Vol. 76 Friday, No. 141 July 22, 2011

Part V

Bureau of Consumer Financial Protection

12 CFR Part 1004 Alternative Mortgage Transaction Parity (Regulation D); Interim Final Rule

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BUREAU OF CONSUMER FINANCIAL • Electronic: http:// Dodd-Frank Act amended AMTPA to PROTECTION www.regulations.gov. Follow the transfer rule-writing authority to the instructions for submitting comments. CFPB and to narrow the scope of federal 12 CFR Part 1004 • Mail or Hand Delivery/Courier in preemption. After July 21, the Dodd- [Docket No. CFPB–2011–0004] Lieu of Mail: Monica Jackson, Office of Frank Act provides that state housing the Executive Secretary, Consumer creditors may only make alternative RIN 3170–AA04 Financial Protection Bureau, 1801 L mortgage transactions under AMTPA if Street, NW., Washington, DC 20036. they comply with rules issued by the Alternative Mortgage Transaction All submissions must include the CFPB, even though the Dodd-Frank Act Parity (Regulation D) agency name and docket number or does not vest the CFPB with authority AGENCY: Bureau of Consumer Financial Regulatory Information Number (RIN) to issue such rules before that date. Protection. for this rulemaking. In general, all Accordingly, CFPB interim rules are comments received will be posted ACTION: Interim final rule with request needed immediately in order to avoid a without change to http:// for public comment. suspension in the operation of AMTPA, www.regulations.gov. In addition, which would prevent state housing SUMMARY: The Bureau of Consumer comments will be available for public creditors from making variable rate inspection and copying at 1801 L Street, Financial Protection (CFPB) is loans and other alternative mortgage NW., Washington, DC 20036, on official publishing for public comment an transactions in states where such loans business days between the hours of 10 interim final rule establishing are otherwise prohibited by state law. Regulation D (Alternative Mortgage a.m. and 5 p.m. Eastern Time. You can Transaction Parity) pursuant to the make an appointment to inspect the The CFPB does not believe that Alternative Mortgage Transaction Parity documents by telephoning (202) 435– Congress intended its amendments to Act (AMTPA) and the Truth in Lending 7275. AMTPA to create a regulatory gap that Act. The interim final rule is necessary All comments, including attachments would interrupt access to credit. As to avoid a regulatory gap created by the and other supporting materials, will discussed below in Section IV, the CFPB amendments to AMTPA in the Dodd- become part of the public record and finds that there is good cause to issue Frank Wall Street Reform and Consumer subject to public disclosure. Sensitive this interim final rule without notice Protection Act (Dodd-Frank Act). personal information, such as account and comment and effective immediately Without an interim final rule that takes numbers or social security numbers, in order to avoid the risk of disrupting immediate effect, state housing creditors should not be included. Comments will mortgage markets, placing state housing would no longer be able to make not be edited to remove any identifying creditors at an inappropriate variable rate mortgage loans and other or contact information. competitive disadvantage, and reducing alternative mortgage transactions FOR FURTHER INFORMATION CONTACT: consumers’ access to credit. In pursuant to AMTPA in states that Monica Jackson, Office of the Executive particular, the CFPB is concerned that prohibit such transactions, thus denying Secretary, Consumer Financial failure to issue an interim final rule consumers access to that form of credit. Protection Bureau, 1801 L Street, NW., addressing the modification of existing Until July 22, 2012, the interim final Washington, DC 20036, (202) 435–7275. AMTPA loans could create uncertainty rule applies only to state housing SUPPLEMENTARY INFORMATION: and discourage such modifications. In creditors seeking to invoke federal advance of issuing this interim final I. Overview preemption of state law under AMTPA. rule, the CFPB issued a public bulletin The interim final rule will be in place The Bureau of Consumer Financial alerting state chartered and licensed as a temporary measure pending the Protection (CFPB) is publishing for lenders and other interested parties that: CFPB’s completion of a notice-and- public comment this interim final rule (1) the Dodd-Frank Act amendments to comment rulemaking to promulgate implementing amendments to the AMTPA take effect on July 21, 2011; permanent rules, including rules Alternative Mortgage Transaction Parity and (2) the amendments affect what governing alternative mortgage Act (AMTPA) 1 made by the Dodd-Frank laws apply to mortgage loans issued by transactions made by federally chartered Wall Street Reform and Consumer state chartered or licensed lenders after housing creditors. The CFPB seeks Protection Act (Dodd-Frank Act).2 that date by narrowing the statutory public comment in anticipation of that AMTPA authorizes state-licensed or definition of ‘‘alternative mortgage process. -chartered housing creditors (state transaction’’ and the scope of 3 preemption under AMTPA.4 In DATES: This interim final rule is housing creditors) to make alternative addition, the CFPB reached out to state effective July 22, 2011. mortgage transactions in compliance Mandatory compliance date: with federal rather than state law, in and federal regulators, trade Compliance with § 1004.4 of this order to establish parity and competitive associations, and consumer advocates to interim final rule is optional until July equality between state and federal urge planning for an orderly transition 22, 2012 for federal housing creditors lenders. Effective July 21, 2011, the process. The CFPB will continue its and for state housing creditors that are outreach and consultations while it not relying on preemption of state law 1 12 U.S.C. 3801 et seq. engages in a notice-and-comment 2 under § 1004.3. On July 22, 2012, Public Law 111–203, 124 Stat. 1376 (2010) rulemaking to more fully effectuate the (hereinafter ‘‘Pub. L. 111–203’’). Dodd-Frank Act amendments. The compliance with § 1004.4 is mandatory 3 Under 12 U.S.C. 3802(2), the term ‘‘housing CFPB is committed to beginning the for all creditors, except as provided in creditor’’ means: (1) A depository institution as § 1004.4(d). defined in 12 U.S.C. 1735f–7 note; (2) a lender notice-and-comment rulemaking Comments: Comments must be approved by the Secretary of Housing and Urban process as soon as possible after the received on or before September 22, Development for participation in any mortgage comment period closes on the interim insurance program under the National Housing Act; final rule. 2011. (3) a person who regularly makes loans, credit sales, ADDRESSES: or advances secured by an interest in residential You may submit comments, real property, dwellings, cooperatives or residential 4 Available at http://www.consumerfinance.gov/ identified by Docket No. CFPB–2011– manufactured homes; and (4) any transferee of a wp-content/uploads/2011/06/Amendments-to-the- 0004, by any of the following methods: person in the other three categories. Alternative-Mortgage-Transaction-Parity-Act.pdf.

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II. Summary of the Interim Final Rule prepayment penalties, interest-only mortgage transactions across the broader The interim final rule applies to an payment periods, and negative marketplace, and seeks comment in alternative mortgage transaction if the amortization are no longer preempted anticipation of that rulemaking. under AMTPA with respect to creditor received an application for that III. Background transaction on or after July 22, 2011. If alternative mortgage transactions. the creditor received the application Furthermore, state laws prohibiting A. AMTPA before July 22, 2011, the alternative unfair or deceptive acts and practices AMTPA was enacted by Congress in mortgage transaction is generally generally are not subject to preemption 1982 to stimulate consumer access to grandfathered and remains subject to under AMTPA. credit and increase parity between state The interim final rule also provides the AMTPA provisions and regulations and federal creditors during an era of standards governing alternative in effect at the time of application. unusually high interest rates. In Senate mortgage transactions made by state Thus, a consistent set of requirements hearings held in 1981, mortgage bankers housing creditors pursuant to AMTPA. will apply from application to testified that laws in 26 states either The rule generally requires that completion of an alternative mortgage barred state housing creditors from adjustable rate mortgages utilize a originating alternative mortgage loans or transaction. The rule also clarifies that publicly available index that is beyond modifications, renewals, or extensions imposed significantly greater the creditor’s control. In the alternative, restrictions on such loans than those of alternative mortgage transactions do a closed-end mortgage may use a not result in a loss of AMTPA that applied to federal housing creditors formula or schedule identifying the operating under federal regulations.6 As preemption. This clarification is amount and timing of interest rate intended to facilitate the modification of the first section of the Act explained: increases. Renegotiable rate mortgages It is the purpose of [AMTPA] to eliminate loans for distressed borrowers. (also called renewable balloon-payment However, refinancings are treated as the discriminatory impact that [federal mortgages) must include a written regulations authorizing federally chartered new transactions that must commitment by the lender to renew the depository institutions to make, purchase, independently meet the requirements loan, subject to certain limitations. In and enforce alternative mortgage for preemption in effect at the time of addition, state housing creditors (like all transactions] have upon nonfederally refinancing. other creditors) must comply with chartered housing creditors and provide them with parity with federally chartered Consistent with the Dodd-Frank Act certain federal underwriting amendments to AMTPA, the interim institutions by authorizing all housing requirements. creditors to make, purchase, and enforce final rule’s definition of ‘‘alternative Initially, these standards are mortgage transaction’’ is limited to alternative mortgage transactions so long as applicable only to state housing the transactions are in conformity with the transactions in which the interest rate or creditors seeking to invoke preemption regulations issued by the Federal agencies.7 finance charge may be adjusted or of certain state laws under AMTPA. Accordingly, except in states that renegotiated. As a result, previously However, because AMTPA is designed preempted state consumer protection opted out of the preemption regime to promote parity between federal and 8 laws will apply to fixed-rate mortgage within three years after enactment, state creditors, the Dodd-Frank Act AMTPA generally authorized state loans with interest-only payment amendments effectively require the periods or negative amortization housing creditors to make, purchase, CFPB to engage in a two-part and enforce alternative mortgage features, fixed-rate balloon loans where rulemaking that: (1) Establishes the lender does not make a commitment transactions ‘‘notwithstanding any State standards for origination of alternative constitution, law, or regulation.’’ 9 to renew the loan, and certain other mortgage transactions by federally fixed-rate products that previously However, this statutory preemption chartered housing creditors (federal applied only to the extent that state qualified as alternative mortgage housing creditors) under sources of law transactions but no longer qualify housing creditors made alternative other than AMTPA; and then (2) mortgage transactions in accordance because of the Dodd-Frank Act designates such standards as applicable amendments. with the regulations governing similar to state housing creditors that make federal housing creditors. Specifically, The interim final rule also alternative mortgage transactions under AMTPA provided that state-chartered implements the Dodd-Frank Act’s AMTPA. The interim final rule therefore banks were to comply with regulations amendment to the scope of preemption relies on the Truth in Lending Act issued by the OCC for national banks. under AMTPA. Specifically, the rule (TILA) 5 to establish the minimum Similarly, state-chartered credit unions provides that state laws are preempted federal standards for alternative were to comply with regulations issued only to the extent that they restrict the mortgage transactions. ability of a state housing creditor to The CFPB has provided a one-year by the NCUA for Federal credit unions, adjust or renegotiate an interest rate or extended compliance period (until July while all other state housing creditors finance charge with respect to an 21, 2012) and a temporary safe harbor were to comply with regulations issued alternative mortgage transaction or the by the Federal Home Loan Bank Board for federal housing creditors and for 10 ability of a state housing creditor to state housing creditors that do not seek (FHLBB) (the predecessor of the OTS). change the amount of interest or finance to invoke AMTPA preemption so that Furthermore, rather than creating charges included in a payment as a these lenders may continue to originate separate authority for the OCC, NCUA, result of the adjustment or renegotiation variable rate mortgages and other 6 Testimony cited in 67 FR 60542, 60543 (Sept. of the rate or charge. In addition, the alternative mortgage transactions in 26, 2002). interim final rule provides that general accordance with other sources of law. 7 12 U.S.C. 3801(b). state laws regulating loan features or However, the CFPB expects that its 8 12 U.S.C. 3804. Six states exercised their opt-out charges that are not integral to notice-and-comment rulemaking authority in whole or in part: Arizona, Maine, alternative mortgage transactions are no process to more fully implement the Massachusetts, New York, South Carolina, and Wisconsin. See, e.g., Grant S. Nelson & Dale A. longer preempted. Accordingly, state Dodd-Frank Act amendments will focus Whitman, Real Estate Finance Law § 11.4 (4th ed. law mortgage disclosure requirements on the origination of alternative 2001). and restrictions on late fees, rate 9 12 U.S.C. 3803(c). increases as a result of late payment, 5 15 U.S.C. 1601, et seq. 10 12 U.S.C. 3803(a).

