Wednesday, January 9, 2008

Part II

Federal Reserve System 12 CFR Part 226 Truth in Lending; Proposed Rule

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FEDERAL RESERVE SYSTEM instructions for submitting comments at VI. Proposed Definition of ‘‘Higher-Priced http://www.federalreserve.gov/ Mortgage Loan’’ 12 CFR Part 226 generalinfo/foia/ProposedRegs.cfm. A. Overview • B. Public Comment on the Scope of New [Regulation Z; Docket No. R–1305] Federal eRulemaking Portal: http:// www.regulations.gov. Follow the HOEPA Rules Truth in Lending instructions for submitting comments. C. General Principles Governing the • E-mail: regs.comments@ Board’s Determination of Coverage AGENCY: Board of Governors of the federalreserve.gov. Include the docket D. Types of Loans Proposed To Be Covered Federal Reserve System. number in the subject line of the Under § 226.35 E. Proposed APR Trigger for § 226.35 ACTION: Proposed rule; request for message. public comment. • F. Mechanics of the Proposed APR Trigger Fax: (202) 452–3819 or (202) 452– VII. Proposed Rules for Higher-Priced SUMMARY: The Board proposes to amend 3102. • Mortgage Loans—§ 226.35 Regulation Z, which implements the Mail: Address to Jennifer J. Johnson, A. Overview Truth in Lending Act and Home Secretary, Board of Governors of the B. Disregard of Consumers’ Ability To Ownership and Equity Protection Act. Federal Reserve System, 20th Street and Repay—§§ 226.34(a)(4) and 226.35(b)(1) The goals of the amendments are to Constitution Avenue, NW., Washington, C. Verification of Income and Assets Relied protect consumers in the mortgage DC 20551. On—§ 226.35(b)(2) market from unfair, abusive, or All public comments will be made D. Prepayment Penalties—§ 226.32(d)(6) deceptive lending and servicing available on the Board’s Web site at and (7); § 226.35(b)(3) practices while preserving responsible http://www.federalreserve.gov/ E. Requirement to Escrow—§ 226.35(b)(4) lending and sustainable generalinfo/foia/ProposedRegs.cfm as F. Evasion Through Spurious Open-end homeownership; ensure that submitted, unless modified for technical Credit—§ 226.35(b)(5) advertisements for mortgage loans reasons. Accordingly, comments will VIII. Proposed Rules for Mortgage Loans— provide accurate and balanced not be edited to remove any identifying § 226.36 information and do not contain or contact information. Public A. Creditor Payments to Mortgage misleading or deceptive representations; comments may also be viewed Brokers—§ 226.36(a) and provide consumers transaction- electronically or in paper in Room MP– B. Coercion of Appraisers—§ 226.36(b) specific disclosures early enough to use 500 of the Board’s Martin Building (20th C. Servicing Abuses—§ 226.36(c) while shopping for a mortgage. The and C Streets, NW.) between 9 a.m. and D. Coverage—§ 226.36(d) proposed revisions would apply four 5 p.m. on weekdays. IX. Other Potential Concerns A. Other HOEPA Prohibitions protections to a newly-defined category FOR FURTHER INFORMATION CONTACT: B. Steering of higher-priced mortgage loans secured Kathleen C. Ryan, Dan S. Sokolov, or X. Advertising by a consumer’s principal dwelling, David Stein, Counsels; Jamie Z. A. Advertising Rules for Open-end Home- including a prohibition on a pattern or Goodson, Brent Lattin, Jelena equity Plans—§ 226.16 practice of lending based on the McWilliams, or Paul Mondor, B. Advertising Rules for Closed-end collateral without regard to consumers’ Attorneys; Division of Consumer and Credit—§ 226.24 ability to repay their obligations from Community Affairs, Board of Governors XI. Mortgage Loan Disclosures income, or from other sources besides of the Federal Reserve System, A. Early Mortgage Loan Disclosures— the collateral. The proposed revisions Washington, DC 20551, at (202) 452– § 226.19 would apply three new protections to 2412 or (202) 452–3667. For users of B. Future Plans To Improve Disclosure mortgage loans secured by a consumer’s Telecommunications Device for the Deaf XII. Civil Liability and Remedies; principal dwelling regardless of loan (TDD) only, contact (202) 263–4869. Administrative Enforcement price, including a prohibition on a XIII. Effective Date SUPPLEMENTARY INFORMATION: creditor paying a mortgage broker more XIV. Paperwork Reduction Act than the consumer had agreed the I. Summary of Proposal XV. Initial Regulatory Flexibility Analysis broker would receive. The Board also A. Proposals To Prevent Unfairness, I. Summary of Proposal proposes to require that advertisements Deception, and Abuse B. Proposals To Improve Mortgage provide accurate and balanced Advertising The Board is proposing to establish information, in a clear and conspicuous C. Proposals To Give Consumers new regulatory protections for manner, about rates, monthly payments, Disclosures Early consumers in the residential mortgage and other loan features; and to ban II. Consumer Protection Concerns in the market through amendments to several deceptive or misleading Subprime Market Regulation Z, which implements the advertising practices, including A. Recent Problems in the Mortgage Market Truth in Lending Act (TILA) and the representations that a rate or payment is B. The Loosening of Underwriting Home Ownership and Equity Protection ‘‘fixed’’ when it can change. Finally, the Standards C. Market Imperfections That Can Act (HOEPA). The goals of the proposal would require creditors to amendments are to protect consumers in provide consumers with transaction- Facilitate Abusive and Unaffordable Loans the mortgage market from unfair, specific mortgage loan disclosures III. The Board’s Hoepa Hearings abusive, or deceptive lending and before they pay any fee except a A. Home Ownership and Equity Protection servicing practices while preserving reasonable fee for reviewing credit Act (HOEPA) responsible lending and sustainable history. B. Summary of 2006 Hearings homeownership; ensure that DATES: Comments must be received on C. Summary of June 2007 Hearing advertisements for mortgage loans or before April 8, 2008. D. Congressional Hearings provide accurate and balanced IV. Inter-Agency Supervisory Guidance ADDRESSES: You may submit comments, V. Legal Authority information and do not contain identified by Docket No. R–1305, by any A. The Board’s Authority Under TILA misleading or deceptive representations; of the following methods: Section 129(l)(2) and provide consumers transaction- • Agency Web site: http:// B. The Board’s Authority Under TILA specific disclosures early enough to use www.federalreserve.gov. Follow the Section 105(a) while shopping.

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A. Proposals To Prevent Unfairness, consumer had agreed in advance that a mortgage lender not affiliated with the Deception, and Abuse the broker would receive; consumer’s current lender; Æ Æ The Board is proposing seven new Prohibit any creditor or mortgage Advertising claims of debt restrictions or requirements for broker from coercing, influencing, or elimination if the product advertised mortgage lending and servicing otherwise encouraging an appraiser to would merely replace one debt intended to protect consumers against provide a misstated appraisal in obligation with another; Æ Advertisements that create a false unfairness, deception, and abuse while connection with a mortgage loan; and Æ Prohibit mortgage servicers from impression that the mortgage broker or preserving responsible lending and ‘‘pyramiding’’ late fees, failing to credit lender has a fiduciary relationship with sustainable homeownership. The payments as of the date of receipt, the consumer; and restrictions would be adopted under Æ Foreign-language advertisements in TILA Section 129(l)(2), which failing to provide loan payoff statements upon request within a reasonable time, which certain information, such as a authorizes the Board to prohibit unfair low introductory ‘‘teaser’’ rate, is or deceptive practices in connection or failing to deliver a fee schedule to a consumer upon request. provided in a foreign language, while with mortgage loans, as well as to required disclosures are provided only prohibit abusive practices or practices B. Proposals To Improve Mortgage in English. not in the interest of the borrower in Advertising C. Proposal To Give Consumers connection with refinancings. 15 U.S.C. Another goal of this proposal is to Disclosures Early 1639(l)(2). Some of the restrictions ensure that mortgage loan would apply only to higher-priced advertisements provide accurate and A third goal of this proposal is to mortgage loans, while others would balanced information and do not provide consumers transaction-specific apply to all mortgage loans secured by contain misleading or deceptive disclosures early enough to use while a consumer’s principal dwelling. representations. Thus the Board is shopping for a mortgage loan. The Board Protections Covering Higher-Priced proposing to require that advertisements proposes to require creditors to provide Mortgage Loans for both open-end and closed-end transaction-specific mortgage loan disclosures such as the APR and The Board is proposing four mortgage loans provide accurate and payment schedule for all home-secured, protections for consumers receiving balanced information, in a clear and higher-priced mortgage loans. These conspicuous manner, about rates, closed-end loans no later than three loans would be defined as consumer- monthly payments, and other loan days after application, and before the purpose, closed-end loans secured by a features. This proposal is made under consumer pays any fee except a consumer’s principal dwelling and the Board’s general authority to adopt reasonable fee for the originator’s review having an annual percentage rate (APR) regulations to ensure consumers are of the consumer’s credit history. The Board recognizes that these that exceeds the comparable Treasury informed about and can shop for credit. disclosures need to be updated to reflect security by three or more percentage TILA Section 105(a), 15 U.S.C. 1604(a). the increased complexity of mortgage points for first-lien loans, or five or The Board is also proposing, under products. In early 2008, the Board will more percentage points for subordinate- TILA Section 129(l)(2), 15 U.S.C. begin testing current TILA mortgage lien loans. For higher-priced mortgage 1639(l)(2), to prohibit the following disclosures and potential revisions to loans, the Board proposes to: seven deceptive or misleading practices Æ Prohibit creditors from engaging in in advertisements for closed-end these disclosures through one-on-one mortgage loans: interviews with consumers. The Board a pattern or practice of extending credit Æ without regard to borrowers’ ability to Advertising ‘‘fixed’’ rates or expects that this testing will identify repay from sources other than the payments for loans whose rates or potential improvements for the Board to collateral itself; payments can vary without adequately propose for public comment in a Æ Require creditors to verify income disclosing that the interest rate or separate rulemaking. and assets they rely upon in making payment amounts are ‘‘fixed’’ only for a II. Consumer Protection Concerns in the loans; limited period of time, rather than for Subprime Market Æ Prohibit prepayment penalties the full term of the loan; Æ unless certain conditions are met; and Comparing an actual or A. Recent Problems in the Mortgage Æ Require creditors to establish hypothetical consumer’s current rate or Market escrow accounts for taxes and payment obligations and the rates or Subprime mortgage loans are made to insurance, but permit creditors to allow payments that would apply if the borrowers who are perceived to have borrowers to opt out of escrows 12 consumer obtains the advertised high credit risk. These loans’ share of months after loan consummation. product unless the advertisement states total consumer originations, according In addition, the proposal would the rates or payments that will apply to one estimate, reached about nine prohibit creditors from structuring over the full term of the loan; Æ percent in 2001 and doubled to 20 closed-end mortgage loans as open-end Advertisements that characterize percent by 2005, where it stayed in lines of credit for the purpose of evading the products offered as ‘‘government 2006.1 The resulting increase in the these rules, which do not apply to lines loan programs,’’ ‘‘government-supported supply of mortgage credit likely of credit. loans,’’ or otherwise endorsed or contributed to the rise in the sponsored by a federal or state Protections Covering Closed-End Loans homeownership rate from 64 percent in government entity even though the 1994 to a high of 69 percent in 2006— Secured by Consumer’s Principal advertised products are not government- Dwelling though about 68 percent now—and supported or -sponsored loans; expanded consumers’ access to the Æ Advertisements, such as In addition, in connection with all equity in their homes. Recently, solicitation letters, that display the consumer-purpose, closed-end loans however, some of this benefit has secured by a consumer’s principal name of the consumer’s current

dwelling, the Board is proposing to: mortgage lender, unless the 1 Æ Inside Mortgage Finance Publications, Inc., The Prohibit creditors from paying a advertisement also prominently 2007 Mortgage Market Statistical Annual vol. I (IMF mortgage broker more than the discloses that the advertisement is from 2007 Mortgage Market), at 4.

