and charged to the consumer (if the tax must be paid to record a security agreement). (See comment 4(a)-5 regarding the treatment of taxes, generally.) ii. Charges not excludable. If the obligation is between the creditor and a third party (an assignee, for example), charges or other fees for filing or recording security agreements, mortgages, continuation statements, termination statements, and similar documents relating to that obligation are not excludable from the finance charge under this section. 2. Itemization. The various charges described in Sec. 226.4(e)(1) and (e)(3) may be totaled and disclosed as an aggregate sum, or they may be itemized by the specific fees and taxes imposed. If an aggregate sum is disclosed, a general term such as security interest fees or filing fees may be used. 3. Notary fees. In order for a notary fee to be excluded under

Sec. 226.4(e)(1), all of the following conditions must be met: i. The document to be notarized is one used to perfect, release, or continue a security interest. ii. The document is required by law to be notarized. iii. A notary is considered a public official under applicable law. iv. The amount of the fee is set or authorized by law. 4. Non-filing insurance. The exclusion in Sec. 226.4(e)(2) is available only if non-filing insurance is purchased. If the creditor collects and simply retains a fee as a sort of ``self-insurance'' against non-filing, it may not be excluded from the finance charge. If the non-filing insurance premium exceeds the amount of the fees excludable from the finance charge under Sec. 226.4(e)(1), only the excess is a finance charge. For example: i. The fee for perfecting a security interest is $5.00 and the fee for releasing the security interest is $3.00. The creditor charges

$10.00 for non-filing insurance. Only $8.00 of the $10.00 is excludable from the finance charge. 4(f) Prohibited offsets. 1. Earnings on deposits or investments. The rule that the creditor shall not deduct any earnings by the consumer on deposits or investments applies whether or not the creditor has a security interest in the property.

rtrif 4(g) Special rule; mortgage transactions. 1. Applicability of commentary to mortgages. The staff commentary under Sec. Sec. 226.4(a)(2) and 226.4(c) through (e) (other than that under Sec. Sec. 226.4(c)(2), 226.4(c)(5), and 226.4(d)(2)) does not apply to closed-end transactions secured by real property or a dwelling. The staff commentary under Sec. Sec. 226.4(a) (other than paragraph (2) of that section), 226.4(c)(2), 226.4(c)(5), and 226.4(d)(2), however, does apply to such transactions. 2. Third-party charges. Charges imposed by third parties are finance charges if they fit the general definition under Sec. 226.4(a). Thus, if a third-party charge is payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to the extension of credit, it is a finance charge unless it would be payable in a comparable cash transaction. For example, appraisal and credit report fees are finance charges because they meet the definition in Sec. 226.4(a). This test generally does not depend on whether the creditor requires the service for which the charge is imposed. In addition, charges imposed by closing agents required by the creditor, whether their own or those of third parties they retain, generally are finance charges unless otherwise excluded.

(Note that Sec. 226.4(a)(2) does not apply to closed-end transactions secured by real property or a dwelling, pursuant to Sec. 226.4(g).)

Insurance premiums generally are finance charges, whether imposed by a closing agent or another insurer, although premiums for property insurance are excluded if Sec. 226.4(d)(2) is satisfied. Premiums for credit insurance (or fees for debt cancellation or debt suspension agreements) and premiums for lender's coverage under a title insurance policy are finance charges because they are imposed as an incident to the extension of credit. In contrast, premiums for owner's title insurance coverage are not finance charges because they are not imposed as an incident to the extension of credit. 3. Charges in comparable cash transactions. While the exclusions in

Sec. 226.4(c) through (e), other than Sec. Sec. 226.4(c)(5) and 226.4(d)(2) are inapplicable to closed-end transactions secured by real property or a dwelling, charges in connection with such transactions that are payable in a comparable cash transaction are not finance charges. See comment 4(a)-1. For example, property taxes and fees or taxes imposed to record the deed evidencing transfer from the seller to the buyer of title to the property securing the transaction are not finance charges because they would be paid even if no credit were extended to finance the purchase. In contrast, fees or taxes imposed to record the mortgage, deed of trust, or other security instrument evidencing the creditor's security interest in the property securing the transaction are finance charges because they would not be incurred were it not for the extension of credit.

* * * * *

Subpart C--Closed-End Credit

Sec. 226.17--General Disclosure Requirements. 17(a) Form of Disclosures

Paragraph 17(a)(1) 1. Clear and conspicuous. This standard requires that disclosures be in a reasonably understandable form. For example, while the regulation requires no mathematical progression or format, the disclosures must be presented in a way that does not obscure the relationship of the terms to each other. In addition, although no minimum type size is mandated, the disclosures must be legible, whether typewritten, handwritten, or printed by computer.

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2. Segregation of disclosures. The disclosures may be grouped together and segregated from other information in a variety of ways.

For example, the disclosures may appear on a separate sheet of paper or may be set off from other information on the contract or other documents:

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rtrifi.[ltrif] By outlining them in a box

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rtrifii.[ltrif] By bold print dividing lines

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rtrifiii.[ltrif] By a different color background

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rtrifiv.[ltrif] By a different type style

(The general segregation requirement described in this subparagraph does not apply to the disclosures required under

Sec. Sec. 226.19(b) and 226.20(c) although the disclosures must be clear and conspicuous.)

3. Location. The regulation imposes no specific location requirements on the segregated disclosures. For example:

[]

rtrifi.[ltrif] They may appear on a disclosure statement separate from all other material.

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rtrifii.[ltrif] They may be placed on the same document with the credit contract or other information, so long as they are segregated from that information.

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rtrifiii.[ltrif] They may be shown on the front or back of a document.

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rtrifiv.[ltrif] They need not begin at the top of a page.

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rtrifv.[ltrif] They may be continued from one page to another. 4. Content of segregated disclosures. Footnotes 37 and 38 contain exceptions to the requirement that the disclosures under Sec. 226.18 be segregated from material that is not directly related to those disclosures. Footnote 37 lists the items that may be added to the segregated disclosures, even though not directly related to those disclosures. Footnote 38 lists the items required under Sec. 226.18 that may be deleted from the segregated disclosures and appear elsewhere. Any one or more of these additions or deletions may be combined and appear either together with or separate from the segregated disclosures. The itemization of the amount financed under

Sec. 226.18(c), however, must be separate from the other segregated disclosures under Sec. 226.18. If a creditor chooses to include the security interest charges required to be itemized under Sec. 226.4(e) and Sec. 226.18(o) in the amount financed itemization, it need not list these charges elsewhere. 5. Directly Related. [rtrif]Except in a transaction secured by real property or a dwelling, t[ltrif][T]he segregated disclosures may, at the creditor's option, include any information that is directly related to those disclosures. [rtrif](See the commentary to Sec. 226.37(a)(2) for a discussion of directly related information for transactions secured by real property or a dwelling.)[ltrif] The following is directly related information [rtrif]for a transaction not secured by real property or a dwelling[ltrif]: i. A description of a grace period after which a late payment charge will be imposed. For example, the disclosure given under Sec. 226.18(l) may state that a late charge will apply to ``any payment received more than 15 days after the due date.'' ii. A statement that the transaction is not secured. For example, the creditor may add a category labelled ``unsecured'' or ``not secured'' to the security interest disclosures given under Sec. 226.18(m). iii. The basis for any estimates used in making disclosures. For example, if the maturity date of a loan depends solely on the occurrence of a future event, the creditor may indicate that the disclosures assume that event will occur at a certain time. iv. The conditions under which a demand feature may be exercised.