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and FHLBB/OTS to issue regulations contributed to the crisis. In addition to state laws governing such products as of governing alternative mortgage consolidating in the CFPB certain July 22, 2011. transactions under AMTPA itself, consumer financial protection Second, Section 1083 narrows the AMTPA specifically stated that, in order authorities that had previously been types of state laws that are preempted to receive preemption, state housing spread across seven different federal under AMTPA. 12 U.S.C. 3803(c) creditors must comply with regulations agencies, the Dodd-Frank Act amends originally provided that a state housing issued by these agencies under other existing federal consumer financial laws creditor could make alternative statutory authority.11 and establishes new standards that mortgage transactions ‘‘notwithstanding Thus, AMTPA established a sort of phase in over time concerning a wide any State constitution, law, or ‘‘piggybacking’’ regime under which range of mortgage lending practices, regulation.’’ Section 1083 amended that state housing creditors could choose to including compensation for mortgage language to provide that, after July 21, comply with federal regulations originators, assessments of consumers’ 2011, a state housing creditor may make applicable to their federally chartered ability to repay, and mortgage servicing. such transactions ‘‘notwithstanding any counterparts if state law would The Dodd-Frank Act makes three State constitution, law, or regulation otherwise prohibit or restrict a significant amendments with regard to that prohibits an alternative mortgage particular mortgage transaction. The AMTPA, all of which are effective on transaction.’’ 17 Section 1083 further OCC, NCUA, and FHLBB/OTS were the designated transfer date (July 21, amended AMTPA to provide that ‘‘a directed to designate which of their 2011).16 First, Section 1083 of the Dodd- State constitution, law, or regulation regulations issued under other statutory Frank Act narrows the definition of that prohibits an alternative mortgage authority applied in place of state law ‘‘alternative mortgage transactions’’ that transaction does not include any State to the state housing creditors within are eligible for preemption of state law constitution, law, or regulation that 12 their respective jurisdictions. under AMTPA. The revised definition regulates mortgage transactions The NCUA designated all of its in 12 U.S.C. 3802(1) continues to generally, including any restriction on regulations concerning mortgage include loans ‘‘in which the interest rate prepayment penalties or late 18 lending as applicable to state credit or finance charge may be adjusted or charges.’’ Thus, if a state law unions conducting alternative mortgage prohibited certain conduct with respect 13 renegotiated,’’ but deletes additional transactions, while the OCC and the language that specifically included to both alternative mortgage transactions FHLBB/OTS each designated a narrower within the prior definition: (1) Fixed- and other mortgage transactions, that set of regulations that addressed the rate mortgage loans in which the debt law generally would not be preempted origination of alternative mortgage loans matures before the end of the loan’s with respect to alternative mortgage specifically. The OCC regulations amortization schedule (a type of balloon transactions. Third, Sections 1061 and 1083 of the applied to ‘‘adjustable-rate mortgage loan); and (2) mortgage loans ‘‘involving 14 Dodd-Frank Act transferred, among loans’’ as defined by that agency, any similar type of rate, method of other things, rule-writing authority while the FHLBB/OTS rules applied to determining return, term, repayment, or under AMTPA from the OCC, NCUA, a broader range of alternative mortgage other variation not common to and OTS to the CFPB.19 In doing so, transactions as defined under traditional fixed rate, fixed term 15 Congress replicated AMTPA’s original AMTPA. Although the OCC and OTS transactions,’’ including but not limited ‘‘piggybacking’’ scheme. Accordingly, rules differed regarding the scope of to shared equity and shared after July 21, 2011, alternative mortgage transactions subject to AMTPA and the appreciation transactions. transactions made by state housing extent of preemption, they overlapped The result of this amendment is that creditors must comply with regulations significantly with regard to the AMTPA no longer preempts some state issued by the CFPB for ‘‘federally substantive standards applicable to laws governing these types of loans, chartered housing creditors under alternative mortgage transactions. although they may be preempted by provisions of law other than [12 U.S.C. other statutes for some creditors. For B. The Dodd-Frank Act 3803].’’ 20 The rulemaking required example, prior to the Dodd-Frank Act, a The Dodd-Frank Act was enacted on under Section 1083 therefore effectively fixed-rate mortgage loan with an July 21, 2010, in response to widespread requires two components: one interest-only payment period would disruption in mortgage markets and the establishing standards for federal have met the definition of an larger economy. A significant focus of housing creditors to follow in ‘‘alternative mortgage transaction’’ the statute was the enhancement of originating alternative mortgage because it involved a payment variation consumer protections regarding transactions under other federal ‘‘not common to traditional fixed rate, mortgage lending practices that consumer financial laws administered fixed term transactions.’’ If a state by the CFPB; and the other designating housing creditor made such an 11 Id. those standards as applicable to state 12 alternative mortgage in compliance with AMTPA also directed these agencies to housing creditors that seek to invoke determine whether any of their existing regulations the applicable federal regulations, federal preemption under AMTPA. were ‘‘inappropriate’’ to apply to state housing AMTPA preempted any conflicting state creditors or needed to be conformed for use by such lenders. Garn-St Germain Depository Institutions law, thereby permitting the housing 17 Public Law 111–203, § 1083(a)(2)(B) (emphasis Act of 1982, Public Law 97–320, § 807(b), 96 Stat. creditor to offer and complete the added). 1469 (Oct. 15, 1982) (codified at 12 U.S.C. 3801 transaction. Under the Dodd-Frank Act, 18 Id. (emphasis added). note). No guidance was provided as to standards for however, only loans ‘‘in which the 19 Public Law 111–203, § 1061 (transferring, appropriateness. interest rate or finance charge may be among other things, the ‘‘consumer financial 13 47 FR 54,424 (Dec. 3, 1982). protection functions’’ of the federal prudential 14 47 FR 55,911 (Dec. 14, 1982). adjusted or renegotiated’’ are eligible for regulators to the CFPB as of the designated transfer 15 47 FR 51,732 (Nov. 17, 1982); see also 48 FR AMTPA preemption. Because a fixed- date); see also § 1002(14) (defining ‘‘Federal 23,032 (May 23, 1983) (explaining that the earlier rate mortgage loan with an interest-only consumer financial law’’ to include the rulemaking was designed to apply federal standards payment period does not meet this ‘‘enumerated consumer laws’’); id. § 1002(12) regarding adjustments to rate, payment, balance, definition, AMTPA will not preempt (defining ‘‘enumerated consumer laws’’ to include and term, and regarding disclosure, but not general AMTPA and TILA); id. § 1083 (amending 12 U.S.C. safety and soundness requirements such as loan-to- 3803). value ratios). 16 75 FR 57252 (Sept. 20, 2010). 20 Public Law 111–203, § 1083(a)(2)(A)(iv).

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Accordingly, the regulations required by function’’ is defined to include ‘‘all As amended, AMTPA states that, in Section 1083 impact the mortgage authority to prescribe rules or issue order to receive preemption, state market as a whole, not just a subset of orders or guidelines pursuant to any housing creditors must comply with state lenders.21 Federal consumer financial law, regulations issued by the CFPB with As a general matter, the amendments including performing appropriate respect to federally chartered housing to AMTPA do not affect transactions functions to promulgate and review creditors ‘‘under provisions of law other entered into on or before July 21, such rules, orders, and guidelines.’’ 25 than this section [12 U.S.C. 3803].’’ 32 2011.22 After July 21, however, AMTPA AMTPA and TILA are Federal consumer As noted above, the Federal Reserve will preempt state laws that prohibit financial laws.26 Accordingly, effective Board’s rulemaking authority pursuant new alternative mortgage transactions July 21, 2011, the authority of the OCC, to TILA transferred to the CFPB under only if: (1) Such transactions meet the NCUA, and OTS to issue regulations Section 1061 on the designated transfer revised definition of ‘‘alternative pursuant to AMTPA and the authority date. Accordingly, in addition to its mortgage transaction;’’ (2) the state law of the Board of Governors of the Federal authority under AMTPA, the CFPB is in questions falls within the narrowed Reserve System (Federal Reserve Board) using its rulemaking authority under scope of AMTPA preemption; and (3) to issue regulations pursuant to TILA TILA to issue this interim final rule. the creditor complies with regulations transfer to the CFPB.27 As amended by the Dodd-Frank Act, issued by the CFPB.23 Thus, in order for Section 1083 of the Dodd-Frank Act TILA directs the CFPB to ‘‘prescribe AMTPA to continue facilitating access directs the CFPB to issue regulations regulations to carry out the purposes of to credit in states in which alternative implementing the amended AMTPA [TILA].’’33 In addition, the CFPB is mortgage transactions are prohibited by ‘‘after the designated transfer date.’’ 28 generally authorized to issue regulations state law, the CFPB must issue Specifically, the CFPB is directed to: (1) that contain such classifications, regulations governing such transactions. Review the regulations identified by the differentiations, or other provisions, or Despite this requirement, however, the OCC and NCUA pursuant to AMTPA; that provide for such adjustments and Dodd-Frank Act did not vest the CFPB (2) determine whether those regulations exceptions for any class of transactions, with authority to issue such regulations are fair, not deceptive, and otherwise that in the CFPB’s judgment are until after July 21, 2011.24 Accordingly, meet the objectives of title X of the necessary or proper to effectuate the 29 absent adoption of this interim final rule Dodd-Frank Act; and (3) promulgate purpose of TILA, facilitate compliance on July 22, 2011, state housing creditors regulations governing alternative with TILA, or prevent circumvention or 34 could no longer invoke AMTPA mortgage transactions that are eligible evasion of TILA. In the past, the 30 preemption because there would be no for AMTPA preemption. In addition, Federal Reserve Board has used this CFPB regulations governing alternative AMTPA provides that the statutory TILA authority to issue extensive rules mortgage transactions. definition of ‘‘alternative mortgage that promote the informed use of credit transaction’’ in 12 U.S.C. 3802(1) is to by mandating disclosures and IV. Legal Authority be further ‘‘described and defined by substantively regulating certain 31 A. Rulemaking Authority applicable regulation.’’ practices regarding mortgages and home equity lines of credit.35 The CFPB also The CFPB is issuing this interim final 25 Public Law 111–203, § 1061(a)(1). Effective on has the authority under TILA (as rule pursuant to its authority under the designated transfer date, the CFPB is also amended by Section 1405(a) of the AMTPA, TILA, and the Dodd-Frank Act. granted ‘‘all powers and duties’’ vested in each of the federal agencies, relating to the consumer Dodd-Frank Act) to issue regulations Effective July 21, 2011, Section 1061 of financial protection functions, on the day before the that it ‘‘finds to be * * * necessary or the Dodd-Frank Act transfers to the designated transfer date. proper to ensure that responsible, CFPB the ‘‘consumer financial 26 Public Law 111–203, § 1002(14) (defining affordable mortgage credit remains protection functions’’ previously vested ‘‘Federal consumer financial law’’ to include the available to consumers in a manner ‘‘enumerated consumer laws’’); id. § 1002(12) in certain other federal agencies. The (defining ‘‘enumerated consumer laws’’ to include consistent with’’ Sections 129B and term ‘‘consumer financial protection AMTPA and TILA). 129C of TILA, which are new sections 27 Section 1066 of the Dodd-Frank Act grants the added by the Dodd-Frank Act to 21 However, as discussed above, federal housing Secretary of the Treasury interim authority to regulate various mortgage originator creditors and any state housing creditors that do not perform certain functions of the CFPB. Pursuant to practices and the evaluation of seek AMTPA preemption are not required to that authority, Treasury is publishing this interim comply with the CFPB’s regulations until July 22, final rule on behalf of the CFPB. borrowers’ ability to repay their 2012. Furthermore, § 1004.4(d) of the interim final 28 Public Law 111–203, § 1083(a)(2)(C) (creating a mortgages.36 rule provides that these creditors may continue to new 12 U.S.C. 3803(d)). make variable rate mortgages and other alternative 29 As discussed below with respect to § 1004.4, B. Authority To Issue an Interim Final mortgage transactions consistent with other the CFPB believes that it is consistent with the Rule Without Prior Notice and Comment applicable provisions of law. intent and purpose of Section 1083 to interpret the 22 Public Law 111–203, § 1083(a)(2)(A)(i). As requirement that the CFPB determine whether the The Administrative Procedure Act discussed below with respect to § 1004.1, an OCC and NCUA regulations are unfair or deceptive (APA) 37 generally requires public alternative mortgage transaction is made for as requiring the CFPB to determine whether those notice and an opportunity to comment purposes of this interim final rule on the date the regulations are effective in preventing unfair or before promulgation of substantive creditor receives the application. Thus, the deceptive acts or practices. In addition, the CFPB 38 amended AMTPA preemption standards do not believes that it is appropriate to consider the OTS regulations. It also generally requires apply to an alternative mortgage transaction if the regulations governing alternative mortgage that a final regulation be published not application was received on or before July 21, 2011, transactions when making this determination. less than 30 days prior to its effective even if the transaction is completed after that date. 30 Id. 23 Public Law 111–203, § 1083(a)(2)(A)(iv). 31 Furthermore, 12 U.S.C. 3801 note, which was 32 Public Law 111–203, § 1083(a)(2)(A)(iv) 24 Public Law 111–203, § 1061 (transferring, enacted as part of AMTPA in 1982, directs the OCC, (emphasis added). among other things, the ‘‘consumer financial NCUA, and FHLBB to identify, describe, and 33 Id. § 1100A(2); 15 U.S.C. 1604(a). protection functions’’ of the federal prudential publish existing regulations that should or should 34 Id. regulators to the CFPB as of the designated transfer not apply to alternative mortgage transactions and 35 date); § 1083(b) (transferring AMTPA authority to to make any necessary changes to address See Regulation Z, 12 CFR Part 226. the CFPB on the designated transfer date); see also alternative mortgage transactions. See Public Law 36 Public Law 111–203, § 1405(a); see also 15 id. § 1083(a)(2)(C) (directing the CFPB to issue 97–320 (1982). The Dodd-Frank Act does not U.S.C. 1639b, 1639c. AMTPA regulations ‘‘after the designated transfer remove this authority, which transfers to the CFPB 37 5 U.S.C. 551 et seq. date’’). pursuant to Section 1061 of the Dodd-Frank Act. 38 5 U.S.C. 553(b), (c).