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eroded. In the last two years, B. The Loosening of Underwriting or declined, thereby reducing delinquencies and foreclosure starts Standards homeowners’ equity, but borrowers among subprime mortgages have Rising delinquencies have been often had little equity to start with increased dramatically and reached caused largely by a combination of a because of very high initial cumulative exceptionally high levels as house price decline in house price appreciation— loan-to-value ratios. Moreover, growth has slowed or prices have and in some areas slower economic prepayment penalty clauses, which are declined in some areas. The proportion growth—and a loosening of found in a substantial majority of of all subprime mortgages past-due underwriting standards. Underwriting subprime loans, place an added demand ninety days or more (‘‘serious standards loosened in large parts of the on the limited equity or other resources delinquency’’) was about 13 percent in mortgage market in recent years as available to many borrowers and make October 2007, more than double the lenders—particularly nondepository it harder still for them to refinance. mid-2005 level.2 Adjustable-rate institutions, many of which have since Borrowers who cannot refinance will subprime mortgages have performed the ceased to exist—competed more have to make sacrifices to stay in their worst, reaching a serious delinquency aggressively for market share. This homes or could lose their homes 6 rate of nearly 19 percent in October loosening was particularly pronounced altogether. Relaxed underwriting was not limited 2007, triple the mid-2005 level. These in the subprime sector, where the to the subprime market. According to mortgages have seen unusually high frequent combination of several riskier one estimate, interest-only mortgages levels of early payment default, or loan attributes—high loan-to-value ratio, (most of them with adjustable rates) and default after only one or two payments payment shock on adjustable-rate ‘‘option ARMs’’—which permit or even no payment at all. mortgages, no verification of borrower income, and no escrow for taxes and borrowers to defer both principal and The serious delinquency rate has also insurance—increased the risk of serious interest for a time in exchange for higher risen for loans in alt-A (near prime) delinquency and foreclosure for payments later—rose from 7 percent of securitized pools. According to one subprime loans originated in 2005 total consumer mortgage originations in source, originations of these loans were 7 through early 2007. 2004 to 26 percent in 2006. By one 13 percent of consumer mortgage Payment shock from rate adjustments estimate these mortgages reached 78 3 8 originations in 2006. Alt-A loans are within two or three years of origination percent of alt-A originations in 2006. made to borrowers who typically have could make these loans unaffordable to These types of mortgages hold the higher credit scores than subprime many of the consumers who hold them. potential for payment shock and borrowers, but the loans pose more risk Approximately three-fourths of increasingly contained additional layers than prime loans because they involve originations in securitized subprime of risk such as loan amounts near the small down payments or reduced ‘‘pools’’ from 2004 to 2006 were full appraised value of the home, and income documentation, or the terms of adjustable-rate mortgages (ARMs) with partial or no documentation of income. the loan are nontraditional and may two-or three-year ‘‘teaser’’ rates For example, the share of interest-only increase risk. The rate of serious followed by substantial increases in the mortgages with low or no delinquency for these loans has risen to rate and payment (so-called ‘‘2–28’’ and documentation in alt-A securitized over 3 percent (as of September 2007) ‘‘3–27’’ mortgages).5 The burden of pools increased from around 60 percent 9 from 1 percent only a year ago. In these payment increases on the in 2003 to nearly 80 percent in 2006. contrast, 1 percent of loans in the prime- borrower would likely be heavier than Most of these mortgages have not yet mortgage sector were seriously expected if the borrower’s stated income reset so their full implications are not delinquent as of October. was inflated, as appears to have yet apparent. The risks to consumers happened in some cases, and the and to creditors were serious enough, The consequences of default are however, to cause the federal banking severe for homeowners, who face the inflated figure was used to determine repayment ability. In addition, agencies to issue supervisory guidance, possibility of foreclosure, the loss of which many state agencies later accumulated home equity, higher rates affordability problems with subprime loans can be compounded by adopted.10 for other credit transactions, and A decline in underwriting standards reduced access to credit. When unexpected property tax and homeowners insurance obligations. In does not just increase the risk that foreclosures are clustered, they can consumers will be provided loans they injure entire communities by reducing the prime market, lenders typically establish escrows for these obligations, cannot repay. It also increases the risk property values in surrounding areas. that originators will engage in an Higher delinquencies are in fact but in the subprime market escrows have been the exception rather than the abusive strategy of ‘‘flipping’’ borrowers showing through to foreclosures. rule. in a succession of refinancings, Lenders initiated 430,000 foreclosures Delinquencies and foreclosure ostensibly to lower borrowers’ in the third quarter of 2007, about half initiations in subprime ARMs are burdensome payments, that strip of them on subrpime mortgages. This expected to rise further as more of these borrowers’ equity and provide them no was significantly higher than the mortgages see their rates and payments quarterly average of 325,000 in the first reset at significantly higher levels. On 6 These effects may be mitigated for some half of the year, and nearly twice the borrowers by a recently-announced agreement average in 2008, 374,000 subprime among major loan servicers and investors to quarterly average of 225,000 for the past mortgages per quarter are scheduled to 4 ‘‘freeze’’ many subprime ARMs at their initial six years. undergo their first interest rate and interest rates for five years. payment reset. Relative to past years, 7 IMF 2007 Mortgage Market, at 6. 2 Delinquency rates calculated from data from avoiding the payment shock of an 8 David Liu & Shumin Li, Alt-A Credit—The First American LoanPerformance on mortgages in interest rate reset by refinancing the Other Shoe Drops?, The MarketPulse (First subprime securitized pools. Figures include loans American LoanPerformance, Inc., San Francisco, on non-owner-occupied properties. mortgage will be much more difficult. Cal.), Dec. 2006. 3 IMF 2007 Mortgage Market, at 4. Not only have home prices flattened out 9 Figures calculated from First American 4 Estimates are based on data from Mortgage LoanPerformance data. Bankers’ Association’s National Delinquency 5 Figure calculated from First American Loan 10 Interagency Guidance on Nontraditional Survey (2007). Performance data. Mortgage Product Risks, 71 FR 58609, Oct. 4, 2006.

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benefit. Moreover, an atmosphere of variety of lenders without paying a fee. that a mortgage broker is obligated to relaxed standards may increase the In contrast, subprime rates, which can find the consumer the best and most incidence of abusive lending practices vary significantly based on the suitable loan terms available. For by attracting less scrupulous originators individual borrower’s risk profile, are example, in a 2003 survey of older into the market, while at the same time not broadly advertised. Advertising in borrowers who had obtained prime or bringing more vulnerable borrowers into the subprime market focuses on easy subprime refinancings, seventy percent the market. These abuses can lead approval and low payments. Moreover, of respondents with broker-originated consumers to pay more for their loans a borrower shopping in the subprime refinance loans reported that they had than their risk profiles warrant. market generally cannot obtain a useful relied ‘‘a lot’’ on their brokers to find the The market has responded to the rate quote from a particular lender best mortgage for them.13 Consumers current problems with increasing without submitting an application and who rely on brokers often are unaware, attention to loan quality. Structural paying a fee. The quote may not even be however, that a broker’s interests may factors, or market imperfections, reliable, as loan originators sometimes diverge from, and conflict with, their however, make it necessary to consider use ‘‘bait and switch’’ strategies. own interests. In particular, consumers regulations to help prevent a recurrence Second, products in the subprime are often unaware that a creditor pays a of these problems. New regulation can market tend to be complex, both relative broker more to originate a loan with a also provide the market clear ‘‘rules of to the prime market and in absolute rate higher than the rate the consumer the road’’ at a time of uncertainty, so terms, as well as less standardized than qualifies for based on the creditor’s that responsible higher-priced lending, in the prime market.11 As discussed underwriting criteria. which serves a critical need, may earlier, subprime originations have Limited shopping. In this continue. much more often had adjustable rates environment of limited transparency, consumers—particularly those in the C. Market Imperfections That Can than more easily understood fixed rates. subprime market—who have been told Facilitate Abusive and Unaffordable Adjustable-rate mortgages require by an originator that they will receive a Loans consumers to make judgments about the future direction of interest rates and loan from that originator may The recent sharp increase in serious translate expected rate changes into reasonably decide not to shop further delinquencies has highlighted the roles changes in their payment amounts. among originators or among loan that structural elements of the subprime Subprime loans are also far more likely options. The costs of further shopping mortgage market may play in increasing to have prepayment penalties. The price may be significant, including the likelihood of injury to consumers of the penalty is not reflected in the completing another application form who find themselves in that market. annual percentage rate (APR); to and paying yet another application fee. Limitations on price and product calculate that price, the consumer must Delaying receipt of funds is another cost transparency in the subprime market— of continuing to shop, a potentially often compounded by misleading or both calculate the size of the penalty according to a formula such as six significant one for the many borrowers inaccurate advertising—may make it in the subprime market who are seeking harder for consumers to protect months of interest, and assess the likelihood the consumer will move or to refinance their obligations to lower themselves from abusive or unaffordable their debt payments at least temporarily, loans, even with the best disclosures. refinance during the penalty period. In these and other ways subprime products to extract equity in the form of cash, or The injuries consumers in the subprime 14 tend to be complex for consumers. both. Nearly 90 percent of subprime market may suffer as a result are ARMs used for refinancing in recent Third, the roles and incentives of magnified when originators’ incentives years were ‘‘cash out.’’ 15 originators are not transparent. One to carefully assess consumers’ While the cost of continuing to shop repayment ability grow weaker, as can source estimates that 60 percent or more is likely obvious, the benefit may not be happen when originators sell off their of mortgages originated in the last several years were originated through a loans to be securitized. The 13 Kellie K. Kim-Sung & Sharon Hermanson, fragmentation of the originator market mortgage broker, often an independent Experiences of Older Refinance Mortgage Loan can further exacerbate the problem by entity, who takes loan applications from Borrowers: Broker- and Lender-Originated Loans, consumers and shops them to Data Digest No. 83 (AARP Public Policy Inst., making it more difficult for investors to Washington, DC), Jan. 2003, at 3, available at http:// monitor originators and for lenders to depository institutions or other www.aarp.org/research/credit-debt/mortgages/ 12 _ _ _ _ _ monitor brokers. The multiplicity of lenders. Anecdotal evidence indicates experiences of older refinance mortgage loan_borro.html. originators and their regulators can also that consumers in both the prime and subprime markets often believe, in error, 14 See Anthony Pennington-Cross & Souphala inhibit the ability of regulators to Chomsisengphet, Subprime Refinancing: Equity protect consumers from abusive and Extraction and Mortgage Termination, 35 Real 11 U.S. Dep’t of Hous. & Urban Dev. & U.S. Dep’t unaffordable loans. Estate Economics 2, 233 (2007) (reporting that 49% of Treasury, Recommendations to Curb Predatory of subprime refinance loans involve equity Limited Transparency and Limits of Home Mortgage Lending 17 (2000) (‘‘While extraction, compared with 26% of prime refinance predatory lending can occur in the prime market, loans); Marsha J. Courchane, Brian J. Surette, and Disclosure such practices are for the most part effectively Peter M. Zorn, Subprime Borrowers: Mortgage Limited transparency in the subprime deterred by competition among lenders, greater Transitions and Outcomes (Subprime Outcomes), homogeneity in loan terms and the prime market increases the risk that borrowers 29 J. of Real Estate Economics 4, 368–371 (2004) borrowers’ greater familiarity with complex (discussing survey evidence that borrowers with in that market will receive unaffordable financial transactions.’’); Howard Lax, Michael subprime loans are more likely to have experienced or abusive loans. The transparency of Manti, Paul Raca & Peter Zorn, Subprime Lending: major adverse life events (marital disruption; major the subprime market to consumers is An Investigation of Economic Efficiency (Subprime medical problem; major spell of unemployment; Lending Investigation), 15 Housing Policy Debate 3, major decrease of income) and often use refinancing limited in several respects. First, price 570 (2004) (stating that the subprime market lacks for debt consolidation or home equity extraction); information for the subprime market is the ‘‘overall standardization of products, Subprime Lending Investigation, at 551–552 (citing not widely and readily available to underwriting, and delivery systems’’ that is found survey evidence that borrowers with subprime consumers. A consumer searching in the in the prime market). loans have increased incidence of major medical 12 Data reported by Wholesale Access Mortgage expenses, major unemployment spells, and major prime market can buy a newspaper or Research and Consulting, Inc., available at http:// drops in income). access the Internet and easily find www.wholesaleaccess.com/8-17-07-prs.shtml; 15 Figure calculated from First American current interest rates from a wide http://www.wholesaleaccess.com/7_28_mbkr.shtml. LoanPerformance data.