For example, in a loan subject to demand after five years, the disclosures may state that the loan will become payable on demand in five years. v. An explanation of the use of pronouns or other references to the parties to the transaction. For example, the disclosures may state,

```You' refers to the customer and `we' refers to the creditor.'' vi. Instructions to the creditor or its employees on the use of a multiple-purpose form. For example, the disclosures may state, ``Check box if applicable.'' vii. A statement that the borrower may pay a minimum finance charge upon prepayment in a simple-interest transaction. For example, when

State law prohibits penalties, but would allow a minimum finance charge in the event of prepayment, the creditor may make the Sec. 226.18(k)(1) disclosure by stating, ``You may be charged a minimum finance charge.'' viii. A brief reference to negative amortization in variable-rate transactions. For example, in the variable-rate disclosures, the creditor may include a short statement such as ``Unpaid interest will be added to principal.'' (See the commentary to Sec. 226.18(f)[(1)(iii)][rtrif](3)[ltrif].) ix. A brief caption identifying the disclosures. For example, the disclosures may bear a general title such as ``Federal Truth in Lending

Disclosures'' or a descriptive title such as ``Real Estate Loan

Disclosures.'' x. A statement that a due-on-sale clause or other conditions on assumption are contained in the loan document. For example, the disclosure given under Sec. 226.18(q) may state, ``Someone buying your home may, subject to conditions in the due-on-sale clause contained in the loan document, assume the remainder of the mortgage on the original terms.'' xi. If a State or Federal law prohibits prepayment penalties and excludes the charging of interest after prepayment from coverage as a penalty, a statement that the borrower may have to pay interest for some period after prepayment in full. The disclosure may state, for example, ``If you prepay your loan on other than the regular installment date, you may be assessed interest charges until the end of the month.'' xii. More than one hypothetical example under Sec. 226.18(f)[(1)(iv)][rtrif](4)[ltrif] in transactions with more than one variable-rate feature. For example, in a variable-rate transaction with an option permitting consumers to convert to a fixed-rate transaction, the disclosures may include an example illustrating the effects of an increase resulting from conversion in addition to the example illustrating an increase resulting from changes in the index. xiii. [rtrif]Reserved.[ltrif][The disclosures set forth under section 226.18(f)(1) for variable-rate transactions subject to section 226.18(f)(2).] xiv. [rtrif][Reserved][ltrif][A statement whether or not a subsequent purchase of the property securing an obligation may be permitted to assume the remaining obligation on its original terms.] xv. A late-payment fee disclosure under Sec. 226.18(l) on a single payment loan. xvi. The notice set forth in [Sec. 226.19(a)(4)][rtrif]Sec. 226.38(f)(1)[ltrif], in a closed-end transaction not subject to Sec. 226.19(a)(1)(i). In a mortgage transaction subject to Sec. 19(a)(1)(i), the creditor must disclose the notice contained in [Sec. 226.19(a)(4)][rtrif]Sec. 226.38(f)(1)[ltrif] grouped together with the disclosures made under [Sec. 226.18. See comment 19(a)(4)- 1.][rtrif]Sec. 226.38.[ltrif] 6. Multiple-purpose forms. [rtrif]Except for transactions secured by real property or a dwelling, t[ltrif][T]he creditor may design a disclosure statement that can be used for more than one type of transaction, so long as the required disclosures for individual transactions are clear and conspicuous. (See the Commentary to appendices G and H for a discussion of the treatment of disclosures that do not apply to specific transactions.) Any disclosure listed in

Sec. 226.18 (except the itemization of the amount financed under Sec. 226.18(c)) may

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be included on a standard disclosure statement even though not all of the creditor's transactions include those features. For example, the statement may include:

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rtrifi.[ltrif] The variable rate disclosure under Sec. 226.18(f).

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rtrifii.[ltrif] The demand feature disclosure under

Sec. 226.18(i).

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rtrifiii.[ltrif] A reference to the possibility of a security interest arising from a spreader clause, under Sec. 226.18(m).

The assumption policy disclosure under Sec. 226.18(q).

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rtrifiv.[ltrif] The required deposit disclosure under

Sec. 226.18(r). 7. Balloon payment financing with leasing characteristics. In certain credit sale or loan transactions, a consumer may reduce the dollar amount of the payments to be made during the course of the transaction by agreeing to make, at the end of the loan term, a large final payment based on the expected residual value of the property. The consumer may have a number of options with respect to the final payment, including, among other things, retaining the property and making the final payment, refinancing the final payment, or transferring the property to the creditor in lieu of the final payment.

Such transactions may have some of the characteristics of lease transactions subject to Regulation M, but are considered credit transactions where the consumer assumes the indicia of ownership, including the risks, burdens and benefits of ownership upon consummation. These transactions are governed by the disclosure requirements of this regulation instead of Regulation M. Creditors should not include in the segregated Truth in Lending disclosures additional information. Thus, disclosures should show the large final payment in the payment schedule and should not, for example, reflect the other options available to the consumer at maturity. [rtrif]For extensions of credit secured by real property or a dwelling, the large final payment in the payment schedule should be disclosed in accordance with the requirements under section 226.38(c), as applicable.[ltrif]

Paragraph 17(a)(2). 1. When disclosures must be more conspicuous. The following rules apply to the requirement that the terms annual percentage rate and finance charge be shown more conspicuously:

[]

rtrifi.[ltrif] The terms must be more conspicuous only in relation to the other required disclosures under Sec. 226.18. For example, when the disclosures are included on the contract document, those 2 terms need not be more conspicuous as compared to the heading on the contract document or information required by State law.

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rtrifii.[ltrif] The terms need not be more conspicuous except as part of the finance charge and annual percentage rate disclosures under Sec. 226.18(d) and (e), although they may, at the creditor's option, be highlighted wherever used in the required disclosures. For example, the terms may, but need not, be highlighted when used in disclosing a prepayment penalty under Sec. 226.18(k) or a required deposit under Sec. 226.18(r).

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rtrifiii.[ltrif] The creditor's identity under Sec. 226.18(a) may, but need not, be more prominently displayed than the finance charge and annual percentage rate.

[]

rtrifiv.[ltrif] The terms need not be more conspicuous than figures (including, for example, numbers, percentages, and dollar signs) 2. Making disclosures more conspicuous. The terms finance charge and annual percentage rate may be made more conspicuous in any way that highlights them in relation to the other required disclosures. For example, they may be:

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rtrifi.[ltrif] Capitalized when other disclosures are printed in capital and lower case.

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rtrifii.[ltrif] Printed in larger type, bold print or different type face.

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rtrifiii.[ltrif] Printed in a contrasting color.

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rtrifiv.[ltrif] Underlined.

[]

rtrifv.[ltrif] Set off with asterisks. 17(b) Time of disclosures. 1. Consummation. As a general rule, disclosures must be made before

``consummation'' of the transaction. The disclosures [rtrif]for transactions not secured by real property or a dwelling[ltrif] need not be given by any particular time before consummation[, except in certain mortgage transactions and variable-rate transactions secured by the consumer's principal dwelling with a term greater than one year under

Sec. 226.19.][rtrif] Pre-consummation disclosures for transactions secured by real property or a dwelling must be provided in accordance with the timing requirements in Sec. 226.19.[ltrif] (See the commentary to Sec. 226.2(a)(13) regarding the definition of consummation.) 2. Converting open-end to closed-end credit. Except for home equity plans subject to Sec. 226.5b in which the agreement provides for a repayment phase, if an open-end credit account is converted to a closed-end transaction under a written agreement with the consumer, the creditor must provide a set of closed-end credit disclosures before consummation of the closed-end transaction. ([rtrif]See the commentary to Sec. 226.19(a) for a discussion of disclosure timing requirements for closed-end transactions secured by real property or a dwelling.[ltrif] See the commentary to Sec. 226.19(b) for the timing rules for additional disclosures required upon the conversion to [a variable-rate transaction secured by a consumer's principal dwelling with a term greater than one year][rtrif]an adjustable-rate transaction secured by real property or a dwelling[ltrif].) If consummation of the closed-end transaction occurs at the same time as the consumer enters into the open-end agreement, the closed-end credit disclosures may be given at the time of conversion. If disclosures are delayed until conversion and the closed-end transaction has a variable-rate feature, disclosures should be based on the rate in effect at the time of conversion. (See the commentary to Sec. 226.5 regarding conversion of closed-end to open-end credit.) 3. Disclosures provided on credit contracts. Creditors must give the required disclosures to the consumer in writing, in a form that the consumer may keep, before consummation of the transaction. See Sec. 226.17(a)(1) and (b). Sometimes the disclosures are placed on the same document with the credit contract. Creditors are not required to give the consumer two separate copies of the document before consummation, one for the consumer to keep and a second copy for the consumer to execute. The disclosure requirement is satisfied if the creditor gives a copy of the document containing the unexecuted credit contract and disclosures to the consumer to read and sign; and the consumer receives a copy to keep at the time the consumer becomes obligated. It is not sufficient for the creditor merely to show the consumer the document containing the disclosures before the consumer signs and becomes obligated. The consumer must be free to take possession of and review the document in its entirety before signing. i. Example. To illustrate:

A. A creditor gives a consumer a multiple-copy form containing a credit agreement and TILA disclosures. The consumer reviews and signs the form and returns it to the creditor, who separates the copies and gives one copy to the consumer to keep. The creditor has satisfied the disclosure requirement. 17(c) Basis of disclosures and use of estimates.

Paragraph 17(c)(1)[rtrif]Legal obligation[ltrif]. 1. [Legal obligation.][rtrif]General.[ltrif] 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

Page 43377

Sec. 226.20(c), 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. [rtrif]The disclosures should be based on the assumption that the consumer will abide by the terms of the legal obligation throughout the term of the transaction. For example, the disclosures should be based on the assumption that the consumer makes payments on time and in full.

In the case of an adjustable-rate mortgage described in Sec. 226.38(a)(3)(i)(A), the creditor shall make the disclosure required by

Sec. 226.38(c) based on the assumption that the interest rate increases as fast as it can, taking into account any limitations on increases under the legal obligation.[ltrif] (Certain transactions are specifically addressed in this commentary. See, for example, the discussion of buydown transactions elsewhere in the commentary to Sec. 226.17(c).)

[]

rtrifi.[ltrif] 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. 2. Modification of obligation. The legal obligation normally is presumed to be contained in the note or contract that evidences the agreement. But this presumption is rebutted if another agreement between the parties legally modifies that note or contract. If the parties informally agree to a modification of the legal obligation, the modification should not be reflected in the disclosures unless it rises to the level of a change in the terms of the legal obligation. For example:

[]

rtrifi.[ltrif] If the creditor offers a preferential rate, such as an employee preferred rate, the disclosures should reflect the terms of the legal obligation[rtrif], subject to special disclosure rules for transactions secured by real property or a dwelling in Sec. 226.38(a)(3) and (c)[ltrif]. [(See the commentary to

Sec. 226.19(b) for an example of a preferred-rate transaction that is a variable-rate transaction.)]

[]

rtrifii.[ltrif] If the contract provides for a certain monthly payment schedule but payments are made on a voluntary payroll deduction plan or an informal principal-reduction agreement, the disclosures should reflect the schedule in the contract.

[]

rtrifiii.[ltrif] If the contract provides for regular monthly payments but the creditor informally permits the consumer to defer payments from time to time, for instance, to take account of holiday seasons or seasonal employment, the disclosures should reflect the regular monthly payments.

rtrif 3. Number of transactions. Creditors have flexibility in handling credit extensions that may be viewed as multiple transactions.

For example: i. When a creditor finances the credit sale of a radio and a television on the same day, the creditor may disclose the sales as either 1 or 2 credit sale transactions. ii. When a creditor finances a loan along with a credit sale of health insurance, the creditor may disclose in one of several ways: a single credit sale transaction, a single loan transaction, or a loan and a credit sale transaction. iii. The separate financing of a downpayment in a credit sale transaction may, but need not, be disclosed as 2 transactions (a credit sale and a separate transaction for the financing of the downpayment).[ltrif]

3. Third-party buydown.

rtrif17(c)(1)(i) Buydowns. 1. Third-party buydown.[ltrif] In certain transactions, a seller or other third party may pay an amount, either to the creditor or to the consumer, in order to reduce the consumer's payments or buy down the interest rate for all or a portion of the credit term. For example, a consumer and a bank agree to a mortgage with an interest rate of 15% and level payments over 25 years. By a separate agreement, the seller of the property agrees to subsidize the consumer's payments for the first 2 years of the mortgage, giving the consumer an effective rate of 12% for that period.

[]

rtrifi.[ltrif] If the lower rate is reflected in the credit contract between the consumer and the bank, the disclosures must take the buydown into account. For example, the annual percentage rate must be a composite rate that takes account of both the lower initial rate and the higher subsequent rate, and if the loan is not secured by real property or a dwelling, the payment schedule disclosures must reflect the 2 payment levels. However, the amount paid by the seller would not be specifically reflected in the disclosures given by the bank, since that amount constitutes seller's points and thus is not part of the finance charge.

[]

rtrifii.[ltrif] If the lower rate is not reflected in the credit contract between the consumer and the bank and the consumer is legally bound to the 15% rate from the outset, the disclosures given by the bank must not reflect the seller buydown in any way. For example, the annual percentage rate and, in a transaction not secured by real property, the payment schedule, would not take into account the reduction in the interest rate and payment level for the first 2 years resulting from the buydown.

4.

rtrif2.[ltrif] Consumer buydowns. In certain transactions, the consumer may pay an amount to the creditor to reduce the payments or obtain a lower interest rate on the transaction. Consumer buydowns must be reflected in the disclosures given for that transaction. To illustrate, in a mortgage transaction, the creditor and consumer agree to a note specifying a 14 percent interest rate. However, in a separate document, the consumer agrees to pay an amount to the creditor at consummation in return for a reduction in the interest rate to 12 percent for a portion of the mortgage term. The amount paid by the consumer may be deposited in an escrow account or may be retained by the creditor. Depending upon the buydown plan, the consumer's prepayment of the obligation may or may not result in a portion of the amount being credited or refunded to the consumer. In the disclosures given for the mortgage, the creditor must reflect the terms of the buydown agreement. For example:

[]

rtrifi.[ltrif] The amount paid by the consumer is a prepaid finance charge [(][rtrif],[ltrif] even if deposited in an escrow account[)]. [rtrif](In transactions secured by real property or a dwelling, ``finance charges'' are referred to as ``interest and settlement charges'' under Sec. 226.38(e)(5)(ii).)[ltrif]

[]

rtrifii.[ltrif] A composite annual percentage rate must be calculated, taking into account both interest rates, as well as the effect of the prepaid finance charge.

[]

rtrifiii.[ltrif] The payment schedule must reflect the multiple payment levels resulting from a buydown[rtrif], in a transaction not secured by real property or a dwelling[ltrif].

rtrif 3. Lender buydown.[ltrif] The rules regarding consumer buydowns do not apply to transactions known as ``lender buydowns.'' In lender buydowns. a creditor pays an amount (either into an account or to the party to whom the obligation is sold) to reduce the consumer's payments or interest rate for all or a portion of the credit term.

Typically, these transactions are structured as a buydown of the interest rate during an initial period of the transaction with a higher than usual rate for the remainder of the term. The disclosures for lender buydowns should be based on the terms of the legal obligation between the consumer and the creditor. See comment [17(c)(1)- 3][rtrif]17(c)(1)(i)-1[ltrif] for the analogous rules concerning third- party buydowns.

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5.

rtrif4.[ltrif] Split buydowns. In certain transactions, a third party (such as a seller) and a consumer both pay an amount to the creditor to reduce the interest rate. The creditor must include the portion paid by the consumer in the finance charge and disclose the corresponding multiple payment levels and composite annual percentage rate. The portion paid by the third party and the corresponding reduction in interest rate, however, should not be reflected in the disclosures unless the lower rate is reflected in the credit contract.

See the discussion on third-party and consumer buydown transactions

elsewhere in the commentary to Sec. 226.17(c)

rtrifin comments 17(c)(1)(i)-1 and 17(c)(1)(i)-2, respectively[ltrif].

rtrif 17(c)(1)(ii) Wrap-around financing.[ltrif]

6. Wraparound financing.

rtrif1. General.[ltrif] Wrap-around transactions, usually loans, involve the creditor's wrapping the outstanding balance on an existing loan and advancing additional funds to the consumer. The pre-existing loan, which is wrapped, may be to the same consumer or to a different consumer. In either case, the consumer makes a single payment to the new creditor, whom makes the payments on the pre-existing loan to the original creditor. Wrap-around loans or sales are considered new single-advance transactions, with an amount financed equaling the sum of the new funds advanced by the wrap creditor and the remaining principal owed to the original creditor on the pre-existing loan. In disclosing the itemization of the amount financed, the creditor may use a label such as ``the amount that will be paid to creditor X'' to describe the remaining principal balance on the pre-existing loan. This approach to Truth in Lending calculations has no effect on calculations required by other statutes, such as State usury laws.

7.

rtrif2.[ltrif] Wrap-around financing with balloon payments.

For wrap-around transactions involving a large final payment of the new funds before the maturity of the pre-existing loan, the amount financed is the sum of the new funds and the remaining principal on the pre- existing loan. The disclosures should be based on the shorter term of the wrap loan, with a large final payment of both the new funds and the total remaining principal on the pre-existing loan (although only the wrap loan will actually be paid off at that time).