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date.39 However, the APA provides an experiencing modest growth.43 In Similarly, several states impose exception to notice-and-comment addition, while balloon mortgage loans substantive restrictions on the ability of procedures where an agency for good represent a very small percentage of housing creditors to offer mortgage cause finds that such procedures are total originations, they can be important loans with a balloon payment feature.45 impracticable, unnecessary, or contrary products in certain markets served by to the public interest.40 The APA also rural and community banks. Absent this amend the loan at no cost); Ind. Code § 28–15–11– provides a good cause exception to the interim final rule, state housing 14 (1997) (setting requirements for adjustable 41 mortgage loans, including limitations on effective date requirement. The CFPB creditors would no longer be able to adjustments to the principal loan balance, interest finds that there is good cause to offer—and consumers would no longer rate adjustments, and fees); Kan. Stat. § 16–207 conclude that providing notice and be able to obtain—these products to the (1999) (setting interest rate limitations on any loan, opportunity for comment would be extent they are inconsistent with state including all first mortgage loans and contracts for deed to real estate); Ky. Rev. Stat. § 360.150 (1984) impracticable and contrary to the public law. (subjecting all adjustable rate mortgages to certain interest under these circumstances. The Furthermore, as discussed below with provisions, including limitations on interest rate CFPB also finds that there is good cause respect to § 1004.1, this interim final changes and installment payments and disclosures); rule clarifies that modifying an La. Rev. Stat. § 9:3504 (2004) (authorizing to issue this rule effective immediately; adjustable rate mortgages on certain terms relating however, the CFPB is making alternative mortgage transaction made to interest rate indices, the frequency of interest rate compliance with the requirements in on or before July 21, 2011 does not adjustments, and installment adjustments, and § 1004.4 optional for certain creditors result in a loss of AMTPA preemption. exempting certain types of adjustable rate mortgages Without this guidance, state lenders from the applications of laws on usury and interest until July 22, 2012. upon interest); N.J. Stat. § 46:10B–40 (2008) The CFPB’s findings are based on the would likely reduce the availability of (providing for a mandatory three-year extension following factors. As discussed above, modifications for fear of losing AMTPA period during which the interest rate on an introductory rate mortgage shall not increase for beginning on July 22, 2011, state preemption. No current data sources track the certain eligible borrowers who do not have housing creditors may only make new sufficient monthly income to pay monthly amount of lending activity that would alternative mortgage transactions payments that will apply after the interest rate be impermissible but for AMTPA pursuant to AMTPA if they comply with resets); N.M. Stat. 56–1–16 (1983) (setting preemption. However, even with regard requirements for mobile home loans, including that regulations issued by the CFPB. to basic variable rate mortgages, the adjustments in the rate shall be tied to a specific However, the CFPB was unable to issue index, limitations on frequency and amount of rate CFPB’s initial research indicates that a a notice of proposed rulemaking under adjustments, and allowance of changes in significant number of states impose AMTPA or TILA prior to July 21, 2011, installment payments due to rate adjustments); 41 restrictions on the size, frequency, or Pa. Stat. § 301 (2008) (setting caps on interest rates because rule-writing authority under timing of interest rate and payment and limitations on frequency and amount of rate each of those statutes was vested in adjustments for residential mortgages); Tex. Fin. adjustments and renegotiations.44 other agencies and did not transfer to Code § 347.102 (1997) (authorizing interest rate the CFPB until that date. As a result, the adjustments provided that the lender ties the rate 43 Federal Reserve Bank of New York, Current changes to an approved index according to the CFPB finds that it would have been Issues in Economics and Finance (Dec. 2010); statute). This footnote is included for illustrative impracticable to engage in notice-and- Inside Mortgage Finance data; see also Tara Siegel purposes and does not constitute a determination comment rulemaking prior to July 21, Bernard, Borrowers Wade Back Into Adjustable-Rate by the CFPB that specific state laws are or are not 2011. Mortgages, N.Y. Times, June 21, 2011 (available at preempted by the interim final rule. http://bucks.blogs.nytimes.com/2011/06/21/ 45 See, e.g., Cal. Bus. & Prof. § 10244.1 (1973) Furthermore, the CFPB’s failure to borrowers-wade-back-into-adjustable-rate- (restricting payments greater than twice the amount issue an interim final rule without mortgages/). of the smallest installment for loans with a term of advance notice and comment that is 44 See, e.g., Cal. Civ. Code § 1916.5 (2004) six years or less); Colo. Rev. Stat. § 5–3.5–102 (2003) (requiring certain provisions for any variable rate (restricting payments greater than twice the average effective immediately would be contrary loan, including caps on interest rate increases and of earlier regularly scheduled payments unless such to the public interest. Without CFPB a promise that the rate of interest shall change no balloon payment becomes due and payable not less rules in place by July 22, 2011, a more than twice a year); § 1916.7 (1981) (requiring than 120 months after the date of execution of the regulatory gap would occur, in which certain provisions for adjustable-rate mortgages, loan); DC Code § 26–1152.13 (2002) (restricting including minimum term and amortization periods, scheduled payment more than twice as large as the state housing creditors would not be limitations on changes in interest and monthly average of earlier scheduled monthly payments able to continue issuing variable rate payments, limitations on which indices lenders unless the balloon payment becomes due and and other alternative mortgage loans may use to determine interest rate changes, and payable not less than 7 years after the date of the pursuant to AMTPA in states that requirements relating to extending the loan under loan closing); Ga. Code, § 7–6A–5(2) (2002) certain circumstances); § 1916.8 (1980) (defining a (prohibiting scheduled payments more than twice prohibit such transactions, thus denying renegotiable rate mortgage loan as a loan issued for as large as earlier payments in certain high cost consumers access to that form of a term of three, four, or five years, automatically home loans); Ill. Admin. Code tit. 38, § 1050.1272 credit.42 In addition, the CFPB is renewable at equal intervals, repayable in equal (2005) (restricting certain balloon payments unless concerned that failure to issue an monthly installments of principal and interest, in such balloon payment becomes due and payable at an amount at least sufficient to amortize the loan least 15 years after the loan’s origination); Ind. Code interim final rule addressing the over the remaining term of the mortgage, and setting § 24–9–4–3 (2005) (restricting payments greater modification of existing AMTPA loans requirements for interest rate changes and than twice the average of earlier regularly could create uncertainty and discourage disclosures); § 1920 (1997) (providing requirements scheduled payments for certain high cost loans such modifications. for any mortgage instrument, including standards unless such balloon payment becomes due and for the adjustment of interest rates and monthly payable not less than 120 months after the date of Although originations of variable rate payments); Cal. Fin. Code § 7504 (1984) (allowing execution of the loan); Ky. Rev. Stat. Ann. § 360.100 alternative mortgage loans have slowed an association to adjust the interest rate, payment, (2010) (restricting payments greater than twice the balance, or term-to-maturity on any loan secured by amount of the smallest installment for certain high significantly in recent years, they still real property as authorized by the loan contract; cost loans); N.C. Gen. Stat. § 24–1.1A (1973) constitute approximately 12 percent of requiring that such adjustments be subject to certain (restricting certain affiliates from providing balloon mortgage originations and are limitations including loan term limits, loan-to-value payments on home loans in excess of six months); ratios, and interest rate indices, and allowing loans 7 Pa. Cons. Stat. Ann. § 6020–155 (1995) to be fully amortized, partially amortized, (prohibiting balloon loans for financing the 39 5 U.S.C. 553(d). nonamortized, a reverse annuity mortgage, or an purchase of an owner occupied one or two family 40 5 U.S.C. 553(b)(B). open end line of credit loan); Ga. Code § 7–6A–5 residential property); Tex. Fin. Code Ann. § 343.202 41 5 U.S.C. 553(d)(3). (2004) (subjecting high-cost home loans to certain (2006) (restricting scheduled payments more than 42 The CFPB notes that the amendments to limitations, including balloon payments and twice as large as earlier payments in certain high AMTPA and this interim final rule do not affect interest rate increases, and requiring creditors to cost home loans unless the balloon payment preemption of state law under other statutes. allow the borrower to modify, renew, extend, or becomes due not less than 60 months after the date

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In some cases, these state law definition of ‘‘alternative mortgage 4. How many balloon loans are requirements are stricter than—or transaction’’ and the scope of community and rural banks originating materially different from—the preemption under AMTPA.47 In today to hold in portfolio? Please restrictions on federal housing creditors addition, the CFPB reached out to state describe the terms of the balloon loans, that state housing creditors were and federal regulators, trade including whether a written or oral entitled to follow until July 22, 2011. associations, and consumer advocates to commitment is made to renew the loan A curtailment in variable and urge planning for an orderly transition. at expiration. adjustable rate loans would be harmful The CFPB will continue its outreach 5. What role is AMTPA playing with to consumers for whom these products and consultations while it engages in a respect to loan modifications and can serve an important purpose. For notice-and-comment rulemaking to refinancings? example, they can result in lower more fully effectuate the Dodd-Frank State Laws Regulating Alternative interest rates for borrowers who plan to Act amendments. The CFPB is Mortgage Transactions sell their homes or refinance within a committed to beginning the notice-and- few years or are otherwise able and comment rulemaking process as soon as 1. How are states currently regulating willing to assume associated interest possible after the comment period alternative mortgage transactions? rate risk. These products may also closes on the interim final rule. Which state laws currently prohibit or enable some creditworthy consumers restrict such transactions and how do who otherwise could not qualify for a V. Request for Comment they do so? How burdensome are any restrictions? Are these restrictions fixed-rate loan to obtain a mortgage Requests for comment on the interim applicable to mortgage transactions loan. Furthermore, as noted above, final rule and related matters are listed balloon-payment mortgage loans can be generally? in the section-by-section analysis below. 2. How do state laws that regulate an important product in certain markets. In anticipation of its upcoming notice- For these reasons, the CFPB finds that alternative mortgage transactions help and-comment rulemaking proceeding, protect consumers? the failure to adopt an interim final rule the CFPB also seeks comment on a wide would create a risk of substantially 3. How have state mortgage laws range of issues relating to AMTPA, state disrupting mortgage markets, placing changed since AMTPA was enacted, regulation of alternative mortgage state housing creditors at an and what are the reasons for those transactions, and regulations that have inappropriate competitive disadvantage, changes? previously been designated by the OCC, and reducing access to credit for NCUA, and OTS/FHLBB as applicable Federal Fegulation of Alternative consumers. For many consumers and to state housing creditors when Mortgage Transactions state lenders, the resulting curtailment conducting alternative mortgage of alternative mortgages would be 1. Should the requirements set forth transactions. sudden, unexpected, and disruptive. in § 1004.4(a) through (c) of this interim This outcome would conflict not only State Housing Creditors’ Reliance on final rule be retained? Are any with the purpose of AMTPA but also AMTPA modifications or additional with a fundamental purpose of the requirements needed? To what extent Dodd-Frank Act, which is to ‘‘ensur[e] 1. What categories of mortgage loans do the requirements in § 1004.4(a) that all consumers have access to were being made in reliance on AMTPA through (c) promote parity between markets for consumer financial products preemption prior to the Dodd-Frank Act federal and state housing creditors? To and services and that [such markets] are (for example, adjustable rate mortgages, what extent do these requirements affect fair, transparent, and competitive.’’ 46 reverse mortgages, balloon loans)? What the cost of credit, consumers’ access to The CFPB does not believe that was the volume of these types of credit, and consumer protection? To Congress intended such a result and mortgage loans? Were these types of what extent do these requirements affect finds good cause to issue the interim loans more prevalent in particular the burden on lenders? final rule without notice-and-comment geographic markets (such as rural 2. In this interim final rule, the CFPB procedures and effective immediately as areas)? If so, which geographic markets? has used its authority under TILA to a temporary measure pending the What types of entities made these loans? establish standards for alternative completion of a notice-and-comment 2. To what extent did AMTPA mortgage transactions. The CFPB rulemaking proceeding. preemption enable state housing solicits comment on whether it should In order to mitigate disruptions creditors to make such loans? Do any utilize other authorities for establishing resulting from the implementation of state laws prohibit state housing such standards in a permanent final the amendments to AMTPA, the CFPB creditors from making such loans? If so, rule. issued a public bulletin in advance of please describe the background and VI. Section-by-Section Analysis this interim final rule alerting state purpose of the law and its effect on the chartered and licensed lenders and state housing creditors’ ability to make Section 1004.1 Authority, Purpose, other interested parties that: (1) The the type of loan. Scope Dodd-Frank Act amendments to 3. What categories of mortgage loans This section addresses the authority, AMTPA take effect on July 21, 2011; are currently being made in reliance on purpose, and scope of the new Part and (2) the amendments affect what AMTPA preemption under the interim 1004, which the CFPB is issuing to laws apply to mortgage loans issued by final rule? What is the volume of these implement AMTPA, as amended by state chartered or licensed lenders after types of mortgage loans? Are these types Section 1083 of the Dodd-Frank Act. that date by narrowing the statutory of loans more prevalent in particular (a) Authority geographic locations? If so, which of the loan); W. Va. Code § 46A–4–110a (1996) geographic markets? What types of Section 1004.1(a) explains that Part (prohibiting balloon payments unless preempted by entities are making these loans? 1004 implements AMTPA as amended federal law). This footnote is included for by Section 1083 of the Dodd-Frank Act, illustrative purposes and does not constitute a determination by the CFPB that specific state laws 47 Available at http://www.consumerfinance.gov/ pursuant to the rulemaking authority are or are not preempted by the interim final rule. wp-content/uploads/2011/06/Amendments-to-the- transferred to the CFPB from various 46 Public Law 111–203 § 1021(a). Alternative-Mortgage-Transaction-Parity-Act.pdf. transferor agencies under Section 1061

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of the Dodd-Frank Act. This section also activities that occur prior to a distressed borrower with a variable explains that § 1004.4 is issued based on consummation (such as disclosure and rate mortgage loan that is currently the CFPB’s authority under TILA. underwriting). In order to establish a subject to preemption under AMTPA workable regulatory regime, there must would be able to avoid foreclosure (b) Purpose be a readily identifiable date and a through a modification, the CFPB Consistent with AMTPA, TILA, and single set of rules to govern the entire believes that AMTPA should continue the Dodd-Frank Act, § 1004.1(b) states transaction. In light of these to preempt state law that would that the purpose of Part 1004 is to considerations, the CFPB has otherwise prohibit the modification. balance: (1) Access to responsible credit interpreted an ‘‘alternative mortgage However, if state law was preempted at and enhanced parity between state and transaction’’ as being ‘‘entered into’’ on the time of application and the federal housing creditors regarding the the date the application is received by transaction is later satisfied and making, purchase, and enforcement of the creditor. This interpretation seeks to replaced by another transaction (such as alternative mortgage transactions, with ensure that the entire transaction is through a refinancing), the second (2) consumer protection and the governed by a consistent set of rules. transaction must independently meet interests of the states in regulating For example, if an application for a the requirements for preemption in mortgage transactions generally. The mortgage transaction is received on July effect at the time the second transaction purpose of AMTPA (as defined in 12 21, 2011, but is not completed on is made under 12 U.S.C. 3803(c) or this U.S.C. 3801) is to provide parity August 21, 2011, AMTPA preemption is interim final rule (as applicable). between federal and state housing determined under the regime in effect This interpretation is generally creditors ‘‘by authorizing all housing prior to the Dodd-Frank Act similar to the statutory language that creditors to make, purchase, and enforce amendments. However, if the governed the transition period with alternative mortgage transactions so application is received on July 22, 2011, regard to states that decided to opt-out long as the transactions are in AMTPA preemption is determined of the statutory preemption regime conformity with the regulations issued under the regime established by the when AMTPA was first enacted.48 by the Federal agencies.’’ However, as Dodd-Frank Act amendments and this However, the interim final rule treats described above, the level of parity interim final rule. refinancings differently than provided by AMTPA has been modified Comment 1(c)–1 clarifies that, if an modifications, extensions, and renewals by the Dodd-Frank Act’s amendments to application for a transaction is received because, as provided in 12 CFR 226.20, the definition of ‘‘alternative mortgage by a creditor prior to July 22, 2011, a refinancing constitutes a new transaction’’ and the scope of whether 12 U.S.C. 3803(c) preempts transaction that satisfies and replaces an preemption under AMTPA, which state law with respect to that transaction existing obligation. Under these narrow the range of transactions eligible depends on whether: (1) The transaction circumstances, the CFPB believes that for AMTPA preemption and restore the was an alternative mortgage transaction the new transaction should be evaluated effect of certain state mortgage laws. as defined by the version of 12 U.S.C. independently with respect to AMTPA Section 1004.1(b) reflects this 3802(1) in effect at the time of preemption. The CFPB seeks comment modification as well as the CFPB’s use application; and (2) the state housing on these interpretations, particularly as of its consumer protection authority creditor complied with applicable to what types of modifications might under TILA. federal regulations issued by the OCC, otherwise be prohibited under state law (c) Scope NCUA, or OTS/FHLBB in effect at the and whether additional protections are time of application. needed with respect to modifications. Section 1004.1(c) states that Part 1004 Comment 1(c)–2 clarifies that, if 12 applies to an alternative mortgage U.S.C. 3803(c) or this interim final rule Section 1004.2 Definitions transaction if the creditor received an (as applicable) preempted state law at (a) Alternative Mortgage Transaction application for that transaction on or the time an application was received, after July 22, 2011. This section further certain subsequent actions with respect The interim final rule defines states that Part 1004 does not apply to to that transaction are entitled to the ‘‘alternative mortgage transaction’’ to a transaction if the creditor received the same degree of preemption. This include a loan, credit sale, or account: application for that transaction before comment applies regardless of whether (1) That is secured by an interest in a July 22, 2011. the application was received before, on, residential structure that contains one to Section 1083(c) of the Dodd-Frank Act or after July 22, 2011. First, if state law four units, whether or not the structure provides that its amendments to was preempted at the time of is attached to real property, including AMTPA do not affect ‘‘any transaction application, state law is also preempted an individual condominium unit, covered by the Alternative Mortgage with respect to the subsequent cooperative unit, mobile home, and Transaction Parity Act of 1982 (12 consummation, completion, purchase, trailer, if it is used as a residence; (2) U.S.C. 3801 et seq.) and entered into on or enforcement of the transaction by a that is made primarily for personal, or before the designated transfer date.’’ state housing creditor. This family, or household purposes; and (3) Accordingly, the CFPB must determine interpretation is consistent with 12 in which the interest rate or finance when a transaction is ‘‘entered into’’ for U.S.C. 3801(b) and 3803(a), which charge may be adjusted or renegotiated. purposes of determining which address state housing creditors’ ability Comment 2(a)–1 clarifies that home preemption standards and rules—pre- to ‘‘make, purchase, or enforce’’ equity lines of credit and subordinate Dodd-Frank Act amendments or post- alternative mortgage transactions. lien mortgages are alternative mortgage Dodd-Frank Act amendments—are Second, if state law was preempted at transactions as long as they meet the applicable. Rather than a single event, a the time of application, state law is also definition in § 1004.2(a). Comment 2(a)– mortgage transaction is a series of steps preempted with respect to the progressing from application to subsequent modification, renewal, or 48 12 U.S.C. 3804(a)(2) (providing that ‘‘any consummation to servicing. Each of extension of the transaction. The CFPB renewal, extension, refinancing, or other modification of an alternative mortgage transaction these steps is subject to a variety of state interprets such activity as constituting a that was entered into during the preemption and federal consumer protection continuation of the same ‘‘transaction’’ period’’ would also be afforded AMTPA statutes, many of which govern for purposes of AMTPA. For instance, if preemption).