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clear or may appear quite small. rate, and up-front fees (though up-front discern which features are most Without easy access to subprime fees may be more obscure when added important. product prices, a consumer who has to the loan amount, and ‘‘discount Furthermore, a consumer cannot been offered a loan by one originator points’’ in particular may be difficult for make effective use of disclosures may have only a limited idea whether consumers to understand). These without having a certain minimum level further shopping is likely to produce a consumers, therefore, may not focus on of understanding of the market and better deal. Moreover, consumers in the terms that may seem less immediately products. Disclosures themselves, likely subprime market have reported in important to them such as future cannot provide this minimum studies that they were turned down by increases in payment amounts or understanding for transactions that are several lenders before being approved.16 interest rates, prepayment penalties, and complex and that consumers engage in Once approved, these consumers may negative amortization. They are also not infrequently. Moreover, consumers may see little advantage to continuing to likely to focus on underwriting practices rely more on their originators to explain shop if they expect, based on their such as income verification, and on the disclosures when the transaction is experience, that many of their features such as escrows for future tax complex; some originators may have applications to other originators would and insurance obligations.19 Consumers incentives to misrepresent the be turned down. Furthermore, if a who do not fully understand such terms disclosures so as to obscure the consumer uses a broker and believes and features, however, are less able to transaction’s risks to the consumer; and that the broker is shopping for the appreciate their risks, which can be such misrepresentations may be consumer, the consumer may believe significant. For example, the payment particularly effective if the originator is the chance of finding a better deal than may increase sharply and a prepayment face-to-face with the consumer.21 the broker is small. An unscrupulous penalty may hinder the consumer from Therefore, while the Board anticipates originator may also seek to discourage a refinancing to avoid the payment proposing changes to Regulation Z to consumer from shopping by increase. Thus, consumers may improve mortgage loan disclosures, it intentionally understating the cost of an unwittingly accept loans that they will appears unlikely that better disclosures, offered loan. For all of these reasons, have difficulty repaying. alone, will address adequately the risk borrowers in the subprime market may Limits of disclosure. Disclosures of abusive or unaffordable loans in the not shop beyond the first approval and describing the multiplicity of features of subprime market. may be willing to accept unfavorable a complex loan could help some Misaligned Incentives and Obstacles to terms.17 consumers in the subprime market, but Monitoring Limited focus. Consumers considering disclosures may not be sufficient to obtaining a typically complex subprime protect them against unfair loan terms Not only are consumers in the mortgage loan may simplify their or lending practices. Obtaining subprime market often unable to protect decision by focusing on a few attributes widespread consumer understanding of themselves from abusive or unaffordable of the product or service that seem most the many potentially significant features loans, originators may at certain times important.18 A consumer may focus on of a typical subprime product is a major be more likely to extend unaffordable loan attributes that have the most challenge.20 Moreover, even if all of a loans. The recent sharp rise in serious obvious and immediate consequence loan’s features are disclosed clearly to delinquencies on subprime mortgages such as loan amount, down payment, consumers, they may continue to focus has made clear that originators may not initial monthly payment, initial interest on a few features that appear most give adequate attention to repayment significant. Alternatively, disclosing all ability if they sell the mortgages they 16 James M. Lacko & Janis K. Pappalardo, Fed. features may ‘‘overload’’ consumers and originate and bear little loss if the Trade Comm’n, Improving Consumer Mortgage mortgages default. The growth of the Disclosures: An Empirical Assessment of Current make it more difficult for them to and Prototype Disclosure Forms (Improving secondary market gave lenders—and, Mortgage Disclosures), 24–26 (2007) (reporting 19 Consumer Information Search, at 285 thus, mortgage borrowers—greater evidence based on qualitative consumer (reporting survey evidence that most consumers access to capital markets, lowered interviews); Subprime Lending Investigation, at 550 compared interest rate or APR, loan type (fixed-rate transaction costs, and allowed risk to be (finding based on survey data that ‘‘[p]robably the or ARM), and mandatory up-front fees, but only a most significant hurdle overcome by subprime quarter considered the costs of optional products shared more widely. This ‘‘originate-to- borrowers * * * is just getting approved for a loan such as credit insurance and back-end costs such distribute’’ model, however, may also for the first time. This impact might well make as late fees). There is evidence that borrowers are tend to contribute to the loosening of subprime borrowers more willing to accept less not aware of, or do not understand, terms of this underwriting standards, particularly favorable terms as they become uncertain about the nature even after they have obtained a loan. See possibility of qualifying for a loan at all.’’). Improving Mortgage Disclosures, at 27–30 during periods of rapid house price 17 Subprime Outcomes, at 371–372 (reporting (discussing anecdotal evidence based on consumer appreciation, which may mask problems survey evidence that relative to prime borrowers, interviews that borrowers were not aware of, did by keeping default and delinquency subprime borrowers are less knowledgeable about not understand, or misunderstood an important cost rates low until price appreciation slows the mortgage process, search less for the best rates, or feature of their loans that had substantial impact and feel they have less choice about mortgage terms on the overall cost, the future payments, or the or reverses. and conditions); Subprime Mortgage Investigation, ability to refinance with other lenders); Brian Bucks This potential tendency has several at 554 (‘‘Our focus groups suggested that prime and & Karen Pence, Do Homeowners Know Their House related causes. First, when an originator subprime borrowers use quite different search Values and Mortgage Terms? 18–22 (Fed. Reserve sells a mortgage and its servicing rights, criteria in looking for a loan. Subprime borrowers Bd. of Governors Fin. and Econ. Discussion Series search primarily for loan approval and low monthly Working Paper No. 2006–3, 2006) (discussing depending on the terms of the sale, most payments, while prime borrowers focus on getting statistical evidence that borrowers with ARMs or all of the risks typically are passed on the lowest available interest rate. These distinctions underestimate annual as well as life-time caps on are quantitatively confirmed by our survey.’’). the interest rate; the rate of underestimation 21 U.S. Gen. Accounting Office, GAO 04–280, 18 Jinkook Lee & Jeanne M. Hogarth, Consumer increases for lower-income and less-educated Consumer Protection: Federal and State Agencies Information Search for Home Mortgages: Who, borrowers), available at http://www.federalreserve. Face Challenges in Combating Predatory Lending What, How Much, and What Else? (Consumer gov/pubs/feds/2006/200603/200603pap.pdf. 97–98 (2004) (stating that the inherent complexity Information Search), Financial Services Review 291 20 Improving Mortgage Disclosures, at 74–76 of mortgage loans, some borrowers’ lack of financial (2000) (‘‘In all, there are dozens of features and (finding that borrowers in the subprime market may sophistication, education, or infirmities, and costs disclosed per loan, far in excess of the have more difficulty understanding their loan terms misleading statements and actions by lenders and combination of terms, lenders, and information because their loans are more complex than loans in brokers limit the effectiveness of even clear and sources consumers report using when shopping.’’). the prime market). transparent disclosures).