rtrif 17(c)(1)(iii) Variable- or adjustable-rate transactions.[ltrif]

8.

rtrif1.[ltrif] Basis of disclosures [in variable-rate transactions]. The disclosures for a variable-[rtrif]or adjustable-

ltrif

rate transaction must be given for the full term of the transaction and must be based on the terms in effect at the time of consummation. Creditors [rtrif]generally[ltrif] should base the disclosures only on the initial rate and should not assume that this rate will increase [rtrif](except as provided in Sec. 226.38(c) for transactions secured by real property or a dwelling)[ltrif]. For example, in a [rtrif]a variable- or adjustable-rate[ltrif] loan with an initial [rtrif]interest[ltrif] rate of 10 percent and a 5 percentage points rate cap, creditors should base the disclosures on the initial rate and should not assume that the rate will increase 5 percentage points. However, in a variable-rate transaction with a seller buydown that is reflected in the credit contract, a consumer buydown, or a discounted or premium rate, disclosures should be a composite rate based on the rate in effect during the initial period and the rate that is the basis of the variable-rate feature for the remainder of the term. (See the commentary to section 226.17(c)[rtrif](1)[ltrif] for a discussion of buydown, discounted, and premium transactions and the commentary to section 226.19(a)(2) for a discussion of [the] redisclosure in [certain mortgage transactions with a variable-rate]

rtrif transactions secured by real property or a dwelling with an adjustable-rate[ltrif] feature.

9.

rtrif2.[ltrif] Use of estimates in variable-[rtrif]or adjustable-[ltrif]rate transactions. The variable- [rtrif]or adjustable-[ltrif] rate feature does not, by itself, make the disclosures estimates.

10.

rtrif3.[ltrif] Discounted and premium variable-[rtrif]or adjustable-[ltrif]rate transactions. In some variable-[rtrif]or adjustable-[ltrif]rate transactions, creditors may set an initial interest rate that is not determined by the index or formula used to make later interest rate adjustments. Typically, this initial rate charged to consumers is lower than the rate would be if it were calculated using the index or formula. However, in some cases the initial rate may be higher. In a discounted transaction, for example, a creditor may calculate interest rates according to a formula using the six-month Treasury bill rate plus a 2 percent margin. If the Treasury bill rate at consummation is 10 percent, the creditor may forgo the 2 percent spread and charge only 10 percent for a limited time, instead of setting an initial rate of 12 percent. i. When creditors use an initial interest rate that is not calculated using the index or formula for later rate adjustments, the disclosures should reflect a composite annual percentage rate based on the initial rate for as long as it is charged and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation. The interest rate at consummation need not be used if a contract provides for a delay in the implementation of changes in an index value. For example, if the contract specifies that interest rate changes are based on the index value in effect 45 days before the [rtrif]interest rate[ltrif] change date, creditors may use any index value in effect during the 45[rtrif]-

ltrif day period before consummation in calculating a composite annual percentage rate. ii. The effect of the multiple rates must also be reflected in the calculation and disclosure of the finance charge, total of payments, and payment schedule. [rtrif](In transactions secured by real property or a dwelling, creditors disclose the ``interest and settlement charges'' rather than the ``finance charge'' and the ``payment summary'' rather than the ``payment schedule.'' See Sec. 226.38(c) and

(e)(5).[ltrif] iii. If a loan contains a rate or payment cap that would prevent the initial rate or payment, at the time of the first adjustment, from changing to the rate determined by the index or formula at consummation, the effect of that rate or payment cap should be reflected in the disclosures. iv. Because these transactions involve irregular payment amounts, an annual percentage rate tolerance of \14\; of 1 percent applies, in accordance with Sec. 226.22(a)(3). v. Examples of discounted [variable][rtrif]adjustable[ltrif]-rate transactions [rtrif]secured by real property or a dwelling[ltrif] include:

A. A 30-year loan for $100,000 with no prepaid [finance charges][rtrif]interest and settlement charges[ltrif] and rates determined by the Treasury bill rate plus 2 percent. Rate and payment adjustments are made annually. Although the Treasury bill rate at the time of consummation is 10 percent, the creditor sets the interest rate for one year at 9 percent, instead of 12 percent according to the formula. The disclosures should reflect a composite annual percentage rate of 11.63 percent based on 9 percent for one year and 12 percent for 29 years. [Reflecting those two rate levels, the payment schedule should show 12 payments of $804.62 and 348 payments of $1,025.31.] The

finance charge

rtrifinterest and settlement charges[ltrif] should be

$266,463.32 and the total of payments $366,463.32.

B. Same loan as above, except with a 2 percent rate cap on periodic adjustments. The disclosures should reflect a composite annual percentage

Page 43379

rate of 11.53 percent based on 9 percent for the first year, 11 percent for the second year, and 12 percent for the remaining 28 years.

Reflecting those three rate levels, the payment schedule should show 12 payments of $804.62, 12 payments of $950,09, and 336 payments of

$365,234.76.

The [finance charge][rtrif]interest and settlement charges[ltrif] should be $265,234.76 and the total of payments should be $365,234.76.

C. Same loan as above, except with a 7\1/2\; percent cap on payment adjustments. The disclosures should reflect a composite annual percentage rate of 11.64 percent, based on 9 percent for one year and 12 percent for 29 years. [Because of the payment cap, five levels of payments should be reflected.] The [finance charge][rtrif]interest and settlement charges[ltrif] should be $277,040.60, and the total of payments $377,040.60. vi. A loan in which the initial interest rate is set according to the index or formula used for later adjustments but is not set at the value of the index or formula at consummation is not a discounted or premium variable-[rtrif]or adjustable-[ltrif]rate loan. For example, if a creditor commits to an initial rate based on the formula on a date prior to consummation, but the index has moved during the period between that time and consummation, a creditor should base its disclosures on the initial rate.

11. Examples of variable-rate transactions.

rtrif4. General. In general, v[ltrif][V]ariable-rate transactions include:

[]

rtrifi.[ltrif] Renewable balloon-payment instruments

rtrif with a fixed interest rate[ltrif] where the creditor is both unconditionally obligated to renew the balloon-payment loan at the consumer's option (or is obligated to renew subject to conditions within the consumer's control) and has the option of increasing the interest rate at the time of renewal. [rtrif](However, a transaction secured by real property or a dwelling with a balloon payment and a fixed interest rate must be disclosed as a fixed-rate transaction under

Sec. 226.38(a)(3) whether or not the transaction is renewable.)[ltrif]

Disclosures must be based on the payment amortization (unless the specified term of the obligation with renewals is shorter) and on the rate in effect at the time of consummation of the transaction.

(Examples of conditions within a consumer's control include requirements that a consumer be current in payments or continue to reside in the mortgaged property. In contrast, setting a limit on the rate at which the creditor would be obligated to renew or reserving the right to change the credit standards at the time of renewal are examples of conditions outside a consumer's control.) If, however, a creditor is not obligated to renew as described above, disclosures must be based on the term of the balloon-payment loan. Disclosures also must be based on the term of the balloon-payment loan in balloon-payment instruments in which the legal obligation provides that the loan will be renewed by a ``refinancing'' of the obligation, as that term is defined by Sec. 226.20(a). If it cannot be determined from the legal obligation that the loan will be renewed by a ``refinancing,'' disclosures must be based either on the term of the balloon-payment loan or on the payment amortization, depending on whether the creditor is unconditionally obligated to renew the loan as described above.

(This discussion does not apply to construction loans subject to Sec. 226.17(c)(6).)

``Shared-equity'' or ``shared-appreciation'' mortgages that have a fixed rate of interest and an appreciation share based on the consumer's equity in the mortgaged property, in a transaction not secured by real property or a dwelling. The appreciation share is payable in a lump sum at a specified time. Disclosures must be based on the fixed interest rate. (As discussed in the commentary to Sec. 226.2, other types of shared-equity arrangements are not considered

``credit'' and are not subject to Regulation Z.)

[]

rtrifii.[ltrif] Preferred-rate loans where the terms of the legal obligation provide that the initial underlying rate is fixed but will increase upon the occurrence of some event, such as an employee leaving the employ of the creditor, and the note reflects the preferred rate. The disclosures are to be based on the preferred rate.

Graduated-payment mortgages and step-rate transactions without a variable-rate feature are not considered variable-rate transactions. ``Shared-equity'' or ``shared-appreciation'' mortgages are not considered variable-rate transactions.

[]

rtrifiii.[ltrif] ``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. Disclosures are to be based on the fixed interest rate.

rtrif 5. Not variable- or adjustable-rate transactions. Graduated- payment mortgages and step-rate transactions without a variable-rate feature are not considered variable- or adjustable-rate transactions.[ltrif]

12.

rtrif 6.[ltrif] Graduated-payment adjustable-rate mortgage.

Graduated payment adjustable rate mortgages involve both [a variable][rtrif]an adjustable[ltrif] interest rate and scheduled

variations