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2, discussed in more detail below, term transactions,’’ including but not purposes of this interim final rule, the provides specific examples of limited to shared equity and shared best approach is to focus on whether transactions that are alternative appreciation transactions. particular types of transactions fit mortgage transactions, while comment The interim final rule construes the within the remaining statutory 2(a)–3 provides examples of amendment to exclude only those definition. mortgages that do not involve an transactions that are not alternative As discussed further below, the Dodd- adjustable or renegotiable rate or finance mortgage transactions. Frank Act’s amendments to both the The first element of the definition of charge. For example, a fixed-rate loan definition of ‘‘alternative mortgage alternative mortgage transaction is that permits the consumer to make transaction’’ and to the scope of derived from AMTPA as well as the interest-only payments for a period of definition of a ‘‘dwelling’’ in 12 CFR time does not involve an adjustment to preemption under AMTPA are subject 226.2(a)(19). The second element of the or renegotiation of the interest rate or to different interpretations and are definition requires that an alternative finance charge. Previously, such interrelated. The CFPB seeks public mortgage transaction involve an transactions were considered alternative comment about how best to effectuate extension of consumer credit. AMTPA’s mortgage transactions under the third congressional intent through findings indicate that Congress was prong of the original AMTPA definition implementing regulations that will concerned with the availability of since an interest-only feature was ‘‘not protect consumers, promote parity, and housing credit to consumers.49 In common to traditional fixed rate, fixed be readily understandable and addition, AMTPA applies to term transactions.’’ 50 Under the interim applicable by creditors, supervising transactions secured by residential real final rule, however, such transactions agencies, and others. The CFPB also property or a dwelling (including stock are no longer alternative mortgage requests comment on whether any allocated to a dwelling in a residential transactions. Yet transactions that are specific types of mortgages should be cooperative housing corporation or a specifically mentioned in the second excluded from the definition of an residential manufactured home). While and third prongs of the original AMTPA alternative mortgage transaction. some consumers may use their definition, such as shared-equity/ Mortgages with adjustable rates or residence as security for credit for non- shared-appreciation transactions and finance charges. Comment 2(a)–2 consumer purposes (such as to finance renewable balloon-payment transactions provides specific examples of a business), AMTPA’s use of the terms (which involve renegotiation of or transactions that are alternative ‘‘residential’’ property and ‘‘dwelling’’ adjustments to the rate or finance mortgage transactions.51 Examples of indicate that it is intended to apply to charge), do continue to be alternative alternative mortgage transactions alternative mortgage transactions mortgage transactions under the interim include transactions in which the involving consumer credit. In addition, final rule. Furthermore, under the interest rate changes in accordance with requiring alternative mortgage interim final rule, a mortgage with both changes to an index and transactions in transactions to be consumer credit an adjustable or renegotiable rate or which the interest rate may be increased aligns the AMTPA regulations with the finance charge and one or more other or decreased after a specified period of CFPB’s general scope of authority under ‘‘nontraditional’’ features continues to time or under specified circumstances. TILA, which also serves as authority for be an ‘‘alternative mortgage For example, the definition includes this interim final rule. However, the transaction.’’ (However, as discussed loans in which the interest rate or CFPB seeks comment on this issue. below with respect to § 1004.3, the finance charge may be adjusted after a The third element of the definition scope of AMTPA preemption has also period of time as specified and defined requires that the interest rate or finance been narrowed such that alternative by the contract, for instance to provide charge for the transaction may be mortgage transactions with certain a ‘‘timely payment discount rate’’ upon adjusted or renegotiated. As described nontraditional features like interest-only an anniversary of loan origination to above, Section 1083 narrows AMTPA’s payments or negative amortization are borrowers who have made timely definition of an ‘‘alternative mortgage subject to greater state regulation under transaction’’ so that it refers only to payments for a specified period of the amended statute.) 52 loans and credit sales ‘‘in which the The CFPB recognizes that the time. (However, as discussed below interest rate or finance charge may be amendments to AMTPA’s definition with respect to § 1004.3, generally adjusted or renegotiated, [as] described could be interpreted differently. applicable state laws governing late and defined by applicable regulation.’’ Specifically, by eliminating references charges, including increases in the As noted above, Section 1083 deletes to balloon payment loans and shared- interest rate due to default, are no longer language that specifically included equity/shared-appreciation mortgages, preempted by AMTPA.) within the definition of alternative the amendment could be interpreted as The definition of ‘‘alternative mortgage transaction: (1) Fixed-rate excluding all such transactions from the mortgage transaction’’ in § 1004.2(a) balloon loans ‘‘which implicitly definition of an alternative mortgage includes ‘‘variable rate transactions’’ as permit[] rate adjustments’’ because the transaction. In addition, the amendment defined under Regulation Z for purposes debt matures before the end of the loan’s removed a provision that defined of providing disclosures under 12 CFR amortization schedule; and (2) mortgage alternative mortgage transactions as loans ‘‘involving any similar type of loans with variations to the rate, method 51 These examples are consistent with the rate, method of determining return, of determining return, term, repayment, definition of an ‘‘adjustable rate mortgage loan’’ in term, repayment, or other variation not or other variations not common to AMTPA, 12 U.S.C. 3806(d)(2), as one in which the traditional fixed-rate, fixed-term loan agreement permits the creditor to adjust the common to traditional fixed rate, fixed rate of interest from time to time. While the transactions. However, rather than definition of ‘‘adjustable rate mortgage loan’’ 49 See 12 U.S.C. 3801(a)(1) (finding that attempting to identify each and every applies to a section of AMTPA that requires ‘‘increasingly volatile and dynamic changes in type of loan that could potentially fall adjustable rate mortgages to have maximum interest interest rates have seriously impaired the ability of under the deleted portions of the rates (rather than to the preemption provisions), it housing creditors to provide consumers with fixed- sheds light on the types of loans contemplated by term, fixed-rate credit secured by interests in real definition, the CFPB believes that, for AMTPA as having adjustable rates. property, cooperative housing, manufactured 52 See OTS Letter P–2003–9 (Dec. 2, 2003); OTS homes, and other dwellings’’ (emphasis added)). 50 See OTS Letter P–2003–9 (Dec. 2, 2003). Letter P–96–13 (Nov. 27, 1996).

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226.19(b).53 The definition is also notes secured by long-term mortgages, period but a balloon payment is due at similar to the OCC’s definition of where the creditor made a commitment the end of five years, the product is an ‘‘adjustable rate mortgage’’ under its to renew the notes but reserved ‘‘alternative mortgage transaction’’ for AMTPA regulations.54 discretion to adjust the interest rate at purposes of AMTPA if the creditor With regard to shared appreciation renewal.56 commits to renew the mortgage.58 The and shared equity features in particular, This commitment to renew CFPB notes that the requirement of a although the Dodd-Frank Act distinguishes renegotiable/renewable lender commitment to renew can help amendments to AMTPA deleted the loans from a broader and more generic protect borrowers from the heightened specific language referencing shared category of balloon loans that was default risk associated with balloon appreciation and shared equity included in AMTPA’s original payments.59 Furthermore, as discussed mortgages, loans with these features definition of ‘‘alternative mortgage below with respect to § 1004.4(b), this continue to fall within the remaining transaction,’’ but was then removed commitment must be made in writing in definition of ‘‘alternative mortgage from the definition by the Dodd-Frank order for the transaction to receive transaction’’ because they are mortgage Act amendments. That language referred AMTPA preemption. transactions in which a finance charge to loans ‘‘involving a fixed rate, but The CFPB seeks comment on all is adjustable. Indeed, the CFPB notes which implicitly permit[] rate aspects of this issue, including comment that Regulation Z currently categorizes adjustments by having the debt mature on what products, if any, should be shared-equity/shared appreciation at the end of an interval shorter than the considered renegotiable rate loans, how mortgages as variable-rate term of the amortization schedule,’’ commitments to renew are typically transactions.55 Accordingly, consistent without reference or regard to renewal structured, and whether further clarity with that interpretation, the interim commitments.57 or protections may be appropriate for final rule includes such mortgages As discussed above, the fact that these mortgage products. within the definition of alternative Section 1083 deleted the reference to Adjustable or renegotiable rate loans mortgage transaction. balloon loans while retaining the with additional nontraditional features. The CFPB seeks comment on whether reference to loans for which the interest As noted above, the interim final rule the products discussed above should be rate or finance charge may be defines ‘‘alternative mortgage considered alternative mortgage renegotiated creates significant transaction’’ by focusing on the transactions and what other products in ambiguity as to how balloon loans language of the amended statutory the current market have adjustable rates should be treated under AMTPA as definition—in other words, whether the or finance charges. The CFPB in amended. However, based on available loan has an adjustable or renegotiable particular seeks comment on whether information, it is unclear to what the rate or finance charge. It is unclear treating a mortgage that permits a rate phrase ‘‘renegotiable rate’’ in the whether the deletion of AMTPA’s adjustment upon default as an amended AMTPA definition refers, if language recognizing other alternative mortgage transaction is an not to balloon loans where there is a nontraditional loan features such as appropriate approach in light of the commitment to renew the loan but the negative amortization or interest-only Dodd-Frank Act amendments that rate is subject to renegotiation. payment periods was intended to specifically preserve states’ authority to For these reasons, the CFPB believes exclude adjustable rate or renegotiable regulate late charges. that, for purposes of this interim final rate loans that also contain such features Mortgages with renegotiable rates or rule, it is appropriate to construe the from AMTPA preemption. For purposes finance charges. The statute does not category of renegotiable rate loans to of the interim final rule, the CFPB has define what types of loans provide for include fixed-rate balloon loans in concluded that such loans should not be the ‘‘renegotiat[ion]’’ of the interest rate which the lender has committed to excluded, for several reasons. or finance charge. The CFPB does not renew the loan. For example, the First, a broader exclusion based on believe that Congress intended this interim final rule provides that, if a loan the absence of statutory text would language to apply to every transaction in has, for instance, a 30-year amortization create a number of practical difficulties. which the interest rate or finance charge The definitions removed from AMTPA might theoretically be renegotiated. 56 See, e.g., 45 FR 24,108 (Apr. 9, 1980). The FHLBB initially provided very detailed rules mention two specific loan types— Such an interpretation could encompass regarding renegotiable rate mortgages, which were balloon loans and shared-equity/shared- almost any mortgage transaction. subsumed into regulations on adjustable rate appreciation loans—which can, in Instead, the CFPB believes it is mortgages at 46 FR 24,148 (Apr. 30, 1981). The certain circumstances, be loans with appropriate to consider historical Federal Reserve also has moved from a narrower definition of ‘‘renegotiable rate mortgages’’ to a adjustable or renegotiable rates or regulations and interpretations issued broader category of ‘‘renewable’’ balloon loans. by the FHLBB and by the Federal Compare 66 Fed.Res.Bull. 830 (Oct. 1980) (defining 58 This approach is also consistent with the OCC’s Reserve Board under Regulation Z, both ‘‘renegotiable rate mortgages’’ to include fixed-rate regulations applicable to AMTPA loans, which of which suggest that ‘‘renegotiable rate balloon loan mortgages for which the lender was define ‘‘adjustable rate mortgages’’ to exclude obliged to renew the loan upon expiration of the ‘‘fixed-rate extensions of credit that are payable at mortgages’’ were commonly understood loan on the same credit terms except for a change the end of a term that, when added to any terms at the time that AMTPA was enacted to in the interest rate, and interpreting Regulation Z for which the bank has promised to renew the loan, include a subset of fixed-rate balloon to permit lenders to disclose such mortgages either is shorter than the term of the amortization loans involving renewable short-term as a variable-rate obligation under 12 CFR schedule.’’ 12 CFR 34.20. Thus, if the bank 226.8(b)(8) or as a balloon-payment obligation promises to renew the loan for the term of the under 12 CFR 226.8(b)(3)), with 56 FR 13751, 13754 amortization schedule, the loan fell within the 53 As discussed below, Regulation Z also treats (Apr. 4, 1991) (dropping the term ‘‘renegotiable rate OCC’s definition of ‘‘adjustable rate mortgage.’’ renewable balloon payment loans as variable rate mortgage’’ in favor of a more generic category of 59 See, e.g., Roberto G. Quercia, Michael A. transactions. See 12 CFR 226.17 comment 17(b)–11. renewable loans with balloon payments, where the Stegman & Walter Davis, The impact of predatory 54 See 12 CFR 34.20, 34.24 (authorizing state creditor is either unconditionally obligated to loan terms on subprime foreclosures: The special chartered banks to make ‘‘adjustable rate renew the loan or obligated to renew subject only case of prepayment penalties and balloon mortgages,’’ defined generally to include secured to conditions within the consumer’s control, and payments, 18 Housing Pol’y Debate 311 (2007) extensions of credit ‘‘where the lender, pursuant to requiring that such loans be disclosed as long-term (finding that first-lien subprime refinance mortgage an agreement with the borrower, may adjust the rate variable rate loans rather than as short-term balloon loans with balloon payments in general were 50% of interest from time to time’’). loans). more likely to go into foreclosure than other loans, 55 See 12 CFR 226 comment 17(c)(1)–11. 57 12 U.S.C. 3802(1)(B). holding other factors constant).