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to the loan purchaser. Thus, originators sharing information among regulators. These restrictions include limitations on who sell loans may have less of an State regulatory regimes come under prepayment penalties and ‘‘balloon incentive to undertake careful particular pressure when a booming payment’’ loans, and prohibitions of underwriting than if they kept the loans. market brings new lenders and brokers negative amortization and of engaging in Second, warranties by sellers to into the marketplace more rapidly than a pattern or practice of lending based on purchasers and other ‘‘repurchase’’ regulators can increase their oversight the collateral without regard to contractual provisions have little resources. These circumstances may repayment ability. meaningful benefit if originators have inhibit the ability of regulators to When it enacted HOEPA, Congress limited assets. Third, fees for some loan protect consumers from abusive and granted the Board authority, codified in originators have been tied to loan unaffordable loans. TILA Section 129(l), to create volume, making loan sales—sometimes A Role for New HOEPA Rules exemptions to HOEPA’s restrictions and accomplished through aggressive ‘‘push to expand its protections. 15 U.S.C. marketing’’—a higher priority than loan As explained above, consumers in the 1639(l). Under TILA Section 129(l)(1), quality for some originators. Fourth, subprime market face serious the Board may create exemptions to investors may not exercise adequate due constraints on their ability to protect HOEPA’s restrictions as needed to keep diligence on mortgages in the pools in themselves from abusive or unaffordable responsible credit available; and under which they are invested, and may loans, even with the best disclosures; TILA Section 129(l)(2), the Board may instead rely heavily on credit-ratings originators themselves may at times lack adopt new or expanded restrictions as firms to determine the quality of the sufficient market incentives to ensure needed to protect consumers from investment. loans they sell are affordable; and unfairness, deception, or evasion of The fragmentation of the originator regulators face limits on their ability to HOEPA. In HOEPA Section 158, market can further exacerbate the oversee a fragmented subprime Congress directed the Board to monitor problem. Data reported under HMDA origination market. These circumstances changes in the home equity market show that independent mortgage appear to warrant imposing a new through regular public hearings. companies—those not related to national legal standard on subprime Hearings the Board held in 2000 led depository institutions or their lenders to help ensure that consumers the Board to expand HOEPA’s subsidiaries or affiliates—made nearly receive mortgage loans they can afford protections in December 2001.24 Those one-half of higher-priced first-lien to repay, and help prevent the equity- rules, which took effect in 2002, mortgages in 2005 and 2006 but only stripping abuses that unaffordable loans lowered HOEPA’s rate trigger, expanded one-fourth of loans that were not higher- facilitate. Adopting this standard under its fee trigger to include single-premium priced. Nor was lending by independent authority of HOEPA would ensure that credit insurance, added an anti- mortgage companies particularly it applied uniformly to all originators ‘‘flipping’’ restriction, and improved the concentrated: In each of 2005 and 2006 and provide consumers an opportunity special pre-closing disclosure. around 150 independent mortgage to redress wrongs through civil actions B. Summary of 2006 Hearings companies made 500 or more higher- to the extent authorized by TILA. As priced first-lien mortgage loans on explained in the next part, substantial In the summer of 2006, the Board held owner-occupied dwellings. In addition, information supplied to the Board four hearings in four cities on three one source suggests that 60 percent or through several public hearings broad topics: (1) The impact of the 2002 more of mortgages originated in the last confirms the need for new HOEPA HOEPA rule changes on predatory several years were originated through a rules. lending practices, as well as the effects mortgage broker.22 This same source III. The Board’s HOEPA Hearings on consumers of state and local estimates the number of brokerage predatory lending laws; (2) companies at over 50,000 in recent A. Home Ownership and Equity nontraditional mortgage products and years. Protection Act (HOEPA) reverse mortgages; and (3) informed Thus, a securitized pool of mortgages The Board has recently held extensive consumer choice in the subprime may have been sourced by tens of public hearings on consumer protection market. Hearing panelists included lenders and thousands of brokers. issues in the mortgage market, including mortgage lenders and brokers, credit Investors have limited ability to directly the subprime sector. These hearings ratings agencies, real estate agents, monitor these originators’ activities. were held pursuant to the Home consumer advocates, community Similarly, a lender may receive a Ownership and Equity Protection Act development groups, housing handful of loans from each of hundreds (HOEPA), which directs the Board to counselors, academicians, researchers, or thousands of small brokers every hold public hearings periodically on the and state and federal government year. A lender has limited ability or home equity lending market and the officials. In addition, consumers, incentive to monitor every small adequacy of existing law for protecting housing counselors, brokers, and other brokerage’s operations and performance. the interests of consumers, particularly individuals made brief statements at the Government oversight of such a low income consumers. HOEPA hearings during an ‘‘open mike’’ period. fragmented originator market faces imposes substantive restrictions, and In all, 67 individuals testified on panels significant challenges. The various special pre-closing disclosures, on and 54 comment letters were submitted lending institutions and brokers operate particularly high-cost refinancings and to the Board. in fifty different states and the District home equity loans (‘‘HOEPA loans’’).23 Consumer advocates and some state of Columbia with different regulatory officials stated that HOEPA is generally and supervisory regimes, varying 23 HOEPA loans are closed-end, non-purchase effective in preventing abusive terms in resources for supervision and money mortgages secured by a consumer’s principal loans subject to the HOEPA price dwelling (other than a reverse mortgage) where triggers. They noted, however, that very enforcement, and different practices in either: (a) The APR at consummation will exceed the yield on Treasury securities of comparable 22 Data reported by Wholesale Access Mortgage maturity by more than 8 percentage points for first- greater of 8 percent of the total loan amount, or Research and Consulting, Inc. Available at http:// lien loans, or 10 percentage points for subordinate- $547 for 2007 (adjusted annually). www.wholesaleaccess.com/8-17-07-prs.shtml; lien loans; or (b) the total points and fees payable 24 Truth in Lending, 66 FR 65604, 65608, Dec. 20, http://www.wholesaleaccess.com/7_28_mbkr.shtml. by the consumer at or before closing exceed the 2001.

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few loans are made with rates or fees at brokers and lenders and subject them to lending. More detailed accounts of the or above the HOEPA triggers, and some excessive litigation risk. testimony and letters are provided advocated that Congress lower them. below in the context of specific issues C. Summary of June 2007 Hearing Consumer advocates and state officials the Board is proposing to address. also urged regulators and Congress to In light of the information received at D. Congressional Hearings curb abusive practices in the origination the 2006 hearings and the rise in of loans that do not meet HOEPA’s price defaults that began soon after, the Board Congress has also held a number of triggers. held an additional hearing in June 2007 hearings in the past year about Consumer advocates identified to explore how it could use its authority consumer protection concerns in the several particular areas of concern. They under HOEPA to prevent abusive mortgage market.25 In these hearings, urged the Board to prohibit or restrict lending practices in the subprime Congress has heard testimony from certain loan features or terms, such as market while still preserving individual consumers, representatives prepayment penalties, and underwriting responsible subprime lending. The of consumer and community groups, practices such as ‘‘stated income’’ or Board focused the hearing on four representatives of financial and ‘‘low documentation’’ (‘‘low doc’’) loans specific areas: Lenders’ determination of mortgage industry groups and federal for which the borrower’s income is not borrowers’ repayment ability; ‘‘stated and state officials. These hearings have documented or verified. They also income’’ and ‘‘low doc’’ lending; the focused on rising subprime foreclosure expressed concern about aggressive lack of escrows in the subprime market rates and the extent to which lending marketing practices such as steering relative to the prime market; and the practices have contributed to them. borrowers to higher-cost loans by high frequency of prepayment penalties Consumer and community group emphasizing initial low monthly in the subprime market. representatives testified that certain payments based on an introductory rate At the hearing, the Board heard from lending terms or practices, such as without adequately explaining that the 16 panelists representing consumers, hybrid adjustable-rate mortgages, consumer will owe considerably higher mortgage lenders, mortgage brokers, and prepayment penalties, low or no monthly payments after the state government officials, as well as documentation loans, lack of escrows introductory rate expires. from academicians. The Board also for taxes and insurance, and failure to Some consumer advocates stated that received almost 100 written comments consider the consumer’s ability to repay brokers and lenders should be held to a after the hearing from an equally diverse have contributed to foreclosures. In higher duty such as a duty of good faith group. addition, these witnesses testified that Industry representatives and fair dealing or a duty to make only consumers often believe that mortgage acknowledged concerns with recent loans suitable for the borrower. These brokers represent their interests and lending practices but urged the Board to advocates also urged the Board to ban shop on their behalf for the best loan address most of these concerns through ‘‘yield spread premiums,’’ payments terms. As a result, they argue that supervisory guidance rather than that brokers receive from the lender at consumers do not shop independently closing for delivering a loan with an regulations under HOEPA. They maintained that supervisory guidance, to ensure that they are getting the best interest rate that is higher than the terms for which they qualify. They also lender’s ‘‘buy rate,’’ because they unlike regulation, is flexible enough to preserve access to responsible credit. provide brokers an incentive to increase 25 E.g., Progress in Administration and Other consumers’ interest rates. They argued They also suggested that supervisory Efforts to Coordinate and Enhance Mortgage that such steps would align reality with guidance issued recently regarding Foreclosure Prevention: Hearing before the H. consumers’ perceptions that brokers nontraditional mortgages and subprime Comm. on Fin. Servs., 110th Cong. (2007); lending, as well as market self- Legislative Proposals on Reforming Mortgage serve their best interests. Consumer Practices: Hearing before the H. Comm. on Fin. advocates also expressed concerns that correction, have reduced the need for Servs., 110th Cong. (2007); Legislative and brokers, lenders, and others may coerce new regulations. Industry Regulatory Options for Minimizing and Mitigating appraisers to misrepresent the value of representatives support improving Mortgage Foreclosures: Hearing before the H. mortgage disclosures to help consumers Comm. on Fin. Servs., 110th Cong. (2007); Ending a dwelling; and that servicers may Mortgage Abuse: Safeguarding Homebuyers: charge consumers unwarranted fees and avoid abusive loans. They urged that Hearing before the S. Subcomm. on Hous., Transp., in some cases make it difficult for any substantive rules adopted by the and Cmty. Dev. of the S. Comm. on Banking, Hous., consumers who are in default to avoid Board be clearly drawn to limit and Urban Affairs, 110th Cong. (2007); Improving foreclosure. uncertainty and narrowly drawn to Federal Consumer Protection in Financial Services: Hearing before the H. Comm. on Fin. Servs., 110th Industry panelists and commenters, avoid unduly restricting credit. Cong. (2007); The Role of the Secondary Market in on the other hand, expressed concern In contrast, consumer advocates, state Subprime Mortgage Lending: Hearing before the that state predatory lending laws may and local officials, and Members of Subcomm. on Fin. Insts. and Consumer Credit of reduce the availability of credit for some Congress urged the Board to adopt the H. Comm. on Fin. Servs., 110th Cong. (2007); Possible Responses to Rising Mortgage Foreclosures: subprime borrowers. Most industry regulations under HOEPA. They Hearing before the H. Comm. on Fin. Servs., 110th commenters opposed prohibiting stated acknowledged a proper place for Cong. (2007); Subprime Mortgage Market Turmoil: income loans, prepayment penalties, or guidance but contended that recent Examining the Role of Securitization: Hearing other loan terms, asserting that this problems indicate the need for before the Subcomm. on Secs., Ins., and Inv. of the S. Comm. on Banking, Hous., and Urban Affairs, approach would harm borrowers more requirements enforceable by borrowers 110th Cong. (2007); Subprime and Predatory than help them. They urged the Board through civil actions, which HOEPA Lending: New Regulatory Guidance, Current Market and other regulators to focus instead on enables and guidance does not. They Conditions, and Effects on Regulated Financial enforcing existing laws to remove ‘‘bad also expressed concern that less Institutions: Hearing before the Subcomm. on Fin. Insts. and Consumer Credit of the H. Comm. on Fin. actors’’ from the market. Some lenders responsible, less closely supervised Servs., 110th Cong. (2007); Mortgage Market indicated, however, that restrictions on lenders are not subject to the guidance Turmoil: Causes and Consequences, Hearing before certain features or practices might be and that there is limited enforcement of the S. Comm. on Banking, Hous., and Urban appropriate if the restrictions were clear existing laws for these entities. Affairs, 110th Cong. (2007); Preserving the American Dream: Predatory Lending Practices and and narrow. Industry commenters also Consumer advocates and others Home Foreclosures, Hearing before the S. Comm. on stated that subjective suitability welcomed improved disclosures but Banking, Hous., and Urban Affairs, 110th Cong. standards would create uncertainties for insisted they would not prevent abusive (2007).