rtrifadjustments[ltrif] in payment amounts during the loan term. For example, under these plans, a series of graduated payments may be scheduled before rate adjustments affect payment amounts, or the initial scheduled payment may remain constant for a set period before rate adjustments affect the payment amount. In any case, the initial payment amount may be insufficient to cover the scheduled interest, causing negative amortization from the outset of the transaction. In these transactions, the disclosures should treat these features as follows:

[]

rtrifi.[ltrif] The finance charge includes the amount of negative amortization based on the assumption that the rate in effect at consummation remains unchanged.

[]

rtrifii.[ltrif] The amount financed does not include the amount of negative amortization.

[]

rtrifiii.[ltrif] As in any variable- [rtrif]or adjustable-[ltrif] rate transaction, the annual percentage rate is based on the terms in effect at consummation.

The schedule of payments discloses the amount of any scheduled initial payments followed by an adjusted level of payments based on the initial interest rate. Since some mortgage plans contain limits on the amount of the payment adjustment, the payment schedule in a transaction not secured by real property or a dwelling, or payment summary, in a transaction secured by real property or a dwelling may require several different levels of payments, even with the assumption that the original interest rate does not increase.

13.

rtrif7.[ltrif] Growth-equity mortgages. [rtrif]Growth-equity mortgages, a[ltrif][A]lso referred to as payment-escalated mortgages,

these mortgage plans involve

scheduled payment increases to prematurely amortize the loan. The initial payment amount is determined as for a long-term loan with a fixed interest rate. Payment increases are scheduled periodically, based on changes in an index. The larger payments result in accelerated amortization of the loan. In disclosing these mortgage plans, creditors [may either--

Estimate][rtrif]must estimate[ltrif] the amount of payment increases, based on the best information reasonably available[, or

Disclose by analogy to the variable-rate disclosures in section 226.18(f)(1)]. (This discussion does not apply to growth-equity mortgages in which the

Page 43380

amount of payment increases can be accurately determined at the time of disclosure. For these mortgages, [as for graduated-payment mortgages,] disclosures should reflect the scheduled increases in payments.)

14. Reverse mortgages.

rtrif17(c)(1)(iv) Repayment upon occurrence of future event.[ltrif]

rtrif 1. General.[ltrif] Reverse mortgages, also known as reverse annuity or home equity conversion mortgages, typically involve the disbursement of monthly advances to the consumer for a fixed period or until the occurrence of an event such as the consumer's death.

Repayment of the loan (generally a single payment of principal and accrued interest) may be required to be made at the end of the disbursements or, for example, upon the death of the consumer.

rtrif

(However, a reverse mortgage is covered by Sec. 226.33 only if the consumer's death is one of the conditions of repayment, as provided under Sec. 226.33(a).)[ltrif] In disclosing these transactions, creditors must apply the following rules, as applicable:

[]

rtrifi.[ltrif] If the reverse mortgage has a specified period for disbursements but repayment is due only upon the occurrence of a future event such as the death of the consumer, the creditor must assume that disbursements will be made until they are scheduled to end.

The creditor must assume repayment will occur when disbursements end

(or within a period following the final disbursement which is not longer than the regular interval between disbursements). This assumption should be used even though repayment may occur before or after the disbursements are scheduled to end. In such cases, the creditor may include a statement such as ``The disclosures assume that you will repay the loan at the time our payments to you end. As provided in your agreement, your repayment may be required at a different time.''

[]

rtrifii.[ltrif] If the reverse mortgage has neither a specified period for disbursements nor a specified repayment date and these terms will be determined solely by reference to future events including the consumer's death, the creditor may assume that the disbursements will end upon the consumer's death (estimated by using actuarial tables, for example) and that repayment will be required at the same time (or within a period following the date of the final disbursement which is not longer than the regular interval for disbursements). Alternatively, the creditor may base the disclosures upon another future event it estimates will be most likely to occur first. (If terms will be determined by reference to future events which do not include the consumer's death, the creditor must base the disclosures upon the occur[rtrif]r[ltrif]ence of the event estimated to be most likely to occur first.)

[]

rtrifiii.[ltrif] In making the disclosures, the creditor must assume that all disbursements and accrued interest will be paid by the consumer. For example, if the note has a nonrecourse provision providing that the consumer is not obligated for an amount greater than the value of the house, the creditor must nonetheless assume that the full amount to be disbursed will be repaid. In this case, however, the creditor may include a statement such as ``The disclosures assume full repayment of the amount advanced plus accrued interest, although the amount you may be required to pay is limited by your agreement.''

[]

rtrifiv.[ltrif] Some reverse mortgages provide that some or all of the appreciation in the value of the property will be shared between the consumer and the creditor. [Such loans are considered variable-rate mortgages, as described in comment 17(c)(1)- 11, and the appreciation feature must be disclosed in accordance with

Sec. 226.18(f)(1). If the reverse mortgage has a variable interest rate, is written for a term greater than one year, and is secured by the consumer's principal dwelling, the shared appreciation feature must be described under Sec. 226.19(b)(2)(vii).][rtrif]If the reverse mortgage has an adjustable interest rate and is secured by real property or a dwelling, the creditor must disclose the shared-equity or shared-appreciation feature as required by Sec. Sec. 226.19(b)(3)(iii) and 226.38(d)(2)(iii).[ltrif]

15. Morris Plan transactions. When a deposit account is created for the sole purpose of accumulating payments and then is applied to satisfy entirely the consumer's obligation in the transaction, each deposit made into the account is considered the same as a payment on a loan for purposes of making disclosures. 16. Number of transactions. Creditors have flexibility in handling credit extensions that may be viewed as multiple transactions. For example:

When a creditor finances the credit sale of a radio and a television on the same day, the creditor may disclose the sales as either 1 or 2 credit sale transactions.

When a creditor finances a loan along with a credit sale of health insurance, the creditor may disclose in one of several ways: a single credit sale transaction, a single loan transaction, or a loan and a credit sale transaction.

The separate financing of a downpayment in a credit sale transaction may, but need not, be disclosed as 2 transactions (a credit sale and a separate transaction for the financing of the downpayment).

17. Special rules for tax refund anticipation loans.

rtrif17(c)(1)(v) Tax refund-anticipation loan.[ltrif]

rtrif 1. General.[ltrif] Tax refund loans, also known as refund anticipation loans (RALs), are transactions in which a creditor will lend up to the amount of a consumer's expected tax refund. RAL agreements typically require repayment upon demand, but also may provide that repayment is required when the refund is made. The agreements also typically provide that if the amount of the refund is less than the payment due, the consumer must pay the difference.

Repayment often is made by a preauthorized offset to a consumer's account held with the creditor when the refund has been deposited by electronic transfer. Creditors may charge fees for RALs in addition to fees for filing the consumer's tax return electronically. In RAL transactions subject to the regulation the following special rules apply:

[]

rtrifi.[ltrif] If, under the terms of the legal obligation, repayment of the loan is required when the refund is received by the consumer (such as by deposit into the consumer's account), the disclosures should be based on the creditor's estimate of the time the refund will be delivered even if the loan also contains a demand clause. The practice of a creditor to demand repayment upon delivery of refunds does not determine whether the legal obligation requires that repayment be made at that time; this determination must be made according to applicable State or other law. (See comment 17(c)(5)-1 for the rules regarding disclosures if the loan is payable solely on demand or is payable either on demand or on an alternate maturity date.)

[]

rtrifii.[ltrif] If the consumer is required to repay more than the amount borrowed, the difference is a finance charge unless excluded under Sec. 226.4. In addition, to the extent that any fees charged in connection with the loan (such as for filing the tax return electronically) exceed those fees for a comparable cash transaction (that is, filing the tax return electronically without a loan), the difference must be included in the finance charge.

18.

rtrif17(c)(1)(vi)[ltrif] Pawn transactions.

rtrif 1. General.[ltrif] When, in connection with an extension of credit, a consumer pledges or sells an item to a pawnbroker

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From the Federal Register Online via GPO Access [wais.access.gpo.gov]

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pp. 43381-43425

Truth in Lending

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Page 43381

creditor in return for a sum of money and retains the right to redeem the item for a greater sum (the redemption price) within a specified period of time, disclosures are required. In addition to other disclosure requirements that may be applicable under Sec. 226.18, for purposes of pawn transactions: i. The amount financed is the initial sum paid to the consumer. The pawnbroker creditor need not provide a separate itemization of the amount financed if that entire amount is paid directly to the consumer and the disclosed description of the amount financed is ``the amount of cash given directly to you'' or a similar phrase. ii. The finance charge is the difference between the initial sum paid to the consumer and the redemption price plus any other finance charges paid in connection with the transaction. (See Sec. 226.4.) iii. The term of the transaction, for calculating the annual percentage rate, is the period of time agreed to by the pawnbroker creditor and the consumer. The term of the transaction does not include a grace period (including any statutory grace period) after the agreed redemption date.