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finance charges, as discussed above. a state has enacted a law regulating, for Islands, American Samoa, and Guam. While this amendment could be example, negative amortization or This is generally consistent with the interpreted as having been intended to interest-only features, AMTPA would federal prudential agencies’ regulations exclude these products from AMTPA not preempt application of that law to as well as the definition of ‘‘State’’ in coverage entirely, there is no specific an alternative mortgage transaction. various other federal consumer financial language in the amended statute that In addition, although the alternative regulations.61 provides guidance as to why such mortgage transaction definition includes products would no longer be considered loans in which the contract permits the (e) State Law loans with adjustable or renegotiable creditor to adjust the interest rate or Consistent with 12 U.S.C. 3803, the rates or finance charges, regardless of finance charge upon default, applicable term ‘‘State law’’ is defined as a State the other aspects of the loan. In state laws governing late charges are not constitution, statute, or regulation or addition, the definitions removed by the preempted under § 1004.3. Accordingly, any provision thereof. Dodd-Frank Act amendments were quite like the statute, the two parts of the Section 1004.3 Preemption of State broad and vague and overlap interim final rule work in conjunction law. substantially with the other with each other to provide for more definitions.60 Accordingly, interpreting consistent application of state law Section 1004.3 provides that a state the amendments to exclude from across similar mortgage products. housing creditor may make, purchase, AMTPA coverage any transactions The CFPB seeks comment not just and enforce alternative mortgage described in the removed definitions about the specific definitional changes transactions in accordance with the could undermine the remaining but also how those changes relate to the requirements of § 1004.4(a) through (c) definition. new scope of preemption as further (as applicable), notwithstanding any Second, where unusual circumstances discussed below. provision of State law that restricts the require publication of an interim rule to ability of the housing creditor to adjust (b) Creditor take immediate effect without advance or renegotiate an interest rate or finance notice and opportunity for comment, The term ‘‘creditor’’ is defined to have charge with respect to the transaction or the CFPB believes that it is appropriate the same meaning as under Regulation to change the amount of interest or to minimize market disruption while Z, 12 CFR 226.2. This reflects the fact finance charges included in a regular the CFPB’s notice-and-comment that § 1004.4 of the interim final rule periodic payment as a result of such an rulemaking is under way. Thus, it is applies broadly to all ‘‘creditors’’ as adjustment or renegotiation. This appropriate to interpret the remaining defined under and pursuant to TILA regulation generally tracks the language definition of ‘‘alternative mortgage and Regulation Z when such creditors and structure of 12 U.S.C. 3803, as transaction’’ broadly. are engaged in the making of alternative amended by the Dodd-Frank Act. The CFPB also believes it is mortgage transactions. Comment 2(b)–1 However, in order to implement the particularly important to consider the clarifies that, under Regulation Z, the purposes of the Dodd-Frank Act’s interaction between the Dodd-Frank term ‘‘creditor’’ includes federally and amendments to AMTPA, § 1004.3 Act’s definitional changes (implemented state-chartered banks, thrifts, and credit interprets and clarifies the amended in § 1004.2) and changes to the scope of unions, as well as non-depository preemption standard in 12 U.S.C. preemption (implemented in § 1004.3). institutions (such as state-licensed 3803(c) in several respects. Under the definition adopted in the lenders). The comment also references As an initial matter, the amendments interim final rule, fixed-rate products the Official Staff Commentary to to 12 U.S.C. 3803(c) narrowed the scope involving negative amortization, Regulation Z for additional guidance on of preemption to apply only to state interest-only periods, or graduated the definition of the term ‘‘creditor.’’ laws that ‘‘prohibit[] an alternative payment features do not meet the 62 (c) Housing Creditor mortgage transaction.’’ Although it is definition of ‘‘alternative mortgage unclear from the statutory text what transaction’’ because they are not loans The definition of ‘‘housing creditor’’ types of state laws prohibit alternative with adjustable or renegotiable rates or generally mirrors the statutory language mortgage transactions for purposes of finance charges. Therefore, these types to include a depository institution as AMTPA, the amendments to 12 U.S.C. of loans are not eligible for federal defined in 12 U.S.C. 1735f–7 note; a 3803(c) clarify that an alternative preemption under AMTPA and instead lender approved by the Secretary of mortgage transaction is not prohibited are subject to applicable state law. Housing and Urban Development for by a state law that ‘‘regulates mortgage In contrast, loans containing the same participation in any mortgage insurance transactions generally, including any features that also have adjustable or program under the National Housing restriction on prepayment penalties or renegotiable rates or finance charges Act; other persons who regularly make late charges.’’ 63 would continue to qualify as loans, credit sales, or advances secured Neither AMTPA nor the Dodd-Frank ‘‘alternative mortgage transactions’’ by an interest in a residential structure Act specifically define the term under the definition in § 1004.2(a). that contains one to four units, whether ‘‘prohibit.’’ However, that term is However, state law is preempted with or not that structure is attached to real generally understood to mean forbid by respect to such loans only to the extent property, including an individual law or to otherwise prevent or hinder an provided in § 1004.3 (and only if the condominium unit, cooperative unit, activity.64 Furthermore, the purpose of transaction also complies with the mobile home, and trailer, if it is used as requirements in § 1004.4(a) through (c), a residence; and any transferee of a 61 See, e.g., 12 CFR 561.50; 12 CFR 563f.2; 12 CFR as applicable). Thus, to the extent that person in the other three categories. 700.2. 62 (d) State Public Law 111–203, § 1083(a)(2)(B) (emphasis 60 See 12 U.S.C. 3802(1)(C) (referring to loans added). ‘‘involving any similar type of rate, method of The term ‘‘State’’ is defined as a state 63 Id. determining return, term, repayment, or other of the United States, the District of 64 See, e.g., Webster’s New World Dictionary 1075 variation not common to traditional fixed rate, fixed (3d College ed. 1991) (‘‘1 to refuse to permit; forbid term transactions, including without limitation, Columbia, and U.S. territories and by law or by an order 2 to prevent; hinder’’); Black’s transactions that involve the sharing of equity or possessions, including Puerto Rico, the Law Dictionary 1331 (9th ed. 2009) (‘‘Prohibit, vb. appreciation’’) (emphasis added). Virgin Islands, the Northern Mariana 1. To forbid by law. 2. To prevent or hinder.’’).

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AMTPA remains providing state interest rate or finance charge with needed with respect to these types of housing creditors ‘‘with parity with respect to an alternative mortgage transactions. The CFPB also solicits federally chartered institutions by transaction or to adjust payments as a comment on the volume of these authorizing all housing creditors to result of such an adjustment or transactions. make, purchase, and enforce alternative renegotiation. Thus, the preemption In addition, comment 2 clarifies that mortgage transactions so long as the regime under § 1004.3 is not tied to state law underwriting requirements are transactions are in conformity with whether a state law by its terms applies preempted by § 1004.3 to the extent that [federal] regulations. * * * ’’ 65 This solely to alternative mortgage they effectively restrict the adjustment purpose would be thwarted if AMTPA transactions. or renegotiation of interest rates or were interpreted not to preempt state Although the amendments to 12 finance charges or changes in payments laws imposing restrictions on state U.S.C. 3803(c) indicate that state laws as a result of such adjustments or housing creditors’ ability to adjust that regulate mortgage transactions renegotiations. For example, if a state interest rates and finance charges where generally are not preempted, the CFPB law requires housing creditors to such restrictions do not apply to federal believes that narrowly focusing on underwrite based on the maximum housing creditors, as the ability to make whether a state law is by its terms contractual rate, that particular such adjustments is integral to general or specific would undermine the provision of the law is preempted by alternative mortgage transactions. key determination of whether a state § 1004.3 with respect to alternative Accordingly, because 12 U.S.C. 3802(1) law prohibits an alternative mortgage mortgage transactions, regardless of defines an alternative mortgage transaction’s adjustment or whether the provision applies solely to transaction as a transaction ‘‘in which renegotiation of an interest rate or alternative mortgage transactions or to the interest rate or finance charge may finance charge or changes to payments both alternative mortgage transactions be adjusted or renegotiated,’’ the interim as a result of the adjustment or and other mortgage or consumer credit final rule construes ‘‘prohibit’’ to renegotiation. For example, applying transactions. In contrast, state include not only state laws banning the preemption to any state law that underwriting requirements of general making, purchase, or enforcement of specifically addresses alternative applicability that do not impact the alternative mortgage transactions, but mortgage transactions would preempt adjustment or renegotiation of interest also state laws that restrict or hinder the state laws that do not prohibit rates or finance charges or changes in adjustment or renegotiation of an alternative mortgage transactions payments as a result of such interest rate or finance charge. For because they do not forbid, prevent, or adjustments or renegotiations are not example, as explained in comment 2, hinder the ability of the state housing preempted. (However, as discussed state laws are preempted to the extent creditor to make such transactions (such below, § 1004.4(c) requires state housing that they restrict the circumstances as a state law requiring that certain creditors that invoke AMTPA under which a rate may be adjusted, the disclosures be provided regarding preemption to comply Regulation Z’s method by which a rate may be alternative mortgage transactions). underwriting requirements for high-cost adjusted, or the amount of a rate Furthermore, this approach would and higher-cost mortgages.) adjustment. shield from preemption state laws that In contrast, comment 3 provides Similarly, § 1004.3 provides that state might be couched in general terms but examples of state laws that are not laws are preempted with respect to effectively prohibit an alternative preempted by § 1004.3 because they do alternative mortgage transactions to the mortgage transaction (for example, a law not restrict the ability of the housing extent that they restrict the ability of a prohibiting increases in an interest rate creditor to adjust or renegotiate an state housing creditor to change the based on increases in an index). Finally, interest rate or finance charge or to amount of a payment to include focusing solely on whether a state law change the amount of a payment as a increased interest or finance charges as is specific to alternative mortgage result of such an adjustment or a result of the adjustment or transactions or more general in its terms renegotiation. In particular, the renegotiation of an interest rate or could lead to anomalous results if, for comment states that, consistent with the finance charge. The CFPB believes that example, one state prohibited certain amended 12 U.S.C. 3803(c), state law such changes to payment amounts are conduct in a statute that specifically restrictions on prepayment penalties also integral to alternative mortgage applied to alternative mortgage and late charges are not preempted by transactions. Indeed, if housing transactions while another state § 1004.3 regardless of whether the restriction applies solely to alternative creditors were not permitted to increase prohibited the same conduct in a statute mortgage transactions or to both the payment amount to account for an that applied generally to all mortgage alternative mortgage transactions and increase in the interest rate, the transactions. For these reasons, the other mortgage or consumer credit transaction could negatively amortize, CFPB believes that it would be transactions. Such a restriction does not which would be harmful to some inconsistent with the goals of the Dodd- prohibit or hinder a feature integral to consumers.66 Frank Act amendments to make AMTPA Comment 1 clarifies that, regardless of preemption determinations based solely an alternative mortgage transaction. The comment further clarifies that an whether a state law applies solely to on whether a state law was specific or increase in an interest rate or finance alternative mortgage transactions or general by its terms. Comment 2 also clarifies that state charge as a result of a late payment is applies to both alternative mortgage law restrictions on shared equity or a late charge for purposes of § 1004.3. transactions and other mortgage or shared appreciation transactions in Therefore, a state law that prohibits consumer credit transactions, that law is which the creditor and the consumer state housing creditors from increasing preempted by § 1004.3 to the extent that share some or all of the appreciation in a consumer’s interest rate as a result of it restricts the ability of a state housing the value of the property are preempted a late payment is not preempted by creditor to adjust or renegotiate an by § 1004.3. As discussed above, such § 1004.3. transactions are alternative mortgage In addition, comment 3 clarifies that 65 12 U.S.C. 3801(b). 66 However, as explained in comment 2, other transactions under § 1004.2(a). state law restrictions on transactions in state law restrictions on changes to payments are However, the CFPB solicits comment on which one or more of the regular not preempted by § 1004.3. whether additional protections are periodic payments may result in an