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testified that, because originators sell loans with adjustable rates and 103(aa), 15 U.S.C. 1602(aa), as well as most loans into the secondary market potentially non-amortizing payments; types of mortgage loans not covered and do not share the risk of default, (2) limit stated income and reduced under that section, such as home brokers and lenders have less incentive documentation loans to cases where purchase loans. Nor is the Board’s to ensure consumers can afford their mitigating factors clearly minimize the authority limited to regulating specific loans. need for full documentation of income; contractual terms of mortgage loan Financial services and mortgage (3) provide that prepayment penalty agreements; it extends to regulating industry representatives testified that clauses expire a reasonable period loan-related practices generally, within consumers need better disclosures of before reset, typically at least 60 days. the standards set forth in the statute. their loan terms, but that substantive The Conference of State Bank Moreover, while HOEPA’s current restrictions on subprime loan terms Supervisors (CSBS) and American restrictions apply only to creditors and would risk reducing access to credit for Association of Residential Mortgage only to loan terms or lending practices, some borrowers. In addition, these Regulators (AARMR) issued parallel TILA Section 129(l)(2) is not limited to witnesses testified that applying a statements for state supervisors to use creditors, nor is it limited to loan terms fiduciary duty to the subprime market, with state-supervised entities, and many or lending practices. See 15 U.S.C. such as requiring that a loan be in the states have adopted the statements. 1639(l)(2). It authorizes protections borrower’s best interest, would The guidance issued by the federal against unfair or deceptive practices introduce subjective standards that banking agencies has helped to promote when such practices are ‘‘in connection would significantly increase compliance safety and soundness and protect and litigation risk. According to these consumers in the subprime market. with mortgage loans,’’ and it authorizes witnesses, some lenders would be less Guidance, however, is not necessarily protections against abusive practices ‘‘in willing to offer loans in the subprime implemented uniformly by all connection with refinancing of mortgage market, making it harder for some originators. Originators who are not loans.’’ consumers to get loans. subject to routine examination and HOEPA does not set forth a standard supervision may not adhere to guidance for what is unfair or deceptive, but the IV. Inter-Agency Supervisory Guidance as closely as originators who are. Conference Report for HOEPA indicates In December 2005, the Board and the Guidance also does not provide that, in determining whether a practice other federal banking agencies individual consumers who have in connection with mortgage loans is responded to concerns about the rapid suffered harm because of abusive unfair or deceptive, the Board should growth of nontraditional mortgages in lending practices an opportunity for look to the standards employed for the previous two years by proposing redress. The new and expanded interpreting state unfair and deceptive supervisory guidance. Nontraditional consumer protections that the Board is trade practices acts and the Federal mortgages are mortgages that allow the proposing would apply uniformly to all Trade Commission Act, Section 5(a), 15 borrower to defer repayment of creditors and be enforceable by federal U.S.C. 45(a).28 principal and sometimes interest. The and state supervisory and enforcement Congress has codified standards guidance advised institutions of the agencies and in many cases by developed by the Federal Trade need to reduce ‘‘risk layering’’ practices borrowers. with respect to these products, such as Commission for determining whether failing to document income or lending V. Legal Authority acts or practices are unfair under 29 nearly the full appraised value of the A. The Board’s Authority Under TILA Section 5(a), 15 U.S.C. 45(a). Under home. The proposal, and the final Section 129(l)(2) the Act, an act or practice is unfair guidance issued in September 2006, when it causes or is likely to cause The substantive limitations in new specifically advised lenders that substantial injury to consumers which is proposed §§ 226.35 and 226.36 and layering risks in nontraditional not reasonably avoidable by consumers corresponding revisions proposed for mortgage loans to subprime borrowers themselves and not outweighed by existing § 226.32, as well as proposed may significantly increase risks to countervailing benefits to consumers or restrictions on misleading and deceptive borrowers as well as institutions.26 to competition. In addition, in advertisements, would be based on the The Board and the other federal determining whether an act or practice Board’s authority under TILA Section banking agencies addressed concerns is unfair, the FTC is permitted to 129(l)(2), 15 U.S.C. 1639(l)(2). That about the subprime market more consider established public policies, but provision gives the Board authority to broadly in March 2007 with a proposal public policy considerations may not prohibit acts or practices in connection addressing the heightened risks to serve as the primary basis for an with: consumers and institutions of ARMs unfairness determination.30 • Mortgage loans that the Board finds with two or three-year ‘‘teaser’’ rates to be unfair, deceptive, or designed to The FTC has interpreted these followed by substantial increases in the evade the provisions of HOEPA; and standards to mean that consumer injury rate and payment. The guidance, • Refinancing of mortgage loans that is the central focus of any inquiry finalized in June, sets out the standards the Board finds to be associated with regarding unfairness.31 Consumer injury institutions should follow to ensure abusive lending practices or that are may be substantial if it imposes a small borrowers in the subprime market otherwise not in the interest of the harm on a large number of consumers, obtain loans they can afford to repay.27 borrower. or if it raises a significant risk of Among other steps, the guidance The authority granted to the Board advises lenders to (1) use the fully- under Section 129(l)(2), 15 U.S.C. 28 indexed rate and fully-amortizing H.R. Rep. 103–652, at 162 (1994) (Conf. Rep.). 1639(l)(2), is broad both in absolute 29 See 15 U.S.C. 45(n); Letter from FTC to the payment when qualifying borrowers for terms and relative to HOEPA’s statutory Hon. Wendell H. Ford and the Hon. John C. prohibitions. For example, this Danforth (Dec. 17, 1980). 26 Interagency Guidance on Nontraditional 30 15 U.S.C. 45(n). Mortgage Product Risks, 71 FR 58609, Oct. 4, 2006. authority reaches mortgage loans with 31 Statement of Basis and Purpose and Regulatory 27 Statement on Subprime Mortgage Lending, 72 rates and fees that do not meet HOEPA’s Analysis, Credit Practices Rule (Credit Practices FR 37569, Jul. 10, 2007. rate or fee trigger in TILA Section Rule), 42 FR 7740, 7743 March 1, 1984.

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concrete harm.32 The FTC looks to capable of being interpreted in a restrictions to closed-end consumer whether an act or practice is injurious misleading way.39 mortgage loans secured by the in its net effects.33 The agency has also In proposing rules under TILA consumer’s principal dwelling without observed that an unfair act or practice Section 129(l)(2)(A), 15 U.S.C. regard to loan price. These restrictions will almost always reflect a market 1639(l)(2)(A), the Board has considered are discussed separately in part VIII. failure or market imperfection that the standards currently applied to the Higher-priced mortgage loans would prevents the forces of supply and FTC Act’s prohibition against unfair or be defined as consumer credit demand from maximizing benefits and deceptive acts or practices, as well as transactions secured by the consumer’s minimizing costs.34 In evaluating the standards applied to similar state principal dwelling for which the APR unfairness, the FTC looks to whether statutes. on the loan exceeds the yield on comparable Treasury securities by at consumers’ free market decisions are B. The Board’s Authority Under TILA 35 least three percentage points for first- unjustifiably hindered. Section 105(a) The FTC has also adopted standards lien loans, or five percentage points for for determining whether an act or Other aspects of this proposal are subordinate lien loans. The proposed practice is deceptive (though these based on the Board’s general authority definition would include home standards, unlike unfairness standards, under TILA Section 105(a) to prescribe purchase loans, refinancings of loans, have not been incorporated into the FTC regulations necessary or proper to carry and home equity loans. The definition Act).36 First, there must be a out TILA’s purposes. 15 U.S.C. 1604(a). would exclude home equity lines of representation, omission or practice that This section is the basis for the proposal credit (‘‘HELOCs’’). In addition, there is likely to mislead the consumer. to require early disclosures for would be exclusions for reverse Second, the act or practice is examined residential mortgage transactions as well mortgages, construction-only loans, and from the perspective of a consumer as many of the proposals to improve bridge loans. acting reasonably in the circumstances. advertising disclosures. These proposals The definition of ‘‘higher-priced Third, the representation, omission, or are intended to carry out TILA’s mortgage loans’’ would appear in practice must be material. That is, it purposes of informing consumers about proposed § 226.35(a). Such loans would must be likely to affect the consumer’s their credit terms and helping them be subject to the restrictions and conduct or decision with regard to a shop for credit. See TILA Section 102, requirements in § 226.35(b) concerning product or service.37 15 U.S.C. 1603. repayment ability, income verification, prepayment penalties, escrows, and Many states also have adopted VI. Proposed Definition of ‘‘Higher- evasion, except that subordinate-lien statutes prohibiting unfair or deceptive Priced Mortgage Loan’’ acts or practices, and these statutes higher-priced mortgage loans would not employ a variety of standards, many of A. Overview be subject to the escrow requirement. them different from the standards The Board proposes to extend certain B. Public Comment on the Scope of New currently applied to the FTC Act. A consumer protections to a subset of HOEPA Rules number of states follow an unfairness consumer residential mortgage loans The June 14, 2007 hearing notice standard formerly used by the FTC. referred to as ‘‘higher-priced mortgage solicited comment on the following Under this standard, an act or practice loans.’’ A creditor would be prohibited questions concerning coverage: is unfair where it offends public policy; from engaging in a pattern or practice of • or is immoral, unethical, oppressive, or Whether terms or practices making higher-priced mortgage loans discussed in the hearing notice should unscrupulous; and causes substantial based on the collateral without regard to injury to consumers.38 Some states be prohibited or restricted for all repayment ability. A creditor would also mortgage loans, or only for loans offered require that a finding of deception be be prohibited from making an supported by a showing of intent to to subprime borrowers? individual higher-priced mortgage loan • Whether terms or practices should deceive, while other states only require without: Verifying the consumer income showing that an act or practice is be prohibited or restricted for loans to and assets the creditor relied upon to first-time homebuyers, home purchase make the loan; and establishing an loans, or refinancings and home equity 32 Letter from Commissioners of the FTC to the escrow account for taxes and insurance. Hon. Wendell H. Ford, Chairman, and the Hon. loans? John C. Danforth, Ranking Minority Member, In addition, a higher-priced mortgage • Whether terms or practices should Consumer Subcomm. of the H. Comm. on loan would not be permitted to have a be prohibited or restricted only for Commerce, Science, and Transp., n.12 (Dec. 17, prepayment penalty except under certain products, such as adjustable-rate 1980). certain conditions. Finally, a creditor 33 mortgages or nontraditional mortgages? Credit Practices Rule, 42 FR at 7744. would be prohibited from structuring a 34 Credit Practices Rule at 7744. Many commenters addressed the 35 Credit Practices Rule at 7744. closed-end mortgage loan as an open- scope of any rules the Board might 36 Letter from James C. Miller III, Chairman, FTC end line of credit for the purpose of propose. Some consumer and to the Hon. John D. Dingell, Chairman, H. Comm. evading the restrictions on higher- community groups favored applying on Energy and Commerce (Dingell Letter) (Oct. 14, priced mortgage loans, which would not some or all prohibitions to the entire 1983). apply to open-end lines of credit. mortgage market, though other groups 37 Dingell Letter at 1–2. This part VI discusses the proposed 38 See, e.g., Kenai Chrysler Ctr., Inc. v. Denison, recommended that certain protections 167 P.3d 1240, 1255 (2007) (quoting FTC v. Sperry definition of a ‘‘higher priced mortgage (e.g., for repayment ability) be applied & Hutchinson Co., 405 U.S. 233, 244–45 n.5 (1972)); loan’’ and a discussion of the specific to the entire market and others (e.g., for State v. Moran, 151 N.H. 450, 452, 861 A.2d 763, protections that would apply to these escrows) only to subprime and 755–56 (2004) (concurrently applying the FTC’s loans follows in part VII. The Board is former test and a test under which an act or practice nontraditional loans. In general, is unfair or deceptive if ‘‘the objectionable conduct proposing to apply certain other financial institutions and financial * * * attain[s] a level of rascality that would raise services groups maintained that new an eyebrow of someone inured to the rough and 39 Compare Robinson, 201 Ill. 2d at 417 (showing rules should not be applied to the entire tumble of the world of commerce.’’) (citation of intent to deceive required under Illinois omitted); Robinson v. Toyota Motor Credit Corp., Consumer Fraud Act) with Kenai Chrysler Ctr., 167 market. 201 Ill. 2d 403, 417–418, 775 N.E.2d 951, 961–62 P.3d at 1255 (no showing of intent to deceive Most commenters suggested that, to (2002) (quoting 405 U.S. at 244–45 n.5). required under Alaska Unfair Trade Practices Act). the extent the Board targets subprime