Paragraph 17(c)(2)(i). 1. Basis for estimates. Disclosures may be estimated when the exact information is unknown at the time disclosures are made[rtrif], except that creditors may not provide estimated disclosures in disclosures required by Sec. 226.19(a)(2)(ii) and (iii)[ltrif]. Information is unknown if it is not reasonably available to the creditor at the time the disclosures are made. The ``reasonably available'' standard requires that the creditor, acting in good faith, exercise due diligence in obtaining information. For example, the creditor must at a minimum utilize generally accepted calculation tools, but need not invest in the most sophisticated computer program to make a particular type of calculation. The creditor normally may rely on the representations of other parties in obtaining information. For example, the creditor might look to the consumer for the time of consummation, to insurance companies for the cost of insurance, or to realtors for taxes and escrow fees. The creditor may utilize estimates in making disclosures even though the creditor knows that more precise information will be available by the point of consummation. However, new disclosures may be required under Sec. 226.17(f) or Sec. 226.19. 2. Labelling estimates. Estimates must be designated as such in the segregated disclosures[rtrif], except that creditors may not provide estimated disclosures in the disclosures required by Sec. 226.19(a)(2)(ii) and (iii)[ltrif]. Even though other disclosures are based on the same assumption on which a specific estimated disclosure was based, the creditor has some flexibility in labelling the estimates. Generally, only the particular disclosure for which the exact information is unknown is labelled as an estimate. However, when several disclosures are affected because of the unknown information, the creditor has the option of labelling either every affected disclosure or only the disclosure primarily affected. For example, when the finance charge is unknown because the date of consummation is unknown, the creditor must label the finance charge as an estimate and may also label as estimates the total of payments and the payment schedule. When many [rtrif]numerical[ltrif] disclosures are estimates, the creditor may use a general statement, such as ``all numerical disclosures except the late payment disclosure are estimates,'' as a method to label those disclosures as estimates. 3. Simple-interest transactions. If consumers do not make timely payments in a simple-interest transaction, some of the amounts calculated for Truth in Lending disclosures will differ from amounts that consumers will actually pay over the term of the transaction.

Creditors may label disclosures as estimates in these transactions[.][rtrif]except as otherwise provided by Sec. 226.19(a)(2). (See the commentary on Sec. 226.19(a)(2) for a discussion of circumstances where creditors may not disclose estimates for transactions secured by real property or a dwelling.)[ltrif] For example, because the finance charge and total of payments may be larger than disclosed if consumers make late payments, creditors may label the finance charge and total of payments as estimates. On the other hand, creditors may choose not to label disclosures as estimates[rtrif]. In all cases, creditors[ltrif] [and] may base [all] disclosures on the assumption that payments will be made on time [rtrif]and in the amounts required by the terms of the legal obligation,[ltrif] disregarding any possible [inaccuracies][rtrif]differences[ltrif] resulting from consumers' payment patterns.

Paragraph 17(c)(2)(ii) 1. Per diem interest. This paragraph applies to any numerical amount (such as the finance charge, annual percentage rate, or payment amount) that is affected by the amount of the per-diem interest charge that will be collected at consummation. If the amount of per-diem interest used in preparing the disclosures for consummation is based on the information known to the creditor at the time the disclosure document is prepared, the disclosures are considered accurate under this rule, and affected disclosures are also considered accurate, even if the disclosures are not labeled as estimates. For example, if the amount of per-diem interest used to prepare disclosures is less than the amount of per-diem interest charged at consummation, and as a result the finance charge is understated by $200, the disclosed finance charge is considered accurate even though the understatement is not within the $100 tolerance of Sec. 226.18(d)(1), and the finance charge was not labeled as an estimate. In this example, if in addition to the understatement related to the per-diem interest, a $90 fee is incorrectly omitted from the finance charge, causing it to be understated by a total of $290, the finance charge is considered accurate because the $90 fee is within the tolerance in Sec. 226.18(d)(1).

Paragraph 17(c)(3) 1. Minor variations. Section 226.17(c)(3) allows creditors to disregard certain factors in calculating and making disclosures. For example:

[]

rtrifi.[ltrif] Creditors may ignore the effects of collecting payments in whole cents. Because payments cannot be collected in fractional cents, it is often difficult to amortize exactly an obligation with equal payments; the amount of the last payment may require adjustment to account for the rounding of the other payments to whole cents.

[]

rtrifii.[ltrif] Creditors may base their disclosures on calculation tools that assume that all months have an equal number of days, even if their practice is to take account of the variations in months for purposes of collecting interest. For example, a creditor may use a calculation tool based on a 360-day year, when it in fact collects interest by applying a factor of 1/365 of the annual rate to 365 days. This rule does not, however, authorize creditors to ignore, for disclosure purposes, the effects of applying 1/360 of an annual rate to 365 days. 2. Use of special rules. A creditor may utilize the special rules in Sec. 226.17(c)(3) for purposes of calculating and making all disclosures for a transaction or may, at its option, use the special rules for some disclosures and not others.

Paragraph 17(c)(4). 1. Payment schedule irregularities. When one or more payments in a transaction differ from the others because of a long or short first period, the variations may be ignored in disclosing the payment schedule,

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finance charge, annual percentage rate, and other terms. For example:

[]

rtrifi.[ltrif] A 36-month auto loan might be consummated on June 8 with payments due on July 1 and the first of each succeeding month. The creditor may base its calculations on a payment schedule that assumes 36 equal intervals and 36 equal installment payments, even though a precise computation would produce slightly different amounts because of the shorter first period.

[]

rtrifii.[ltrif] By contrast, in the same example, if the first payment were not scheduled until August 1, the irregular first period would exceed the limits in Sec. 226.17(c)(4); the creditor could not use the special rule and could not ignore the extra days in the first period in calculating its disclosures. 2. Measuring odd periods. In determining whether a transaction may take advantage of the rule in Sec. 226.17(c)(4), the creditor must measure the variation against a regular period. For purposes of that rule:

[]

rtrifi.[ltrif] The first period is the period from the date on which the finance charge begins to be earned to the date of the first payment.

[]

rtrifii.[ltrif] The term is the period from the date on which the finance charge begins to be earned to the date of the final payment.

[]

rtrifiii.[ltrif] The regular period is the most common interval between payments in the transaction.

In transactions involving regular periods that are monthly, semimonthly or multiples of a month, the length of the irregular and regular periods may be calculated on the basis of either the actual number of days or an assumed 30-day month. In other transactions, the length of the periods is based on the actual number of days. 3. Use of special rules. A creditor may utilize the special rules in Sec. 226.17(c)(4) for purposes of calculating and making some disclosures but may elect not to do so for all of the disclosures. For example, the variations may be ignored in calculating and disclosing the annual percentage rate but taken into account in calculating and disclosing the finance charge and payment schedule. 4. Relation to prepaid finance charges. Prepaid finance charges, including ``odd-days'' or ``per-diem'' interest, paid prior to or at closing may not be treated as the first payment on a loan. Thus, creditors may not disregard an irregularity in disclosing such finance charges.

Paragraph 17(c)(5). 1. Demand disclosures. Disclosures for demand obligations are based on an assumed 1-year term, unless an alternate maturity date is stated in the legal obligation. Whether an alternate maturity date is stated in the legal obligation is determined by applicable law. An alternate maturity date is not inferred from an informal principal reduction agreement or a similar understanding between the parties. However, when the note itself specifies a principal reduction schedule (for example,

``payable on demand or $2,000 plus interest quarterly''), an alternate maturity is stated and the disclosures must reflect that date.

rtrif

See Sec. Sec. 226.19(b)(2)(ii)(D) and 226.38(d)(2)(iv) and associated commentary to determine how to disclose a demand feature for a transaction secured by real property or a dwelling.[ltrif] 2. Future event as maturity date. An obligation whose maturity date is determined solely by a future event, as for example, a loan payable only on the sale of property, is not a demand obligation. Because no demand feature is contained in the obligation, demand disclosures under

Sec. 226.18(i) are inapplicable. The disclosures should be based on the creditor's estimate of the time at which the specified event will occur, and [rtrif]in a transaction not secured by real property or a dwelling[ltrif] may indicate the basis for the creditor's estimate, as noted in the commentary to Sec. 226.17(a). 3. Demand after stated period. Most demand transactions contain a demand feature that may be exercised at any point during the term, but

certain transactions