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increase in the principal balance (a purposes of title X of the Dodd-Frank comply with TILA and other applicable negative amortization feature) or may be Act. The CFPB has adopted those provisions of federal law that fall within applied solely to accrued interest and regulations in modified form in the CFPB’s authority, such an approach not to loan principal (an interest-only § 1004.4(a) and (b) of the interim final would be redundant and unnecessary feature) are not preempted by § 1004.3. rule. However, the CFPB believes that and could cause confusion regarding the The comment also clarifies that state additional research, consultation, and scope of preemption under § 1004.3. law disclosure requirements are not comment are needed before adoption of Instead, as discussed below, that CFPB preempted by § 1004.3 regardless of a permanent final rule. The CFPB has designated specific provisions of whether the law applies specifically to therefore seeks comment on whether the Regulation Z in § 1004.4. alternative mortgage transactions requirements in § 1004.4 are sufficient because disclosure requirements do not to prevent unfair or deceptive acts or The CFPB notes that AMTPA prohibit a state housing creditor from practices, whether modifications to provides an opportunity to cure adjusting or renegotiating an interest those requirements are appropriate, and violations of federal alternative rate or finance charge or making a whether additional protections are mortgage transaction regulations that corresponding change to a payment. needed. may be helpful to state housing Finally, the CFPB notes that, as a As discussed above, the CFPB is creditors as they make adjustments general matter, state laws prohibiting issuing § 1004.4 pursuant to its necessary to comply with the interim unfair or deceptive acts or practices are authority under TILA, which applies to final rule. Specifically, 12 U.S.C. not preempted under 12 U.S.C. 3803(c) all ‘‘creditors’’ as defined by Regulation 3803(b) provides that, where a state or this interim final rule. Z. Thus, § 1004.4 applies to all federal housing creditor has failed to comply The CFPB seeks comment on all and state housing creditors that make with the alternative mortgage aspects of § 1004.3(b) and on whether alternative mortgage transactions. transaction regulations for federally particular state laws should or should However, because there has not yet been chartered housing creditors, an not be subject to AMTPA preemption. an opportunity for notice and comment alternative mortgage transaction will The CFPB notes, however, that nothing on the requirements in § 1004.4(a) nonetheless be deemed to be made in in this interim final rule affects the through (c), the CFPB has delayed accordance with the applicable preemption of state law under mandatory compliance with § 1004.4 regulation if: ‘‘(1) The transaction is in provisions of federal law other than until July 21, 2012 for federal housing substantial compliance with the AMTPA. creditors and for state housing creditors regulation; and (2) within sixty days of that are not relying on preemption of Section 1004.4 Requirements for discovering any error the housing state law under § 1004.3. Accordingly, Alternative Mortgage Transactions creditor corrects such error, including only state housing creditors that choose making appropriate adjustments, if any, Section 1083 of the Dodd-Frank Act to seek AMTPA preemption under to the account.’’ requires the CFPB to promulgate its own § 1004.3 are required to comply with regulations governing alternative § 1004.4 before July 22, 2012.68 (a) Adjustable rate mortgages. mortgage transactions after the The CFPB’s interim final rule is designated transfer date. The CFPB is designed to protect consumers and Section 1004.4(a) of the interim final also required to review and determine preserve access to credit and federal- rule provides standards by which whether the regulations governing state parity while also providing an creditors making alternative mortgage alternative mortgage transactions orderly transition period while the transactions with adjustable rates or designated by the OCC and NCUA notice-and-comment rulemaking finance charges may increase the pursuant to AMTPA are ‘‘fair, not process occurs. Because the OCC, interest rate or finance charge. To rely deceptive, and consistent with the NCUA, and OTS AMTPA rules vary on AMTPA’s preemption provision, purposes of [title X of the Dodd-Frank significantly in substance and scope and creditors making alternative mortgage Act].’’ 67 The CFPB believes that it is because the CFPB’s rules must account transactions that are open-end home consistent with the intent and purpose for the Dodd-Frank Act amendments to equity lines of credit subject to the of Section 1083 to interpret this AMTPA, the CFPB has concluded that Regulation Z requirements in 12 CFR provision as requiring the CFPB to it would not be practicable or 226.5b must comply with § 226.5b’s determine whether the OCC and NCUA appropriate to simply replicate the three requirement that changes in the annual regulations are effective in preventing pre-existing sets of regulations in the percentage rate be made according to a unfair or deceptive practices. In CFPB’s interim final rule. However, the publicly available index that is not addition, although this provision does CFPB has adopted standards and subject to the creditor’s control. not require the CFPB to review OTS language that are comparable to central For closed-end alternative mortgage AMTPA regulations, the CFPB believes elements of those regulations where it transactions involving an adjustable rate that it is appropriate to do so in order was consistent with the Dodd-Frank Act or finance charge, the interim final rule to predict potential impacts on the and otherwise appropriate to do so. provides that adjustments must be made marketplace. The CFPB did consider simply based on either: (1) an index outside the Accordingly, the CFPB has completed requiring state housing creditors to an initial review of the regulations creditor’s control to which changes in comply with all requirements of federal the interest rate are tied; or (2) a formula designated by the OCC, NCUA, and OTS law in order to receive AMTPA or schedule identifying the amount by as well as agency interpretive guidance, preemption. However, because state which the interest rate or finance charge available court decisions, and secondary housing creditors are already required to sources. Based on this review, the CFPB may increase and the times at which, or circumstances under which, a change has made a preliminary determination 68 As discussed below, however, nothing in Part that certain of those regulations are 1004 alters the obligation of all creditors to may be made. The content of these rules necessary to prevent unfairness and continue to comply with the requirements of is similar to the OCC and OTS deception and are consistent with the Regulation Z that are incorporated by reference in regulations for national banks and § 1004.4 (specifically, 12 CFR 226.5b, 12 CFR federal thrifts, respectively, that were 226.32, 12 CFR 226.34, and 12 CFR 226.35, as 67 Public Law 111–203, § 1083(b). applicable). previously designated as applicable to

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state housing creditors under AMTPA.69 interim final rule is necessary and appropriate to protect consumers, Pursuant to its authority under Section proper to ensure that responsible, promote access to responsible credit, 1405(a) of the Dodd-Frank Act (15 affordable mortgage credit remains and enhance parity between federal and U.S.C. 1639b(e)(1)), the CFPB finds that available to consumers. state housing creditors. the adoption of the standards in As discussed above, a renewable balloon-payment mortgage is generally a (c) Requirements for High-Cost and § 1004.4(a) as part of this interim final Higher-Priced Mortgage Loans rule is necessary and proper to ensure transaction in which payments are that responsible, affordable mortgage based on an amortization period and a Section 1004.4(c) provides that, if an credit remains available to consumers. large final payment is due after a shorter alternative mortgage transaction is a Nevertheless, the CFPB seeks comment term, but the borrower has the option to ‘‘high-cost’’ loan subject to 12 CFR on whether additional or different renew the transaction at specified 226.32, the creditor must comply with requirements are more appropriate to intervals throughout the amortization 12 CFR 226.32 and 12 CFR 226.34. In protect consumers and promote parity period at the interest rate offered by the addition, if an alternative mortgage between federal and state housing creditor at the time of renewal.73 To rely transaction is a ‘‘higher-priced mortgage creditors. on AMTPA’s preemption provision, loan’’ subject to 12 CFR 226.35, the Comment 4(a)–1 clarifies that a creditors making such transactions must creditor must comply with 12 CFR creditor may use any measure of index provide a written commitment to renew 226.35. These provisions of Regulation values that meets the requirements in the transaction at specified intervals Z contain underwriting requirements § 1004.4(a)(2)(i). For example, the index throughout the amortization period. and restrictions on loan terms for may be either single values as of a Under the terms of the written certain types of loans with higher costs. specific date or an average of values commitment, the creditor may negotiate Because the interim final rule preempts calculated over a specified period. an increase or decrease in the interest some state underwriting requirements, Comment 4(a)–2 clarifies that an rate at renewal. the CFPB believes it is appropriate to index is not beyond the creditor’s The CFPB believes that a written require creditors to comply with these control if the index is the creditor’s own commitment is necessary to ensure that provisions in order to obtain that prime rate or cost of funds. A creditor balloon-payment mortgages made under preemption.74 Pursuant to its authority is permitted to use a published prime AMTPA are provided responsibly. under Section 1405(a) of the Dodd- rate, such as the prime rate published in However, the CFPB also believes that, Frank Act (15 U.S.C. 1639b(e)(1)), the the Wall Street Journal.70 The CFPB based on safety and soundness and CFPB finds that the adoption of notes that, in other contexts, the Federal other considerations, creditors should § 1004.4(c) as part of this interim final Reserve Board has concluded that a not be required to renew the loan in rule is necessary and proper to ensure creditor’s use of ‘‘rate floors’’ (in other certain limited circumstances. that responsible, affordable mortgage words, minimum values below which Accordingly, the CFPB has adopted credit remains available to consumers. the interest rate will not fall regardless exceptions to the renewal requirement Comment 1004.3(c)–1 clarifies that of the index value) constituted control based on the exceptions in 12 CFR creditors must comply with the over the operation of an index.71 226.5b(f)(2), which permit a creditor to restrictions on prepayment penalties in Although the CFPB has not adopted that terminate a home-equity line of credit Regulation Z, if applicable. However, as interpretation in this interim final rule, and demand payment of the outstanding discussed above, creditors are not it seeks comment on whether it is balance. The CFPB has modified the exempt under AMTPA and § 1004.3 from state laws regarding prepayment appropriate to do so in a permanent § 226.5b(f)(2) exceptions to ensure that a penalties. Thus, with respect to final regulation implementing the creditor generally cannot decline to prepayment penalties, creditors must amendments to AMTPA. renew a balloon-payment loan under Comment 4(a)–3 clarifies that a § 1004.4(b) unless there has been a comply with both Regulation Z and publicly available index need not be material change in circumstance. with state law unless another basis for published in a newspaper, but it must Therefore, § 1004.4(b) provides that preemption exists (such as because the the creditor is not required to renew the state law is inconsistent with Regulation be one the consumer can independently 75 obtain (by telephone, for example) and transaction if: (1) Any action or inaction Z). For example, if a loan is a higher- use to verify the annual percentage rate by the consumer materially and priced mortgage loan under 12 CFR applied to the alternative mortgage adversely affects the creditor’s security 226.35, it may not have a prepayment transaction.72 for the transaction or any right of the penalty unless the penalty expires creditor in such security; (2) there is a within two years after consummation.76 (b) Renegotiable rates for balloon- material failure by the consumer to meet However, if a state law prohibited payment mortgages. the repayment terms of the transaction; prepayment penalties unless the penalty Renegotiable rates and renewable (3) there is fraud or a willful or knowing expires within one year, that state law balloon-payment mortgages were not material misrepresentation by the would not be preempted by AMTPA (or specifically discussed in the mortgage consumer in connection with the by Regulation Z). rules previously designated as transaction; or (4) Federal law dealing The CFPB seeks comment on the applicable to state housing creditors with credit extended by a depository inclusion of these requirements in under AMTPA by the OCC, NCUA, and institution to its executive officers § 1004.4(c) and on whether additional OTS. However, pursuant to its authority specifically requires that as a condition underwriting requirements are under Section 1405(a) of the Dodd- of the extension the credit shall become warranted. In particular, the CFPB Frank Act (15 U.S.C. 1639b(e)(1)), the due and payable on demand, provided requests comment on whether, once the CFPB finds that adoption of the that the creditor includes such a standards in § 1004.4(b) as part of this provision in the initial agreement. 74 Because 12 CFR 226.32, 12 CFR 226.34, and 12 The CFPB seeks comment on whether CFR 226.35 already apply to all creditors, all creditors must continue to comply with those 69 12 CFR 34.20–25; 12 CFR 560.220. the written commitment requirement provisions, regardless of whether they seek AMTPA 70 See 12 CFR 226.5b comment 5b(f)(1)–1. and the exceptions in § 1004.4(b) are preemption. 71 See 12 CFR 226.55(b)(2) comment 55(b)(2)–2. 75 See 12 CFR 226.28. 72 See 12 CFR 226.5b comment 5b(f)(1)–2 73 See 12 CFR 226.17 comment 17(b)–11. 76 12 CFR 226.35(b)(2)(ii)(A).

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regulations implementing the ability-to- provisions of federal law that are amount of disruption from pay requirements in TILA Section 129C incorporated by reference in § 1004.4. implementation of the statutory (15 U.S.C. 1639c) are finalized, all or Specifically, nothing in § 1004.4(d) amendments by adopting requirements part of those regulations should be exempts a housing creditor from that are generally consistent with the incorporated into § 1004.4(c). complying with 12 CFR 226.5b, 226.32, existing regulations issued by the (d) Other Applicable Law 226.34, or 226.35. federal prudential agencies to the extent permitted under the Dodd-Frank Act (e) Reductions in interest rate or finance Because § 1004.4 applies to all amendments to AMTPA and by charge. creditors on July 22, 2012, the interim providing a delayed mandatory final rule provides § 1004.4(d) as an Section 1004.4(e) of the interim final compliance date and safe harbor for alternative to compliance with rule provides that a creditor may always small federally chartered and state § 1004.4(a) through (c) for creditors that decrease the interest rate or finance chartered lenders that are not making do not seek preemption under § 1004.3. charge on an alternative mortgage loans under AMTPA but may be Specifically, § 1004.4(d) permits a transaction without violating § 1004.4. affected by the broader long-term housing creditor that is not making an The OCC regulations that are designated rulemaking. alternative mortgage transaction as applicable to state housing creditors The CFPB takes its responsibilities pursuant to § 1004.3 to make that contain a similar provision, and the under the Regulatory Flexibility Act transaction consistent with applicable CFPB believes it is appropriate to seriously and is in the process of state or federal law other than § 1004.4. replicate that provision here because refining its long-term policies, Thus, for example, a state housing interest rate and finance charge procedures, and methodologies for creditor that does not invoke AMTPA reductions are beneficial to consumers. conducting impact analyses as required preemption can make an alternative by the statute. The CFPB expects to VII. Regulatory Flexibility Act mortgage transaction consistent with apply these enhanced processes when applicable state law as well as The Regulatory Flexibility Act (RFA), complying with all applicable applicable federal law other than as amended by the Small Business requirements as part of its future notice- § 1004.4. Similarly, a federally chartered Regulatory Enforcement Fairness Act of and-comment rulemaking under housing creditor can make an 1996, requires each agency to consider AMTPA. In advance of issuing this alternative mortgage transaction the potential impact of its regulations on interim final rule, the CFPB issued a consistent with federal law other than small entities including small public bulletin alerting state chartered § 1004.4 (including any requirements businesses, small governmental units, and licensed lenders and other imposed by the chartering agency and and small not-for-profit organizations.77 interested parties that: (1) the Dodd- the requirements for high-cost and The RFA generally requires an agency to Frank Act amendments to AMTPA take higher-priced mortgage loans found in conduct an initial regulatory flexibility effect on July 21, 2011; and (2) the 12 CFR 226.32, 12 CFR 226.34, and 12 analysis (IRFA) and a final regulatory amendments affect what laws apply to CFR 226.35) as well as any applicable flexibility analysis (FRFA) of any rule mortgage loans issued by state chartered state law. subject to notice-and-comment or licensed lenders after that date by Particularly in view of the fact that rulemaking requirements, unless the narrowing the statutory definition of this interim final rule is being published agency certifies that the rule will not ‘‘alternative mortgage transaction’’ and without notice and comment, the CFPB have a significant economic impact on the scope of preemption under believes that this provision is necessary a substantial number of small entities. 79 and appropriate to enable housing AMTPA. The CFPB has also The CFPB is subject to certain conducted outreach with trade creditors that are not using AMTPA additional procedures under the RFA preemption to make alternative associations, state and federal involving the convening of a panel to mortgage transactions to continue regulators, and consumer advocates to consult with small business making such transactions in accordance call attention to the Dodd-Frank Act’s representatives regarding any rule for with applicable federal or state amendments to AMTPA and to urge which an IRFA is required. standards. The CFPB believes that this planning for an orderly transition The RFA requirements do not apply interim final rule strikes an appropriate period. in cases in which an agency finds good short-term balance that will promote Because limited information exists cause to issue an interim final rule greater parity between federal and state concerning AMTPA activity, the CFPB without a notice of proposed housing creditors, continued access to requests comment and data regarding rulemaking.78 As discussed above in credit on currently-available terms, and the amount of activity under the statute Section IV, the CFPB has made such a consumer protection while reflecting prior to the Dodd-Frank Act finding. Moreover, the CFPB believes the narrowed scope of AMTPA amendments, the impact of the OCC, that any delay in the issuance of the preemption under the Dodd-Frank Act. NCUA, and OTS regulations, and the interim final rule would be contrary to The CFPB seeks comment on both the impact of the statutory amendments and the interests of small businesses, since short-term impacts of this provision and the interim final rule. All of these topics the ability of small state housing on potential long-term standards under will help the CFPB in assessing the creditors to make alternative mortgage § 1004.4 that would apply to all potential economic impacts on small transactions under AMTPA would be creditors or a defined subset of lenders as it prepares to propose a suspended while the CFPB assessed creditors. In addition, the CFPB seeks permanent final rule. impacts and completed any other comment on whether it should utilize VIII. Paperwork Reduction Act applicable requirements. The CFPB sources of statutory authority other than notes that the interim final rule is The CFPB has determined that this TILA to issue regulations governing specifically designed to reduce the interim final rule does not impose any alternative mortgage transactions. new recordkeeping or reporting Comment 4(d)–1 clarifies that 77 5 U.S.C. 601 et seq. § 1004.4(d) does not exempt housing 78 5 U.S.C. 553(b)(B); 5 U.S.C. 605(b); 62 FR 79 Available at http://www.consumerfinance.gov/ creditors that do not seek preemption 23,538 (April 30, 1997); 66 FR 37,752 (July 19, wp-content/uploads/2011/06/Amendments-to-the- under § 1004.3 from complying with 2001); 64 FR 3,865 (Jan. 26, 1999). Alternative-Mortgage-Transaction-Parity-Act.pdf.