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loans, it do so based on loan Fourth, the rule should give lenders a purchase loans as well. Covering only characteristics rather than borrower reasonable degree of certainty during refinancings of home purchase loans characteristics such as credit score. the application process regarding would fail to protect consumers Some commenters proposed that whether a transaction, when completed, adequately. From 2003 to 2006, 44 coverage be determined by a loan’s will be covered by a particular percent of the higher-risk ARMs that annual percentage rate (APR) and protection. For some protections, came to dominate the subprime market suggested various approaches based on reasonable certainty may be needed in recent years were extended to lender reporting of ‘‘higher-priced early in the application process; for consumers to purchase a home.40 loans’’ under Regulation C, which other protections, it may not be needed Delinquencies on subprime ARMs used implements the Home Mortgage until later. Reasonable certainty does for home purchase have risen sharply Disclosure Act (HMDA). Several not mean complete certainty. A rule that just as they have for refinancings. industry commenters, however, pointed would provide lenders complete Moreover, comments and testimony at out drawbacks of using an approach certainty about coverage early in the the Board’s hearings indicate that the based on HMDA reporting and application process is likely not problems with abusive lending practices advocated instead that the Board cover achievable. are not confined to refinancings and only loans with ‘‘payment shock.’’ D. Types of Loans Proposed To Be home equity loans. Furthermore, consumers who are C. General Principles Governing the Covered Under § 226.35 seeking home purchase loans can face Board’s Determination of Coverage The Board’s proposed definition of unique constraints on their ability to Four main principles will guide the ‘‘higher-priced mortgage loan’’ has two make decisions. First-time homebuyers Board’s determination of appropriate main aspects. The first aspect is loan are likely unfamiliar with the mortgage coverage. First, new regulations should type—the definition includes certain market. Homebuyers generally are be applied as broadly as needed to types of loans (such as home purchase primarily focused on acquiring a new protect consumers from actual or loans) and excludes others (such as home, arranging to move into it, and potential injury, but not so broadly that HELOCs). The second aspect is loan making other life plans related to the the costs, including the always-present price—the definition includes only move, such as placing their children in risk of unintended consequences, would loans with APRs exceeding specified new schools. These matters can occupy clearly outweigh the benefits. Evidence thresholds. The first aspect of the much of the time and attention that consumers have actually been definition, loan type, is discussed consumers might otherwise devote to injured by a particular practice in a immediately below, and the second is shopping for a loan and deciding what particular market segment is important discussed thereafter. loan to accept. Moreover, even if the to determining proper coverage. The Board proposes to apply the consumer comes to understand later in Protection may also be needed in a protections of § 226.35 to first-lien, as the application process that an offered particular segment, however, to prevent well as subordinate-lien, closed-end loan may not be appropriate, the potential future injury in that segment mortgage loans secured by the consumer may not be able to reject the or to limit adverse effects should consumer’s principal dwelling, loan without risk of abrogating the sales lenders circumvent protections applied including home purchase loans, agreement and losing a substantial to another segment. refinancings of loans, and home equity deposit, as well as disrupting moving Second, the most practical and loans. The proposed definition would plans. effective way to protect borrowers is to not cover loans that do not have apply protections based on loan primarily a consumer purpose, such as Coverage of Subordinate-Lien Loans characteristics, rather than borrower loans for real estate investment. The The Board is proposing to apply the characteristics. Identifying a class of proposed definition also would not proposed new protections—with the protected borrowers would present cover HELOCs, reverse mortgages, exception of the requirement to operational difficulties and other construction-only loans, or bridge loans. establish escrows—to subordinate-lien problems. For example, it is common to loans. (The reasons for this exception distinguish borrowers by credit score, Coverage of Home Purchase Loans, Refinancings, and Home Equity Loans are discussed below under part VII.D.) with lower-scoring borrowers generally The Board seeks comment on whether considered to be at higher risk of injury The statutory protections for HOEPA other exceptions would be appropriate. in the mortgage market. Defining the loans are generally limited to closed-end For example, should the Board limit protected field as lower-scoring refinancings and home equity loans. See coverage of all or some of the proposed consumers would fail to protect higher- TILA Section 103(aa), 15 U.S.C. restrictions to certain kinds of scoring consumers ‘‘steered’’ to loans 1602(aa). The Board proposes to apply subordinate-lien loans such as ‘‘piggy meant for lower-scoring consumers. the protections of § 226.35 to loans of backs’’ to first-lien loans, or Moreover, the market uses different these types, which have historically subordinate-lien loans that are larger commercial scores, and choosing a presented the greatest risk to consumers. than the first-lien loan? particular score as the benchmark for a These loans are often made to regulation could give unfair advantage consumers who have home equity and, Limitation to Loans Secured by to the company that provides that score. therefore, have an existing asset at risk. Principal Dwelling; Exclusion of Loans Third, the rule identifying higher- These loans also can be marketed for Investment priced loans should be as simple as aggressively by originators to The Board is proposing to limit the reasonably possible, consistent with homeowners who may not benefit from protections in proposed § 226.35 to protecting consumers and minimizing them and who, if responding to the loans secured by the consumer’s costs. For the sake of simplicity, the marketing and not shopping principal dwelling. The Board’s primary same coverage rule should apply to all independently, may have limited concern is to ensure that consumers not new protections except where the information about their options. lose the homes they principally occupy benefit of tailoring coverage criteria to The Board proposes to use its specific protections outweighs the authority under TILA Section 129(l)(2), 40 Figure calculated from First American increased complexity. 15 U.S.C. 1639(l)(2), to cover home LoanPerformance data.

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because of unfair, abusive, or deceptive and Regulation Z provide borrowers with the definition of a ‘‘residential lending practices. The inevitable costs special protections for HELOCs such as mortgage transaction’’ in § 226.2(a)(24). of new regulation, including potential restrictions on changing plan terms. A construction-only loan would not unintended consequences, can most And, unlike originations of higher- include the permanent financing that clearly be justified when people’s priced closed-end mortgage loans, replaces a construction loan. principal homes are at stake. HELOC originations are concentrated in Construction-only loans do not appear Limiting the proposed protections to the banking and thrift industries, where to present the same risk of consumer loans secured by the principal dwelling the federal banking agencies can use abuse as other loans the proposal would would have the effect of excluding supervisory authorities to protect cover. The permanent financing, or a many, but not all, loans to purchase borrowers. For example, when new home-secured loan following second homes. A loan to a consumer to inadequate underwriting of HELOCs construction, would be covered by purchase a second home, for example, unduly increased risks to originators proposed § 226.35. Applying § 226.35 to would not be covered by these and consumers several years ago, the construction-only loans, which protections if the loan was secured only agencies responded with guidance.41 generally have higher interest rates than by the second home or by another For these reasons, the Board is not the permanent financing, could hinder dwelling (such as an investment proposing to cover HELOCs. some borrowers’ access to construction property) other than the consumer’s The Board recognizes, however, that financing without meaningfully principal dwelling. Such a loan would, HELOCs may represent a risk of enhancing consumer protection. however, be covered if it was instead circumvention. Creditors may seek to secured by the consumer’s principal evade limitations on closed-end Exclusion of Bridge Loans dwelling. transactions by structuring such Proposed § 226.35(a)(5) would exempt Limiting the proposed protections to transactions as open-end transactions. from § 226.35 temporary or ‘‘bridge loans secured by the principal In proposed § 226.35(b)(5), discussed loans’’ with a term of no more than dwelling—and to loans having primarily below in part VII.F., the Board proposes twelve months. The regulation would a consumer purpose—would also have to prohibit structuring a closed-end loan give as an example a loan that a the effect of excluding loans primarily as an open-end transaction for the consumer takes to ‘‘bridge’’ between the for a real estate investment purpose. purpose of evading the new rules in purchase of a new dwelling and the sale This exclusion is consistent with TILA’s § 226.35. To the extent it may instead be of the consumer’s existing dwelling. focus on consumer concerns and its appropriate to apply those rules directly HOEPA now covers certain bridge loans exclusion in Section 104 of credit to HELOCs, the Board seeks comment with rates or fees high enough to make primarily for business, commercial, or on how an APR threshold for HELOCs them HOEPA loans. TILA Section agricultural purposes. See 15 U.S.C. could be set to achieve the objectives, 129(l)(1) provides the Board authority to 1603(1). Real estate investors are discussed further in subpart E., of exempt classes of mortgage transactions expected to be more sophisticated than covering the subprime market and from HOEPA if the Board finds that the ordinary consumers about the real estate generally excluding the prime market. exemption is in the interest of the financing process and to have more borrowing public and will apply only to experience with it, especially if they Exclusion of Reverse Mortgages and Construction-Only Loans products that maintain and strengthen invest in several properties. homeownership and equity protection. Accordingly, the need to protect The Board proposes to exclude 15 U.S.C. 1639(l)(2). The Board believes investors is not clear, and in any event reverse mortgages and construction-only a narrow exemption from HOEPA for is likely not sufficient to justify the loans from the new protections in bridge loans would be in borrowers’ potential unintended consequences of § 226.35(b). A reverse mortgage is interest and support homeownership. imposing restrictions, with civil liability defined in current § 226.33(a), and the The Board seeks comment on the if they are violated, on the financing of proposal would retain this definition. proposed exemption. real estate investment transactions. The Board heard from panelists about The Board shares concerns that reverse mortgages at its 2006 HOEPA E. Proposed APR Trigger for § 226.35 individuals who invest in residential hearings and has not identified Overview real estate and do not pay their mortgage significant abuses in the reverse obligations put tenants at risk of mortgage market. Moreover, reverse The Board proposes to use an APR eviction in the event of foreclosure. mortgages are unique transactions that trigger to define the range of Regulating the rights of landlords and present unique risks that are currently transactions that would be covered by tenants, however, is traditionally a addressed by Regulation Z § 226.33. At the protections of proposed § 226.35. matter for state and local law. The Board an appropriate time, the Board will The Board seeks to set the trigger at a believes that state and local law could review § 226.33 and consider whether level that would capture the subprime better address this particular tenant new or different protections are needed market but generally exclude the prime protection concern than a Board for reverse mortgages. market. There is, however, inherent regulation. The Board would also exclude from uncertainty as to what level would achieve these objectives. The Board Exclusion of HELOCs § 226.35’s protections a construction- only loan, defined as a loan solely for believes that it may be appropriate, in The Board proposes to exclude the purpose of financing the initial the face of this uncertainty, to err on the HELOCs from the proposed protections. construction of a dwelling, consistent side of covering somewhat more than These transactions do not appear to the subprime market. Based on this present as clear a need for new 41 Interagency Credit Risk Guidance for Home approach, the Board proposes a regulations as closed-end transactions. Equity Lending, May 16, 2005. threshold of three percentage points Most originators of HELOCs hold them Available at http://www.federalreserve.gov/ above the comparable Treasury security in portfolio rather than sell them, which boarddocs/srletters/2005/sr0511a1.pdf. for first-lien loans, or five percentage Addendum to Credit Risk Guidance for Home aligns these originators’ interests in loan Equity Lending, Sept. 29, 2006. Available at points for subordinate-lien loans. Based performance more closely with their http://www.federalreserve.gov/BoardDocs/ on available data, it appears that this borrowers’ interests. In addition, TILA SRLetters/2006/SR0615a3.pdf. threshold would capture at least the