rtrifa transaction may[ltrif] convert to demand status only after a fixed period. [For example, in States prohibiting due-on-sale clauses, the Federal National Mortgage Association (FNMA) requires mortgages that it purchases to include a call option rider that may be exercised after 7 years. These mortgages are generally written as long-term obligations, but contain a demand feature that may be exercised only within a 30-day period at 7 years.] The disclosures for [these transactions][rtrif]a transaction that converts to demand status after a fixed period[ltrif] should be based upon the legally agreed-upon maturity date. Thus, [rtrif]for example,[ltrif] if a mortgage containing [the 7-year FNMA call option] [rtrif]a call option the creditor may exercise during the first 30 days of the eighth year after loan origination[ltrif] is written as a 20-year obligation, the disclosures should be based on the 20-year term, with the demand feature disclosed under [Sec. 226.18(i)][rtrif] Sec. 226.38(d)(2)(iv)[ltrif]. 4. Balloon mortgages. Balloon payment mortgages, with payments based on a long-term amortization schedule and a large final payment due after a shorter term, are not demand obligations unless a demand feature is specifically contained in the contract. For example, a mortgage with a term of 5 years and a payment

schedule

rtrifsummary[ltrif] based on 20 years would not be treated as a mortgage with a demand feature, in the absence of any contractual demand provisions. [In this type of mortgage, disclosures should be based on the 5-year term.][rtrif](See Sec. 226.38(c)(3) for requirements for interest rate and payment summary disclosures for balloon payment mortgages.)[ltrif]

Paragraph 17(c)(6). 1. Series of advances. Section 226.17(c)(6)(i) deals with a series of advances under an agreement to extend credit up to a certain amount.

A creditor may treat all of the advances as a single transaction or disclose each advance as a separate transaction. If these advances are treated as 1 transaction and the timing and amounts of advances are unknown, creditors must make disclosures based on estimates, as provided in Sec. 226.17(c)(2). If the advances are disclosed separately, disclosures must be provided before each advance occurs, with the disclosures for the first advance provided by consummation. 2. Construction loans. Section 226.17(c)(6)(ii) provides a flexible rule for disclosure of construction loans that may be permanently financed. These transactions have 2 distinct phases, similar to 2 separate transactions. The construction loan may be for initial construction or subsequent construction, such as rehabilitation or remodelling. The construction period usually involves several disbursements of funds at times and in amounts that are unknown at the beginning of that period, with the consumer paying only accrued interest until construction is completed. Unless the obligation is paid at that time, the loan then converts to permanent financing in which the loan amount is amortized just as in a standard mortgage transaction. Section 226.17(c)(6)(ii) permits the creditor to give either one combined disclosure for both the construction financing and the permanent financing, or a separate set of disclosures for the 2 phases. This rule is available whether the consumer is initially obligated to accept construction financing only or is obligated to accept both construction and permanent financing from the outset. If the consumer is obligated on both phases and the creditor chooses to give 2 sets of disclosures, both sets must be given to the consumer initially, because both

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transactions would be consummated at that time. (Appendix D provides a method of calculating the annual percentage rate and other disclosures for construction loans, which may be used, at the creditor's option, in disclosing construction financing.) 3. Multiple-advance construction loans. Section 226.17(c)(6)(i) and

(ii) are not mutually exclusive. For example, in a transaction that finances the construction of a dwelling that may be permanently financed by the same creditor, the construction phase may consist of a series of advances under an agreement to extend credit up to a certain amount. In these cases, the creditor may disclose the construction phase as either 1 or more than 1 transaction and also disclose the permanent financing as a separate transaction. 4. Residential mortgage transaction. See the commentary to Sec. 226.2(a)(24) for a discussion of the effect of Sec. 226.17(c)(6) on the definition of a residential mortgage transaction. 5. Allocation of points. When a creditor utilizes the special rule in Sec. 226.17(c)(6) to disclose credit extensions as multiple transactions, buyers points or similar amounts imposed on the consumer must be allocated for purposes of calculating disclosures. While such amounts should not be taken into account more than once in making calculations, they may be allocated between the transactions in any manner the creditor chooses. For example, if a construction-permanent loan is subject to 5 points imposed on the consumer and the creditor chooses to disclose the 2 phases separately, the 5 points may be allocated entirely to the construction loan, entirely to the permanent loan, or divided in any manner between the two. However, the entire 5 points may not be applied twice, that is, to both the construction and the permanent phases. 17(d) Multiple creditors; multiple consumers. 1. Multiple creditors. If a credit transaction involves more than one creditor:

[]

rtrifi.[ltrif] The creditors must choose which of them will make the disclosures.

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rtrifii.[ltrif] A single, complete set of disclosures must be provided, rather than partial disclosures from several creditors.

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rtrifiii.[ltrif] All disclosures for the transaction must be given, even if the disclosing creditor would not otherwise have been obligated to make a particular disclosure. For example, if one of the creditors is the seller, the total sale price disclosure under

Sec. 226.18(j) must be made, even though the disclosing creditor is not the seller. 2. Multiple consumers. When two consumers are joint obligors with primary liability on an obligation, the disclosures may be given to either one of them. If one consumer is merely a surety or guarantor, the disclosures must be given to the principal debtor. In rescindable transactions, however, separate disclosures must be given to each consumer who has the right to rescind under Sec. 226.23, although the disclosures required under Sec. 226.19(b) need only be provided to the consumer who expresses an interest in a variable-rate loan program. 17(e) Effect of subsequent events. 1. Events causing inaccuracies. Inaccuracies in disclosures are not violations if attributable to events occurring after the disclosures are made. [For example, when the consumer fails to fulfill a prior commitment to keep the collateral insured and the creditor then provides the coverage and charges the consumer for it, such a change does not make the original disclosures inaccurate.] The creditor may, however, be required to make new disclosures under Sec. 226.17(f) or

Sec. 226.19 if the events occurred between disclosure and consummation or under Sec. 226.20 if the events occurred after consummation.[rtrif]

For example, when the consumer fails to fulfill a prior commitment to keep the collateral insured and the creditor then provides the coverage and charges the consumer for it, such a change does not make the original disclosures inaccurate. However, the creditor would be required to provide the notice required under Sec. 226.20(e).[ltrif] 17(f) Early disclosures. 1. Change in rate or other terms. Redisclosure is required for changes that occur between the time disclosures are made and consummation if the annual percentage rate in the consummated transaction exceeds the limits prescribed in this section, even if the

initial

rtrifprior[ltrif] disclosures would be considered accurate under the tolerances in Sec. 226.18(d) or [rtrif]Sec. [ltrif] 226.22(a). To illustrate: i. [General.][rtrif]Non-mortgage loan.[ltrif] A. If disclosures are made in a regular transaction [rtrif]not secured by real property or a dwelling[ltrif] on July 1, the transaction is consummated on July 15, and the actual annual percentage rate varies by more than \1/8\ of 1 percentage point from the disclosed annual percentage rate, the creditor must either redisclose the changed terms or furnish a complete set of new disclosures before consummation. Redisclosure is required even if the disclosures made on July 1 are based on estimates and marked as such.

B. In a regular transaction [rtrif]not secured by real property or a dwelling[ltrif], if early disclosures are marked as estimates and the disclosed annual percentage rate is within \1/8\ of 1 percentage point of the rate at consummation, the creditor need not redisclose the changed terms (including the annual percentage rate).

ii. Nonmortgage loan.

rtrifC.[ltrif] If disclosures [rtrif]for a transaction not secured by real property or a dwelling[ltrif] are made on July 1, the transaction is consummated on July 15, and the finance charge increased by $35 but the disclosed annual percentage rate is within the permitted tolerance, the creditor must at least redisclose the changed terms that were not marked as estimates. (See Sec. 226.18(d)(2) of this part.)

iii.

rtrifii.[ltrif] Mortgage loan. At the time [TILA disclosures][rtrif]the disclosures required by Sec. 226.19(a)(2)(ii)[ltrif] are prepared in July, the loan closing is scheduled for July 31 and the creditor does not plan to collect per- diem interest at consummation. Consummation actually occurs on August 5, and per-diem interest for the remainder of August is collected as a prepaid finance charge. [Assuming there were no other changes requiring redisclosure, t][rtrif]T[ltrif]he creditor may rely on the disclosures prepared in July that were accurate when they were prepared. However, if the creditor prepares new disclosures in August that will be provided at consummation, the new disclosures must take into account the amount of the per-diem interest known to the creditor at that time. 2. Variable [rtrif]or adjustable[ltrif] rate. The addition of a variable [rtrif]or adjustable[ltrif] rate feature to the credit terms, after early disclosures are given, requires new disclosures.

rtrif