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requirements on state housing creditors, In the absence of an interim final rule, state requirements. Consumers will states, or members of the public that consumers would receive the benefits of benefit from the provisions of the would be collections of information the application of state consumer interim final rule and any increased requiring approval under 44 U.S.C. protection laws while losing the benefits availability or lowered price for credit at 3501, et seq. of a countervailing federal consumer the cost of decreased consumer protection rule under AMTPA and most 83 IX. Dodd-Frank Act Section 1022(b)(2) protections from state regulation. likely experiencing an increase in the The CFPB notes that the interim final The CFPB has conducted an analysis cost and/or a reduction in the rule does not apply to mortgage of benefits, costs, and impacts of this availability of credit.82 interim final rule and consulted with The benefits, costs, and impacts of the transactions that the Dodd-Frank Act the prudential regulators, the Federal interim final rule can be measured has excluded from the statutory Trade Commission, and the Department against this baseline scenario which definition of ‘‘alternative mortgage of Housing and Urban Development.80 assumes that the Dodd-Frank Act transaction,’’ as discussed above. For In preparing a notice of proposed amendments have taken effect and these loans, state housing creditors can rulemaking following the issuance of preemption is not in force since no no longer invoke AMTPA preemption this interim final rule, the CFPB plans interim rule exists. Relative to this and therefore the costs and benefits just to perform additional analysis and scenario, the interim final rule allows described are not relevant. Such engage in further consultations preemption of certain state laws and mortgages include fixed-rate mortgage consistent with Section 1022(b)(2).81 provides federal consumer protection loans with interest-only payment In the absence of the interim final standards governing certain terms in periods or negative amortization rule, the provisions of the Dodd-Frank alternative mortgage transactions as a features, fixed-rate balloon loans where Act would, by themselves, impact condition required before federal the lender does not make a commitment portions of the mortgage market. As preemption is triggered. Importantly, to renew the loan, and certain other discussed previously, the Dodd-Frank the interim final rule also allows products that previously fit within the Act requires state housing creditors to creditors not seeking to invoke federal statutory definition. comply with CFPB regulations in order preemption under AMTPA to continue to invoke AMTPA preemption for In order to estimate the potential costs making alternative mortgage and benefits of the interim final rule, the alternative mortgage transactions transactions under other sources of CFPB has examined various data entered into after July 21, 2011. federal law or relevant state laws, as sources and consulted with industry Accordingly, if the CFPB did not adopt applicable. Furthermore, while and consumer representatives, market regulations that took immediate effect compliance with this interim final rule on July 22, AMTPA preemption would is mandatory for state housing creditors participants, and other regulators. To cease to apply and the affected state that choose to invoke federal date, the CFPB has found no housing creditors would be subject to preemption under AMTPA, compliance comprehensive data from either applicable state law. In states where with the requirements for alternative regulatory or private sources to alternative mortgage transactions are mortgage transactions in § 1004.4 of this determine the number, value, location, prohibited, state housing creditors who rule is optional for other creditors until or type of originator of mortgages were affected would no longer be able July 22, 2012. In addition, after July 22, originated specifically using AMTPA to make—and consumers would no 2012, creditors who are not seeking preemption. Available data indicate that longer be able to obtain—those forms of AMTPA preemption may comply with variable rate mortgages comprised credit. Furthermore, in states where other applicable law rather than the approximately 12 percent of mortgage alternative mortgage transactions are requirements of this interim final rule. originations in the first quarter of 2011. regulated but not prohibited, affected As a result, any potential benefits and However, this figure overstates the state housing creditors would either costs from the interim final rule are percentage of transactions made by state choose to cease making such limited to alternative mortgage housing creditors under AMTPA transactions in order to avoid the cost of transactions, issued by state housing preemption because it includes compliance or have to incur those costs. creditors, that would not be permissible transactions made by federally chartered under applicable state law but for housing creditors, transactions made by 80 The President’s July 11, 2011, Executive Order AMTPA’s preemption of state state housing creditors under some 13579 entitled ‘‘Regulation and Independent restrictions or requirements or where Regulatory Agencies,’’ asks the independent other form of preemption or state parity agencies to follow the cost-saving, burden-reducing the lender chooses to issue the mortgage law, and transactions made by state principles in Executive Order 13563; harmonization under AMTPA preemption. Lenders housing creditors under state law. Still, and simplification of rules; flexible approaches that choosing to make such mortgages using with a significant number of states reduce costs; and scientific integrity. In the spirit AMTPA preemption will incur the cost of Executive Order 13563, the CFPB has consulted imposing restrictions on the size, with the Office of Management and Budget of complying with the requirements of frequency, or timing of interest rate and regarding this interim final rule, including with the interim final rule. On the other payment adjustments and respect to the CFPB’s methodologies and analysis hand, to the extent that making renegotiations, the CFPB expects there regarding the potential benefits, costs, and impacts alternative mortgage transactions that of the rule. are some markets where the volume of 81 Section 1022(b)(2)(A) calls for consideration of would otherwise be prohibited or mortgages made using AMTPA the potential benefits and costs of regulation to regulated by state law is profitable to preemption may be significant. The consumers and industry, including the potential lenders, they will benefit from the reduction of access by consumers to consumer CFPB seeks comment on available ability to make these loans under the sources of information to better evaluate financial products or services; the impact of interim final rule and from any cost proposed rules on depository institutions and credit the potential benefits and costs of savings from avoiding the preempted unions with $10 billion or less in total assets as AMTPA implementing rules. described in Section 1026 of the Dodd-Frank Act; and the impact on consumers in rural areas. The 82 The sudden change in the nature of the CFPB is in the process of further developing its regulatory environment and the short term market 83 Intangible effects, such as the increase in state long-term policies and procedures in this area and disruptions that would ensue in the absence of the autonomy inherent in reducing the scope of evaluating potential methodologies for conducting interim final rule would lead to additional costs as preemption, are beyond the scope of the current impact analyses as required by the statute. well. discussion.

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A. Potential Benefits and Costs to since the costs of compliance for any markets, if any, where such balloon Consumers and Covered Persons, affected individual lender are likely to products are prevalent and where Including any Potential Reduction of be small, and these rules likely apply to consumers have few alternatives to such Access by Consumers to Consumer only a limited number of mortgages. On products. The CFPB seeks comment Financial Products or Services the other hand, creditors making loans regarding the size of, and current As described above, the interim final using AMTPA preemption will benefit practices within, this market segment. rule specifies requirements for to the extent that they are able to The interim final rule also requires mortgages made using AMTPA originate loans that would otherwise be that ‘‘high-cost’’ or ‘‘higher-priced’’ preemption, including loans with preempted by state law and do not have alternative mortgage transactions made variable or adjustable rates, shared to incur certain costs related to using AMTPA preemption comply with equity or shared appreciation loans, and complying with the preempted state the corresponding underwriting fixed-rate balloon loans where the law. The specific cost reductions would requirements and restrictions on loan creditor commits to renewing the loan. depend on the regulations in the terms contained in Regulation Z. For These include requirements for the particular state. For creditors choosing loan terms in these mortgages that are index used for adjustable rate to issue loans using AMTPA not preempted under AMTPA, such as mortgages, certain loan terms regarding preemption, these benefits are assumed terms related to prepayment penalties, renewal commitments for balloon to exceed the costs. the interim final rule imposes no mortgages, and underwriting The interim final rule also specifies additional costs or benefits since creditors are required to meet the requirements for high-cost and higher- that, in order to qualify for preemption, federal standards even in the absence of priced mortgage loans.84 The potential balloon payment mortgages with the interim final rule and the state benefits and costs from these provisions renegotiable rates must include a requirements remain in place. For loan to consumers and covered entities are written commitment by the lender to terms that are preempted under discussed below. renew the loan, subject to certain AMTPA, creditors may save from not For home equity lines of credit limitations. As discussed in Section III having to comply with the preempted opened by state housing creditors using of this Federal Register notice, this state requirements. The potential costs AMTPA preemption, the interim final requirement of a written commitment and benefits for consumers depend on rule mandates that an adjustable rate be stems primarily from changes to the based on a publicly available index that the specific provisions that are definition of ‘‘alternative mortgage preempted. is beyond the creditor’s control. For transaction’’ made by Congress under closed-end mortgages, a state housing the Dodd-Frank Act. The requirement B. The Impact of the Interim Final Rule creditor must either comply with this for a written commitment will benefit on Depository Institutions and Credit requirement or use a formula or some consumers by reducing the risk of Unions With $10 Billion or Less in Total schedule identifying the amount and default arising from a borrower’s Assets as Described in Section 1026 and timing of interest rate increases. The inability to satisfy the balloon payment the Impact on Consumers in Rural CFPB does not have specific or to refinance the loan at the end of the Areas information suggesting that creditors are loan term. Conversely, for state housing During 2010, roughly 1,500 state originating mortgages where the interest creditors that, by virtue of AMTPA chartered credit unions with $10 billion rate is tied to an internal index. Based preemption, offer or wish to offer fixed- or less in assets as described in Section on discussions with the other regulators rate balloon mortgages with only 1026 of the Dodd-Frank Act made and industry groups, the CFPB unwritten (oral or implied) adjustable rate or balloon mortgages. In understands that at most a few creditors commitments to renew or with no such aggregate that year, these credit unions use internal indices and that precluding commitments, the implementation of issued roughly 240,000 adjustable rate their use in AMTPA loans would have this standard is likely to increase mortgages and another 30,000 balloon/ a negligible impact on the mortgage operational costs, such as revising hybrid loans. Together, these amount to markets. administrative systems and procedures, To the limited extent some creditors just under 50 percent of the mortgages including contract forms, in order to might seek to offer ARMs based on an (by number) originated by these credit conform to the interim final rule. The index within the creditors’ control, the unions in 2010. To the extent that all or commitment to renew will also impose interim final rule benefits consumers by some of these loans were originated costs on creditors as they assume shielding them from rate increases using AMTPA preemption, the benefits additional risk. On the other hand, within the unilateral control of the and costs described above would apply creditors making loans using AMTPA creditor that are not market-based. At to these types of loans as issued by state preemption will benefit to the extent the same time, the index requirements chartered credit unions. The CFPB seeks that they are able to originate loans that could increase the costs for creditors additional information to specify more would otherwise be prohibited by state who wish to offer loans based on a precisely the benefits or costs for these law and by not having to incur certain prohibited internal index: These credit unions. costs related to complying with the Similar issuance figures are not creditors may incur increased preempted state law. The specific cost available for other depository operational costs in tracking such an reductions would depend on the institutions with $10 billion or less in external index and increased costs of regulations in the particular state. For assets as described in Section 1026. The funding relative to using an internal creditors choosing to issue such balloon closest available data for banks only index. They therefore may raise the loans using AMTPA preemption, these detail the value of outstanding fixed rate price of certain loans or be unwilling to benefits are assumed to exceed the and adjustable rate mortgages but not offer loans to some borrowers. However, costs, and on net consumers should see the value of originations broken out into the aggregate costs from these greater credit availability at the cost of these categories. As of the end of 2010, provisions are likely to be minimal any decreased consumer protections approximately 25 percent of the outstanding amount of mortgages held 84 The interim final rule does not require these provided by the preempted state creditors to report to the CFPB the number of loans regulations. Any effects of these by state chartered banks with total made under AMTPA. provisions are likely to be greatest in assets under $10 billion, and secured by

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1–4 family dwellings, was in adjustable was consistent with prudential, market, that transaction on or after July 22, rate loans. Applying that percentage to or systemic objectives administered by 2011. This regulation does not apply to preliminary data from the most recently those agencies. The CFPB will engage in a transaction if the creditor received the available data collected under the Home further consultations during the notice- application for that transaction before Mortgage Disclosure Act results in an and-comment rulemaking process. July 22, 2011. estimated 340,000 adjustable rate List of Subjects in 12 CFR Chapter X mortgages made in 2009. As the 25 § 1004.2 Definitions. percent figure is likely an overestimate, Banks, banking, consumer protection, For purposes of this part: the result should be viewed as an upper credit unions, mortgages, national Alternative mortgage transaction bound. Were all of these loans made banks, truth in lending. means a loan, credit sale, or account: (1) That is secured by an interest in using AMTPA preemption, they would Authority and Issuance incur the costs and benefits described a residential structure that contains one for these products. The CFPB seeks For the reasons set forth in the to four units, whether or not that additional information to specify more preamble and under the authority of structure is attached to real property, precisely the monetary costs or benefits Public Law 111–203, the CFPB including an individual condominium for these institutions. establishes Chapter X in Title 12 of the unit, cooperative unit, mobile home, or Further, only a fraction of the loans Code of Federal Regulations, consisting trailer, if it is used as a residence; just described were likely made using of parts 1000 through 1099, to read as (2) That is made primarily for AMTPA preemption. Many states have follows: personal, family, or household parity or wild card laws that allow CHAPTER X—BUREAU OF CONSUMER purposes; and designated lenders (most often FINANCIAL PROTECTION (3) In which the interest rate or finance charge may be adjusted or depository institutions and/or credit ■ 1. Add part 1004 to read as follows: unions chartered in those states) the renegotiated. option to follow mortgage regulations PART 1004—ALTERNATIVE Creditor shall have the same meaning applicable to federally chartered lenders MORTGAGE TRANSACTION PARITY as in 12 CFR 226.2. or other types of institutions operating (REGULATION D) Housing creditor means: in the same jurisdiction. Firms that (1) A depository institution, as operate under wild card laws face no Sec. defined in section 501(a)(2) of the added costs under the interim final rule 1004.1 Authority, purpose, and scope Depository Institutions Deregulation because they do not need to rely on 1004.2 Definitions and Monetary Control Act of 1980; 1004.3 Preemption of State law (2) A lender approved by the AMTPA preemption. In addition, in 1004.4 Requirements for alternative states that opted out of AMTPA in mortgage transactions Secretary of Housing and Urban whole or in part,85 the interim final rule Appendix A to Part 1004—Official Development for participation in any will impose no additional costs or Commentary on Regulation D mortgage insurance program under the benefits to the extent of the opt out. Authority: 12 U.S.C. 3802, 3803; 15 U.S.C. National Housing Act; Still, it is possible that for particular 1604, 1639b; Pub. L. No. 111–203, 124 Stat. (3) Any person who regularly makes lenders or markets, AMTPA preemption 1376. loans, credit sales, or advances on an is an important driver of market account secured by an interest in a outcomes. As discussed above, balloon § 1004.1—Authority, purpose, and scope. residential structure that contains one to mortgage loans without a written (a) Authority. This regulation, known four units, whether or not the structure commitment to renew may represent a as Regulation D, is issued by the Bureau is attached to real property, including significant product in certain rural of Consumer Financial Protection to an individual condominium unit, markets served by credit unions and implement the Alternative Mortgage cooperative unit, mobile home, or community banks or by non-depository Transaction Parity Act, 12 U.S.C. 3801 trailer, if it is used as a residence; and issuers who may not be able to avail et seq., as amended by title X, Section (4) Any transferee of a party listed in themselves of wild card laws. The 1083 of the Dodd-Frank Wall Street paragraph (c)(1), (2), or (3) of this specific provisions of the interim final Reform and Consumer Protection Act section. rule offering preemption for only those (Pub. L. 111–203, 124 Stat. 1376). State means any State of the United loans with written commitments, while Section 1004.4 is issued pursuant to the States of America, the District of imposing some costs, should benefit Alternative Mortgage Transaction Parity Columbia, Puerto Rico, the Virgin lenders and consumers in those specific Act (as amended) and the Truth in Islands, the Northern Mariana Islands, markets by allowing such mortgages Lending Act, 15 U.S.C. 1601 et seq. American Samoa, Guam, and any other under AMTPA preemption. The CFPB is (b) Purpose. Consistent with the territory or possession of the United continuing to research this question and Alternative Mortgage Transaction Parity States. seeks comment on these issues. Act, the Truth in Lending Act, and the State law means a State constitution, Dodd-Frank Wall Street Reform and statute, or regulation or any provision C. Consultation Consumer Protection Act, the purpose thereof. The CFPB has consulted with the of this regulation is to balance access to prudential regulators, the Federal Trade responsible credit and enhanced parity § 1004.3 Preemption of State law. Commission, and the Department of between State and federal housing Pursuant to 12 U.S.C. 3803, a State- Housing and Urban Development creditors regarding the making, chartered or -licensed housing creditor regarding the substance of the interim purchase, and enforcement of may make, purchase, and enforce final rule, including whether the rule alternative mortgage transactions with alternative mortgage transactions in consumer protection and the interests of accordance with § 1004.4(a) through (c) 85 12 U.S.C. 3804. Six states exercised their opt- the States in regulating mortgage of this part (as applicable), out authority in whole or in part: Arizona, Maine, transactions generally. notwithstanding any provision of State Massachusetts, New York, South Carolina, and Wisconsin. See, e.g., Grant S. Nelson & Dale A. (c) Scope. This regulation applies to law that restricts the ability of the Whitman, Real Estate Finance Law § 11.4 (4th ed. an alternative mortgage transaction if housing creditor to adjust or renegotiate 2001). the creditor received an application for an interest rate or finance charge with