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higher-priced end of the alt-A market. Coverage Objectives Second, any undue risks to consumers The Board seeks comment, and solicits The Board set forth above a general in the prime market from particular loan data, on the extent to which the principle that new regulations should be terms or lending practices can be threshold would cover the alt-A market, applied as broadly as needed to protect adequately addressed through means and on the benefits and costs, including consumers from actual or potential other than new regulations under any potential unintended consequences injury, but not so broadly that the costs, HOEPA. Supervisory guidance from the for consumers, of applying any or all of including the always-present risk of federal agencies influences a large the protections in § 226.35 to the alt-A unintended consequences, would majority of the prime market which, market to the extent it would be clearly outweigh the benefits. Consistent unlike the subprime market, has been covered. The Board also seeks comment dominated by federally supervised with this principle, the Board believes 42 on whether a different threshold, such that the APR threshold should satisfy institutions. Such guidance affords as four percentage points for first-lien two objectives. It should ensure that regulators and institutions alike more loans (and six percentage points for subprime loans are covered. Second, it flexibility than a regulation, with potentially fewer unintended subordinate-lien loans), would better should also generally exclude prime consequences. In addition, the satisfy the objectives of covering the loans. subprime market, excluding the prime The subprime market should be Government Sponsored Enterprises market, and avoiding unintended covered because it is, by definition, the continue to play a major role in the consequences for consumers in the alt- market with the highest credit risk. prime market, and they are accountable A market. There are of course variations in risk to regulators and policy makers for the within the subprime market. For standards they set for loans they will Reasons To Use APR purchase.43 example, delinquencies on fixed-rate For these reasons, the Board does not The APR corresponds closely to credit subprime mortgages have been lower in risk, that is, the risk of default as well believe that substantive restrictions on recent years than on adjustable-rate loan terms or lending practices are as the closely related risks of serious subprime mortgages. It may not be delinquency and foreclosure. Loans warranted in the prime market at this practical or effective, however, to target time. The need for such restrictions is with higher APRs generally have higher certain loans in the subprime market for credit risks, whatever the source of the not clear and their potential unintended coverage while excluding others. Such a consequences could be significant. risk might be—weaker borrower credit rule would be more complex and histories, higher borrower debt-to- possibly require frequent updating as Inherent Uncertainty of Meeting income ratios, higher loan-to-value products evolved. Moreover, market Coverage Objectives ratios, less complete income or asset imperfections discussed in part II.C.— There are three major reasons why it documentation, less traditional loan the subprime market’s lack of is inherently uncertain which APR terms or payment schedules, or transparency and potentially inadequate threshold would achieve the twin combinations of these or other risk creditor incentives to make only loans objectives of covering the subprime factors. Since disclosing an APR has that consumers can repay—affect the market and generally excluding the long been required by TILA, the figure subprime market as a whole. prime market. First, there is no single, is also very familiar and readily There are two principal reasons why precise, and uniform definition of the available to creditors and consumers. the Board seeks to exclude the prime prime or subprime market, or of a prime Therefore, the Board believes it market from § 226.35. First, there is or subprime loan. Moreover, the markets appropriate to use a loan’s APR to limited evidence that the problems are separated by a somewhat loosely identify loans having a high enough addressed in § 226.35, such as lending defined segment known as the alt-A credit risk to warrant the protections of without regard to repayment ability, market, the precise boundaries of which proposed § 226.35. have been significant in the prime are not clear. The APR for two loans with identical market or gone unaddressed when they Second, available data sets enable risk characteristics can be different at have on occasion arisen. By nature, only estimation, not precise calculation, different times solely because of market loans in the prime market have a lower of the empirical relationship between changes in mortgage rates. The Board credit risk, as seen in the relatively low APR and credit risk. A proprietary proposes to control for such market default and delinquency rates for prime dataset such as First American changes by comparing a loan’s APR to loans compared to sharply increasing LoanPerformance may contain detailed the yield on the comparable Treasury rates for subprime loans since 2005. information on loan characteristics, security. This would be similar, but not Moreover, the prime market is more including the contract rate, but lack the identical, to the approach HOEPA uses transparent and competitive, APR or sufficient data to derive the currently to identify HOEPA-covered characteristics that make it less likely a APR. Other data must be consulted to loans, see TILA Section 103(aa), 15 creditor can sustain an unfair, abusive, estimate APRs based on contract rates. U.S.C. 1602(aa), and § 226.32(a), and or deceptive practice. In addition, HMDA data contain the APR for higher- Regulation C uses to identify higher- borrowers in the prime market are less priced loans (as adjusted by comparable priced loans reportable under HMDA, likely to be under the degree of financial Treasury securities), but they have little see 12 CFR 203.4(a)(12). The Board is stress that tends to weaken the ability of information about credit risk. aware of concerns that the method that many borrowers in the subprime market these regulations use to match mortgage to protect themselves against unfair, 42 According to HMDA data from 2005 and 2006, loans to Treasuries leads to some abusive, or deceptive practices. To be more than three-quarters of prime, conventional first-lien mortgage loans on owner-occupied inaccuracy in coverage and makes sure, there have been concerns about the properties were made by depository institutions or coverage vary with changes in the yield prime market, and this proposal would their affiliates. For this purpose, a loan for which curve (the relationship between short- address some of them. For example, the price information was not reported is treated as a term and long-term interest rates). As proposal addresses concerns about prime loan. 43 According to HMDA data from 2005 and 2006, discussed in more detail below, the coercion of appraisers, untransparent nearly 30 percent of prime, conventional first-lien Board is proposing to address these creditor payments to mortgage brokers, mortgage loans on owner-occupied properties were concerns in the context of § 226.35. and abusive servicing practices. purchased by Fannie Mae or Freddie Mac.

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Third, data sets can of course show and character of this market segment subordinate-lien loan. Available data only the existing or past distribution of have changed markedly in a relatively indicate that this threshold would loans across market segments, which short period. According to one source, capture the subprime market but may change in ways that are difficult to it was 2 percent of residential mortgage generally exclude the prime market. In predict. In particular, the distribution originations in 2003 and 13 percent in each of the last two years, the could change in response to the Board’s 2006.44 At least part of this growth was percentage of the first-lien mortgage imposition of the restrictions in due to increasing flexibility of market Regulation C has captured as § 226.35, but the likely direction of the underwriting standards. For example, in higher-priced using a threshold of three change is not clear. A loan’s APR is 2006, 80 percent of loans originated for percentage points has been greater than typically not known to a certainty until alt-A securitized pools were the percentage of the total market after the underwriting has been underwritten without full originations that one industry source completed, and not until closing if the documentation of income, compared to has estimated to be subprime (25 consumer has not locked the interest about 60 percent from 2000 to 2004.45 percent vs. 20 percent in 2005; 28 rate. Creditors might build in a At the same time, nontraditional percent vs. 20 percent in 2006).47 ‘‘cushion’’ against this uncertainty by mortgages allowing borrowers to defer Regulation C is not thought, however, to voluntarily setting their internal principal, or both principal and interest, have reached the prime market. Rather, thresholds lower than the threshold in also expanded, reaching 78 percent of in both years it reached into the alt-A the regulation. alt-A originations in 2006.46 market, which the same source Creditors would have a competing The Board recognizes that risks to estimated to be 12 percent in 2005 and incentive to avoid the restrictions, consumers in the alt-A market are lower 13 percent in 2006. In 2004, Regulation however, by restructuring the prices of than risks in the subprime market. The C captured a significantly smaller part potential loans that would have APRs Board believes, however, that it may be of the market than an industry estimate just above the threshold to cause the appropriate to cover at least part of the of the subprime market (11 percent vs. loans’ APRs to come under the alt-A market with the protections of 19 percent), but that year’s HMDA data threshold. Different combinations of § 226.35. Because of the inherent were somewhat anomalous.48 interest rate and points that are uncertainties in setting an APR The Board does not have data economically identical for an originator threshold discussed above, covering indicating how closely the proposed produce different APRs. If proposed part of the alt-A market may be threshold of five percentage points for § 226.35 were adopted, an originator necessary to ensure consistent coverage subordinate-lien loans would would have an incentive to achieve a of the subprime market. Moreover, to correspond to the subprime home equity rate-point combination that would bring the extent § 226.35 were to cover the market. It is the Board’s understanding, a loan’s APR below the threshold (if the higher-priced end of the alt-A market, however, that this threshold, which has borrower had the resources or equity to where several risks may be layered, the prevailed in Regulation C since 2004, pay the points). Moreover, some fees, regulation may benefit consumers more has been at least roughly accurate. such as late fees and prepayment than it would cost them. For example, penalties, are not included in the APR. applying an income verification Requests for Comment Creditors could increase the number or requirement to the riskier part of the alt- The Board seeks comment, and amounts of such fees to maintain a A market could ameliorate injuries to supporting data, on whether different loan’s effective price while lowering its consumers from lending based on thresholds would better satisfy the APR below the threshold. It is not clear inflated incomes without necessarily objectives of covering the subprime whether the net effect of these depriving consumers of access to credit, market and generally excluding the competing forces of over-compliance if they are able to document their prime market. The Board seeks and circumvention would be to capture incomes as § 226.35(b)(2) would require. comment and data both as to first-lien more, or fewer, loans. Prohibiting lending without regard to loans and as to subordinate-lien loans; For all of the above reasons, there is repayment ability in this market slice and both as to home purchase loans and inherent uncertainty as to what APR could reduce the risk to consumers from as to refinancings. The Board also seeks threshold would achieve the objectives ‘‘payment shock’’ on nontraditional comment and supporting data on the of covering the subprime market and loans. At the same time, the Board extent to which the proposed threshold generally excluding the prime market. recognizes the potential for unintended would cover the alt-A market and, as consequences if § 226.35 restrictions The Alt-A Market discussed above, on the costs and were to cover part of the alt-A market In the face of this uncertainty, benefits of such coverage. Moreover, the and seeks to minimize those Board seeks comment on whether a deciding on an APR threshold calls for consequences. judgment. The Board believes it may be different threshold than that proposed, appropriate to err on the side of The Proposed Thresholds of 3 and 5 such as four percentage points for first- covering somewhat more than the Percentage Points lien loans (and six percentage points for subprime market. In effect, this could Based on the foregoing subordinate-lien loans), would better mean covering part of the alt-A market, considerations, the Board is proposing satisfy the objectives of covering the a possibility that merits special to set the APR threshold for a loan at subprime market, excluding the prime consideration. three percentage points above the market, and avoiding unintended The alt-A market is generally comparable Treasury security, or five understood to be for borrowers who percentage points in the case of a 47 For industry estimates see IMF 2007 Mortgage Market, at 4. typically have higher credit scores than 48 The principal cause of the reporting deficit was subprime borrowers but still pose more 44 IMF 2007 Mortgage Market, at 4. the unusually steep yield curve that characterized risk than prime borrowers because they 45 Figures calculated from First American 2004. For purposes of proposed § 226.35(a), the make small down payments or do not LoanPerformance data. Board is proposing to adjust the method that 46 David Liu & Shumin Li, Alt A Credit—The Regulation C uses to calculate the higher-priced document their incomes, or for other Other Shoe Drops?, The MarketPulse The loan threshold to reduce, though not eliminate, the reasons. The definition of this market is MarketPulse (First American LoanPerformance, effects of yield curve changes on § 226.35’s not precise, however. Moreover, the size Inc., San Francisco, Cal.), Dec. 2006. coverage. This proposal is discussed below.