(See Sec. 226.19(a)(2) to determine when new disclosures are required for transactions secured by real property or a dwelling.[ltrif] 3. Content of new disclosures. [rtrif]Subject to Sec. 226.19(a), i[ltrif][I]f redisclosure is required [rtrif]in a transaction not secured by real property or a dwelling[ltrif], the creditor has the option of either providing a complete set of new disclosures, or providing disclosures of only the terms that vary from those originally disclosed. [rtrif]If the creditor chooses to provide a complete set of new disclosures, the creditor may but need not highlight the new terms, provided that the disclosures comply with the format requirements of

Sec. 226.17(a). If the creditor chooses to disclose only the new terms, all the new

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terms must be disclosed. For example, a different annual percentage rate will almost always produce a different finance charge, and often a new schedule of payments; all of these changes would have to be disclosed. If, in addition, unrelated terms such as the amount financed or prepayment penalty vary from those originally disclosed, the accurate terms must be disclosed. However, no new disclosures are required if the only differences involve estimates other than the annual percentage rate, and no variable rate feature has been added

(see comment 17(f)-2). If a transaction is secured by real property or a dwelling, the creditor must provide a complete set of new disclosures in all cases, however.[ltrif] (See the commentary to Sec. 226.19(a)(2).) 4. Special rules. [In mortgage transactions subject to Sec. 226.19, the creditor must redisclose if, between the delivery of the required early disclosures and consummation, the annual percentage rate changes by more than a stated tolerance.][rtrif]Special disclosure timing and content requirements apply under Sec. 226.19(a)(2) to disclosures provided before consummation for mortgage transactions secured by real property or a dwelling.[ltrif] When subsequent events occur after consummation, new disclosures are required only if there is a refinancing or an assumption within the meaning of Sec. 226.20.

Paragraph 17(f)(2). 1. Irregular transactions. For purposes of this paragraph, a transaction is deemed to be ``irregular'' according to the definition in footnote 46 of Sec. 226.22(a)(3). 17(g) Mail or telephone orders--delay in disclosures. 1. Conditions for use. When the creditor receives a mail or telephone request for credit[rtrif], except for extensions of credit covered by sections 226.19(a) and 226.19(b),[ltrif] the creditor may delay making the disclosures until the first payment is due if the following conditions are met:

[]

rtrifi.[ltrif] The credit request is initiated without face-to-face or direct telephone solicitation. (Creditors may, however, use the special rule when credit requests are solicited by mail.)

[]

rtrifii.[ltrif] The creditor has supplied the specified credit information about its credit terms either to the individual consumer or to the public generally. That information may be distributed through advertisements, catalogs, brochures, special mailers, or similar means. 2. Insurance. The location requirements for the insurance disclosures under Sec. 226.18(n) permit them to appear apart from the other disclosures. Therefore, a creditor may mail an insurance authorization to the consumer and then prepare the other disclosures to reflect whether or not the authorization is completed by the consumer.

Creditors may also disclose the insurance cost on a unit-cost basis, if the transaction meets the requirements of Sec. 226.17(g). 17(h) Series of sales--delay in disclosures. 1. Applicability. The creditor may delay the disclosures for individual credit sales in a series of such sales until the first payment is due on the current sale, assuming the 2 conditions in this paragraph are met. If those conditions are not met, the general timing rules in [Sec. 266.17(b)] [rtrif]Sec. 226.17(b)[ltrif] apply. 2. Basis of disclosures. Creditors structuring disclosures for a series of sales under Sec. 226.17(h) may compute the total sale price as either:

[]

rtrifi.[ltrif] The cash price for the sale plus that portion of the finance charge and other charges applicable to that sale; or

[]

rtrifii.[ltrif] The cash price for the sale, other charges applicable to the sale, and the total finance charge and outstanding principal. 17(i) Interim student credit extensions. 1. Definition. Student credit plans involve extensions of credit for education purposes where the repayment amount and schedule are not known at the time credit is advanced. These plans include loans made under any student credit plan, whether government or private, where the repayment period does not begin immediately. (Certain student credit plans that meet this definition are exempt from Regulation Z. See Sec. 226.3(f).) Creditors in interim student credit extensions need not disclose the terms set forth in this paragraph at the time the credit is actually extended but must make complete disclosures at the time the creditor and consumer agree upon the repayment schedule for the total obligation. At that time, a new set of disclosures must be made of all applicable items under Sec. 226.18. 2. Basis of disclosures. The disclosures given at the time of execution of the interim note should reflect two annual percentage rates, one for the interim period and one for the repayment period. The use of Sec. 226.17(i) in making disclosures does not, by itself, make those disclosures estimates. Any portion of the finance charge, such as statutory interest, that is attributable to the interim period and is paid by the student (either as a prepaid finance charge, periodically during the interim period, in one payment at the end of the interim period, or capitalized at the beginning of the repayment period) must be reflected in the interim annual percentage rate. Interest subsidies, such as payments made by either a State or the Federal government on an interim loan, must be excluded in computing the annual percentage rate on the interim obligation, when the consumer has no contingent liability for payment of those amounts. Any finance charges that are paid separately by the student at the outset or withheld from the proceeds of the loan are prepaid finance charges. An example of this type of charge is the loan guarantee fee. The sum of the prepaid finance charges is deducted from the loan proceeds to determine the amount financed and included in the calculation of the finance charge. 3. Consolidation. Consolidation of the interim student credit extensions through a renewal note with a set repayment schedule is treated as a new transaction with disclosures made as they would be for a refinancing. Any unearned portion of the finance charge must be reflected in the new finance charge and annual percentage rate, and is not added to the new amount financed. In itemizing the amount financed under Sec. 226.18(c), the creditor may combine the principal balances remaining on the interim extensions at the time of consolidation and categorize them as the amount paid on the consumer's account. 4. Approved student credit forms. See the commentary to appendix H regarding disclosure forms approved for use in certain student credit programs.

Sec. 226.18--Content of Disclosures. 1. As applicable. [rtrif]i.[ltrif] The disclosures required by this section need be made only as applicable. Any disclosure not relevant to a particular transaction may be eliminated entirely. For example:

[]

rtrifA.[ltrif] In a loan transaction, the creditor may delete disclosure of the total sale price.

[]

rtrifB.[ltrif] In a credit sale requiring disclosure of the total sale price under Sec. 226.18(j), the creditor may delete any reference to a downpayment where no downpayment is involved.

rtrif ii.[ltrif] Where the amounts of several numerical disclosures are the same, the ``as applicable'' language also permits creditors to combine the terms, so long as it is done in a clear and conspicuous manner. For example:

[]

rtrifA.[ltrif] In a transaction in which the amount financed equals the total of payments, the creditor may disclose

``amount financed/total of payments,''

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together with descriptive language, followed by a single amount.

[]

rtrifB.[ltrif] However, if the terms are separated on the disclosure statement and separate space is provided for each amount, both disclosures must be completed, even though the same amount is entered in each space. 2. Format. See the commentary to Sec. 226.17 and appendix H for a discussion of the format to be used in making these disclosures, as well as acceptable modifications. 18(a) Creditor. 1. Identification of creditor. The creditor making the disclosures must be identified. [This disclosure may, at the creditor's option, appear apart from the other disclosures.] Use of the creditor's name is sufficient, but the creditor may also include an address and/or telephone number. In transactions with multiple creditors, any one of them may make the disclosures; the one doing so must be identified. 18(b) Amount financed. 1. Disclosure required. The net amount of credit extended must be disclosed using the term amount financed and a descriptive explanation similar to the phrase in the regulation. 2. Rebates and loan premiums. In a loan transaction, the creditor may offer a premium in the form of cash or merchandise to prospective borrowers. Similarly, in a credit sale transaction, a seller's or manufacturer's rebate may be offered to prospective purchasers of the creditor's goods or services. [rtrif]Such premiums and rebates must be reflected in accordance with the terms of the legal obligation between the parties. See Sec. 226.17(c)(1) and its commentary. Thus, if the creditor is legally obligated to provide the premium or rebate to the consumer as part of the credit transaction, the disclosures should reflect its value in the manner and at the time the creditor is obligated to provide it.[ltrif] [At the creditor's option, these amounts may be either reflected in the Truth in Lending disclosures or disregarded in the disclosures. If the creditor chooses to reflect them in the Sec. 226.18 disclosures, rather than disregard them, they may be taken into account in any manner as part of those disclosures.]

Paragraph 18(b)(1). 1. Downpayments. A downpayment is defined in Sec. 226.2(a)(18) to include, at the creditor's option, certain deferred downpayments or pick-up payments. A deferred downpayment that meets the criteria set forth in the definition may be treated as part of the downpayment, at the creditor's option.

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rtrifi.[ltrif] Deferred downpayments that are not treated as part of the downpayment (either because they do not meet the definition or because the creditor simply chooses not to treat them as downpayments) are included in the amount financed.