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respect to the transaction or to change must comply with 12 CFR 226.32 and transaction that is secured by a mortgage, the amount of interest or finance 12 CFR 226.34. deed of trust, or other equivalent consensual charges included in a regular periodic (2) If an alternative mortgage security interest in a dwelling or in payment as a result of such an transaction is subject to 12 CFR 226.35, residential real property that includes a adjustment or renegotiation. the creditor must comply with 12 CFR dwelling. The dwelling need not be the 226.35. primary dwelling of the consumer. Home equity lines of credit and subordinate lien § 1004.4 Requirements for alternative (d) Other applicable law. mortgage transactions. mortgages are alternative mortgage Notwithstanding paragraphs (a) through transactions for purposes of this Part to the (a) Mortgages with adjustable rates or (c) of this section, a housing creditor extent they meet the definition in § 1004.2(a). finance charges and home equity lines that is not making an alternative 2. Examples of alternative mortgage of credit. A creditor that makes an mortgage transaction pursuant to transactions. Examples of alternative alternative mortgage transaction with an § 1004.3 of this part may make that mortgage transactions include: adjustable rate or finance charge may transaction consistent with applicable i. Transactions in which the interest rate only increase the interest rate or finance State or Federal law other than this changes in accordance with fluctuations in charge as follows: section. an index. (1) If the transaction is subject to 12 (e) Reductions in interest rate or ii. Transactions in which the interest rate CFR 226.5b, the creditor must comply finance charge. Nothing in this section or finance charge may be increased or with 12 CFR 226.5b(f)(1). decreased after a specified period of time or prohibits a creditor from decreasing the under specified circumstances. (2) For all other transactions, the interest rate or finance charge on an iii. Balloon transactions in which creditor must use either: alternative mortgage transaction. payments are based on an amortization (i) An index to which changes in the Appendix A to Part 1004—Official schedule and a large final payment is due interest rate are tied that is readily after a shorter term, where the creditor makes Commentary on Regulation D available to and verifiable by the a commitment to renew the transaction at borrower and beyond the control of the § 1004.1 Authority, Purpose, and Scope specified intervals throughout the amortization period, but the interest rate may creditor; or 1(c) Scope. (ii) A formula or schedule identifying be renegotiated at renewal. For example, a 1. Application received before July 22, fixed-rate mortgage loan with a 30-year the amount that the interest rate or 2011. This Part does not apply to a amortization period but a balloon payment finance charge may increase and the transaction if the creditor received the due five years after consummation is an times at which, or circumstances under application for that transaction before July alternative mortgage transaction under which, a change may be made. 22, 2011, even if the transaction was § 1004.2(a) if the creditor commits to renew (b) Renegotiable rates for renewable consummated or completed on or after July the mortgage at five-year intervals for the balloon-payment mortgages. A creditor 22, 2011. Whether 12 U.S.C. 3803(c) entire 30-year amortization period. that makes an alternative mortgage preempts State law with respect to such a iv. Transactions in which the creditor and transaction with payments based on an transaction depends on whether: (1) The the consumer agree to share some or all of transaction was an alternative mortgage the appreciation in the value of the property amortization period and a large final transaction as defined by the version of 12 payment due after a shorter term may (shared equity/shared appreciation). U.S.C. 3802(1) in effect at the time of However, this Part preempts State law only negotiate an increase or decrease in the application; and (2) the State housing to the extent provided in § 1004.3 and only interest rate when the transaction is creditor complied with applicable federal to the extent that the requirements of renewed only if the creditor makes a regulations issued by the Office of the § 1004.4(a) through (c) (as applicable) are written commitment to renew the Comptroller of the Currency, the National met. transaction at specified intervals Credit Union Administration, the Office of 3. Examples of transactions that are not throughout the amortization period. Thrift Supervision, or the Federal Home Loan alternative mortgage transactions. The However, the creditor is not required to Bank Board in effect at the time of following are examples of transactions that application. are not alternative mortgage transactions: renew the transaction if: 2. Subsequent modifications and other (1) Any action or inaction by the i. Transactions with a fixed interest rate actions. If applicable regulations under 12 where one or more of the regular periodic consumer materially and adversely U.S.C. 3803(c) (including this Part) payments may be applied solely to accrued affects the creditor’s security for the preempted State law with respect to an interest and not to loan principal (an interest- transaction or any right of the creditor alternative mortgage transaction at the time only feature). in such security; the application was received, the following ii. Balloon transactions with a fixed (2) There is a material failure by the actions with respect to that transaction are interest rate where payments are based on an consumer to meet the repayment terms entitled to the same degree of preemption amortization schedule and a large final under such regulations: of the transaction; payment is due after a shorter term, where i. The subsequent consummation, the creditor does not make a commitment to (3) There is fraud or a willful or completion, purchase, or enforcement of the knowing material misrepresentation by renew the transaction at specified intervals transaction by a housing creditor. throughout the amortization period. the consumer in connection with the ii. The subsequent modification, renewal, iii. Transactions with a fixed interest rate transaction; or or extension of the transaction. However, if where one or more of the regular periodic (4) Federal law dealing with credit such a transaction is satisfied and replaced payments may result in an increase in the extended by a depository institution to by another transaction, the second principal balance (a negative amortization its executive officers specifically transaction must independently meet the feature). requires that as a condition of the requirements for preemption in effect at the time the application for the second 2(b) Creditor extension the credit shall become due transaction was received. and payable on demand, provided that 1. Creditor. As defined in 12 CFR 226.2, the creditor includes such a provision in § 1004.2 Definitions ‘‘creditor’’ includes federally and State- chartered banks, thrifts, and credit unions, as the initial agreement. 2(a) Alternative Mortgage Transaction well as non-depository institutions, such as (c) Requirements for high-cost and 1. Alternative mortgage transaction. For State-licensed lenders. The Official Staff higher-priced mortgage loans. (1) If an purposes of this Part, an alternative mortgage Commentary to 12 CFR 226.2 contains alternative mortgage transaction is transaction that meets the definition in additional guidance on the definition of the subject to 12 CFR 226.32, the creditor § 1004.2(a) includes any consumer credit term ‘‘creditor.’’ See 12 CFR 226.2, Supp. I.

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§ 1004.3 Preemption of State Law transactions in which one or more of the creditor’s control if the index is the creditor’s 1. Scope of State laws. Regardless of regular periodic payments may result in an own prime rate or cost of funds. A creditor whether a State law applies solely to increase in the principal balance (a negative is permitted, however, to use a published alternative mortgage transactions or applies amortization feature) or may be applied prime rate, such as the prime rate published to both alternative mortgage transactions and solely to accrued interest and not to loan in the Wall Street Journal, even if the other mortgage or consumer credit principal (an interest-only feature). creditor’s own prime rate is one of several transactions, that law is preempted by iii. Restrictions on the creditor and the rates used to establish the published rate. § 1004.3 only to the extent that it restricts the consumer sharing some or all of the 3. Publicly available. For purposes of ability of a State-chartered or -licensed appreciation in the value of the property § 1004.4(a)(2)(i), the index must be available housing creditor to adjust or renegotiate an (shared equity/shared appreciation). to the public. A publicly available index interest rate or finance charge with respect to iv. Underwriting requirements that address need not be published in a newspaper, but an alternative mortgage transaction or to the adjustment or renegotiation of interest it must be one the consumer can change the amount of interest or finance rates or finance charges. For example, if a independently obtain (by telephone, for charges included in a regular periodic provision of State law requires housing example) and use to verify the annual creditors to underwrite based on the payment as a result of such an adjustment or percentage rate applied to the alternative maximum contractual rate, that provision is renegotiation. mortgage transaction. 2. Examples of State laws that are preempted by § 1004.3 with respect to preempted. The following are examples of alternative mortgage transactions, regardless 4(c) Requirements for High-Cost and State laws that are preempted by § 1004.3: of whether the provision applies solely to Higher-Priced Mortgage Loans alternative mortgage transactions or to both i. Restrictions on the adjustment or 1. Prepayment penalties. If applicable, alternative mortgage transactions and other renegotiation of an interest rate or finance creditors must comply with 12 CFR 226.32, mortgage or consumer credit transactions. charge, including restrictions on the including 12 CFR 226.32(d)(6) and (d)(7) 3. Examples of State laws that are not circumstances under which a rate or charge which provide limitations on prepayment may be adjusted, the method by which a rate preempted. The following are examples of State laws that are not preempted by § 1004.3 penalties. Similarly, if applicable, creditors or charge may be adjusted, and the amount must comply with 12 CFR 226.35, including of the adjustment to the rate or charge. For regardless of whether the provision applies solely to alternative mortgage transactions or 12 CFR 226.35(b)(2), which also provides example, if a provision of State law prohibits limitations on prepayment penalties. creditors from increasing an adjustable rate to both alternative mortgage transactions and other mortgage or consumer credit However, under § 1004.3, State laws more than two percentage points or from regarding prepayment penalties are not increasing an adjustable rate more than once transactions: i. Restrictions on prepayment penalties or preempted. See comment 1004.3–3.i. during a year, that provision is preempted by Accordingly, creditors must also comply § 1004.3 with respect to alternative mortgage late charges (including an increase in an with any State laws regarding prepayment transactions that comply with § 1004.4(a) interest rate or finance charge as a result of penalties unless an independent basis for through (c), as applicable. Similarly, if a a late payment). preemption exists, such as because the State provision of State law prohibits housing ii. Restrictions on transactions in which law is inconsistent with the requirements of creditors from renewing balloon transactions one or more of the regular periodic payments Regulation Z, 12 CFR Part 226. See 12 CFR that meet the definition of an alternative may result in an increase in the principal 226.28. mortgage transaction in § 1004.2(a) on balance (a negative amortization feature) or may be applied solely to accrued interest and different terms, that provision is preempted 4(d) Other Applicable Law by § 1004.3 only to the extent that it restricts not to loan principal (an interest-only 1. Other applicable law. Section 1004.4(d) a state housing creditor’s ability to adjust or feature). permits state housing creditors that do not renegotiate the interest rate or finance charge iii. Requirements that disclosures be seek preemption under § 1004.3 and federal at renewal. See also comment 1004.3–3.i. provided. housing creditors to make alternative ii. Restrictions on the ability of a housing § 1004.4 Requirements for Alternative mortgage transactions consistent with creditor to change the amount of interest or Mortgage Transactions applicable State or federal law other than finance charges included in regular periodic § 1004.4(a) through (c). However, § 1004.4(d) payments as a result of the adjustment or 4(a) Mortgages With Adjustable or does not exempt those housing creditors from renegotiation of an interest rate or finance Renegotiable Rates or Finance Charges and complying with the provisions of federal law charge. For example, if a provision of State Home Equity Lines of Credit that are incorporated by reference in § 1004.4 law prohibits housing creditors from 1. Index values. A creditor may use any increasing payments or limits the amount of measure of index values that meets the and are otherwise applicable to the creditor. such increases with respect to both requirements in § 1004.4(a)(2)(i). For Specifically, nothing in § 1004.4(d) exempts alternative mortgage transactions and other example, the index may be either single a housing creditor from complying with 12 mortgage or consumer credit transactions, values as of a specific date or an average of CFR 226.5b, 226.32, 226.34, or 226.35. that provision is preempted by § 1004.3 to values calculated over a specified period. Dated: July 19, 2011. the extent that it restricts a housing creditor’s 2. Index beyond creditor’s control. A Alastair M. Fitzpayne, ability to adjust payments as a result of the creditor may increase an adjustable interest Deputy Chief of Staff and Executive Secretary, adjustment or renegotiation of an interest rate rate pursuant to § 1004.4(a)(2)(i) only if the Department of the Treasury. on an alternative mortgage transaction. Other increase is based on an index that is beyond restrictions on changes to payments are not the creditor’s control. For purposes of [FR Doc. 2011–18676 Filed 7–21–11; 8:45 am] preempted, including restrictions on § 1004.4(a)(2)(i), an index is not beyond the BILLING CODE 4810–25–P

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