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consequences for consumers in the alt- Treasury securities having maturities in application is received, rather than the A market. the range of five to ten years rather than 15th of the month before the rate is The Board also seeks comment on the yields on 30-year Treasury securities. locked. This would introduce more extent to which lenders may set an Rates on adjustable-rate mortgages more certainty, earlier in the application internal threshold lower than that set closely track yields on Treasury process, to the determination as to forth in the regulation to ensure securities that mature in one to five whether a potential transaction would compliance, and the consequences that years, depending in part on the duration be a higher-priced mortgage loan when could have for consumers. Conversely, of any initial fixed-rate period. As a consummated. The actual APR, the Board seeks comment on the extent result, changes in the relationship of however, would not be known to a of the risk creditors would circumvent short-term rates to long-term rates, certainty early in the application the proposed restrictions by charging known as the yield curve, have affected process, leaving some uncertainty as to more fees and lower interest rates to reporting of higher-priced mortgage whether a potential loan will be a reduce their loans’ APRs, and the loans. higher-priced loan if it is actually consequences that could have for For purposes of the rules proposed originated. The APR disclosed within consumers. Is this risk significant here, the Board’s goal is to reduce this three days of application could change enough to warrant addressing ‘‘yield curve effect.’’ Ideally, each loan before closing for legitimate reasons separately. For example, should the would be matched to a Treasury such as changes in the interest rate or Board adopt a separate fee trigger? What security that corresponds to that loan’s in the borrower’s decision as to how fees would such a trigger include and at expected maturity, which would be many points to pay, if any. It is not what level would it be set? determined based on empirical data expected, however, that an APR would Alternatively, would a general about prepayment speeds for loans with change substantially in many cases for prohibition on manipulating the APR to the same features. It is not practicable, legitimate reasons. circumvent the protections of § 226.35 however, to match loans to Treasuries be practicable? on the basis of the full range of features Using two different trigger dates in that may influence prepayment speeds. Regulation C and Regulation Z F. Mechanics of the Proposed APR For the sake of simplicity and § 226.35(a)—the rate lock date in the Trigger predictability, the Board proposes to first and the application date in the Under Regulation C, price information prescribe rules based on three features: second—could increase regulatory on a closed-end, first-lien loan is whether the loan is adjustable-rate or burden. Using the rate lock date in reported if the loan’s APR exceeds by fixed-rate; the term of the loan; and the § 226.35(a), however, could increase three or more percentage points (five if length of any initial fixed-rate period, if uncertainty, relative to using the the loan is secured by a subordinate the loan is adjustable-rate. application date, as to whether a loan lien) the yield on Treasury securities Proposed § 226.35(a) that would would be higher-priced when having a comparable period of maturity. match closed-end loans to Treasury consummated. The Board believes the A lender uses the yield on Treasury securities as follows. First, variable rate potentially somewhat higher regulatory securities as of the 15th day of the transactions with an initial fixed-rate burden from inconsistency may be preceding month if the rate is set period of more than one year would be justified by the increase in certainty. between the 1st and the 14th day of the matched to Treasuries having a maturity Requests for Comment month, and as of the 15th of the current closest to the length of the fixed-rate month if the rate is set on or after the period (unless the fixed-rate period The Board seeks data with which to 15th day. Although the Board proposes exceeds seven years, in which case the evaluate the proposed approach to to use the same numerical thresholds, creditor would use the rules applied to matching mortgage loans to Treasury the Board proposes to use somewhat non-variable rate loans). For example, a securities and the proposal to select the different rules for matching mortgage 30-year ARM having an initial fixed-rate appropriate Treasury security based on loans to Treasury securities. period of five years would be matched the application date. The Board also to a 5-year Treasury security. Second, Matching Loans to Treasury Securities solicits suggestions for alternative variable-rate transactions with an initial approaches that would better meet the For purposes of this rulemaking, the fixed-rate period of one year or less objectives of relative simplicity and Board proposes to use a different would be matched to Treasury security reasonably accurate coverage. approach than Regulation C uses to having a maturity of one year. Third, match loans to Treasury securities, with fixed-rate loans would be matched on VII. Proposed Rules for Higher-Priced the intent of reducing effects solely from the basis of loan term in the following Mortgage Loans—§ 226.35 changes in the interest rate way: A fixed-rate loan with a term of 20 A. Overview environment. Following the model of years or more would be matched to a 10- HOEPA (TILA Section 103(aa), 15 year Treasury security; a fixed-rate loan This part discusses the new consumer U.S.C. 1603(aa)), Regulation C compares with a term of more than 7 years but less protections the Board proposes to apply the APR on a loan to the yield on than twenty years would be matched to to ‘‘higher-priced mortgage loans.’’ A Treasury securities having a period of a 7-year Treasury security; and a fixed- creditor would be prohibited from maturity comparable to the maturity of rate loan with a term of seven years or engaging in a pattern or practice of the loan. 12 CFR 203.4(a)(12). For less would be matched to the Treasury making higher-priced mortgage loans example, the APR on a fixed-rate, 30- security with a maturity closest to the based on the collateral without regard to year loan—the most common loan term term. repayment ability. A creditor would also in the market—is compared to the yield be prohibited from making an on a 30-year Treasury security. In Timing of the Match individual higher-priced mortgage loan actuality, mortgage loans are usually The proposal also would differ from without: Verifying the income and paid off long before they mature, Regulation C as to timing. The Treasury assets the creditor relied upon to make typically in five to ten years. Rates on security yield that would be used is the the loan; and establishing an escrow fixed-rate 30-year mortgage loans, yield as of the 15th of the month account for taxes and insurance. In therefore, more closely track yields on preceding the month in which the addition, a higher-priced mortgage loan

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could not have a prepayment penalty purpose of evading the restrictions on amortizing payment is generally except under certain conditions. higher-priced mortgage loans, which do prudent. With few exceptions, however, The Board believes that the practices not apply to open-end lines of credit. most of these commenters oppose that would be prohibited, when This proposal is based on the authority codifying such a standard in a conducted in connection with higher- of the Board under TILA Section regulation, arguing that a regulation priced mortgage loans, are unfair, 129(l)(2) to prohibit practices that would be too rigid, constrain lenders deceptive, associated with abusive would evade Board regulations adopted from relying on their own experience lending practices, and otherwise not in under authority of that statute. 15 U.S.C. and judgment, and make ARMs the interest of the borrower. See TILA 1639(l)(2). unavailable to many subprime Section 129(l)(2), 15 U.S.C. 1639(l)(2), borrowers. Several financial institutions and the discussion of this statute in part B. Disregard of Consumers’ Ability to and trade groups asked that any fully- V above. Making higher-priced mortgage Repay—§§ 226.34(a)(4) and 226.35(b)(1) indexed rate requirement the Board loans without adequately considering TILA Section 129(h), 15 U.S.C. adopts be limited to ARMs with repayment ability, verifying income or 1639(h), and Regulation Z § 226.34(a)(4) introductory fixed-rate periods of less assets, or establishing an escrow currently prohibit a pattern or practice than five years. They maintained that account for taxes and insurance of extending HOEPA loans based on most borrowers having ARMs with significantly increases the risk that consumers’ collateral without regard to longer fixed-rate periods refinance consumers will not be able to repay their repayment ability. HOEPA loans before the rate adjusts. their loans. When consumers cannot are, however, a very small portion of the Consumer and community groups repay their loans and must choose subprime market. The Board is argue that a requirement to underwrite between losing their homes and proposing to extend the prohibition to the fully-indexed rate would not refinancing in an effort to stay in their against a pattern or practice of lending assure that loans would be affordable homes, they are more vulnerable to such based on consumers’ collateral without unless the Board also specified a abuses as loan flipping and equity regard to their repayment ability to maximum debt-to-income (DTI) ratio. stripping. Prepayment penalties in higher-priced mortgage loans as defined Most groups stated that a maximum 50 certain circumstances can exacerbate in § 226.35(a). The prohibition in percent DTI ratio would be an these injuries by making it more costly § 226.34(a)(4) would be revised appropriate threshold to identify to exit unaffordable loans. somewhat, and this revised prohibition presumptively unaffordable loans. On The Board has considered that some would be incorporated as proposed new the other hand, the vast majority of the of the practices that would be § 226.35(b)(1). financial institution and industry trade prohibited may benefit some consumers group commenters oppose adoption of a in some circumstances. As discussed Public Comment on Determining Ability maximum DTI ratio. Some stated the more fully below with respect to each To Repay DTI ratio is not one of the most prohibited practice, however, the Board In the Board’s June 14, 2007 hearing important predictors of loan believes that in connection with higher- notice, the Board solicited comment on performance. Others noted the priced mortgage loans these practices the following alternatives to ensure difficulties of clearly defining ‘‘debt’’ are likely to cause more injury to borrowers’ repayment ability: and ‘‘income’’ for purposes of such a consumers than any benefit the • Should lenders be required to rule, or of clearly defining mitigating practices may provide them. The Board underwrite all loans based on the fully- factors such as high credit scores. Some has also considered that the proposed indexed rate and fully amortizing identified categories of borrowers for rules may reduce the access of some payments? whom high DTIs are not inappropriate, consumers in some circumstances to • Should there be a rebuttable such as high-income borrowers; legitimate and beneficial credit presumption that a loan is unaffordable borrowers with substantial assets; and arrangements, either directly as a result if the borrower’s debt-to-income (DTI) borrowers refinancing or consolidating of a prohibition or indirectly because ratio exceeds 50 percent? loans with even higher payment creditors may incur, and pass on, • Are there specific consumer burdens. increased compliance and litigation disclosures that would help address costs. The Board believes the benefits of concerns about unaffordable loans? Discussion the proposal outweigh these costs. Few commenters offered specific Recent evidence of disregard for The Board has also considered other, disclosure suggestions but many repayment ability. Subprime loans are potentially less burdensome, commenters and hearing witnesses expected to default at higher rates than approaches such as requiring more, or addressed the first two questions. Most prime loans because they generally are better, disclosures. For reasons consumer and community groups who made to higher-risk borrowers. But the discussed in part II.C., the Board commented support a requirement to high frequency of so-called 2–28 and 3– believes that disclosures alone may not underwrite ARMs using the fully- 27 ARMs in subprime originations in provide consumers in the subprime indexed, fully-amortizing rate. Several recent years—and the recent rapid and market adequate protection from unfair, recommended, however, that the Board significant increase in serious deceptive, and abusive lending require underwriting to the maximum delinquencies and foreclosures among practices. The discussion below sets rate possible or, at least, to a rate higher such loans originated from 2005 to early forth additional reasons why disclosures than the fully-indexed rate. These 2007, including within several months and other possible alternatives to the commenters are concerned that using of closing—have raised serious proposed prohibitions may not give the fully-indexed rate would not questions as to whether originators have adequate protection. adequately assure repayment ability paid adequate attention to repayment In addition to proposing new because indexes can increase. ability. Approximately three-quarters of protections for consumers with higher- All of the financial institutions and securitized originations in subprime priced mortgage loans, the Board is also financial services trade groups who pools from 2004 to 2006 were of 2–28 proposing to prohibit a creditor from responded to the question agree that or 3–27 ARMs, or ARMs with interest structuring a closed-end mortgage loan underwriting a loan based on its fully- rates discounted for two or three years as an open-end line of credit for the indexed interest rate and fully- and fully-indexed afterwards. In a

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typical case of a 2–28 discounted ARM, the true payment only at closing. At the endure foreclosure and eviction; in a $200,000 loan with a discounted rate closing table, many borrowers may not either case they may owe the lender of 7 percent for two years (compared to notice the disclosure of the payment or more than the house is worth. If a a fully-indexed rate of 11.5 percent) and have time to consider it; or they may neighborhood has a concentration of a 10 percent maximum rate in the third consider it but feel constrained to close unaffordable loans, then the entire year would start at a payment of $1,531 the loan. This constraint may arise from neighborhood may endure a decline in and jump to a payment of $1,939 in the a variety of circumstances. For example, homeowner equity. Moreover, if third year, even if the index value did the borrower may have signed disregard for repayment ability not increase. The rate would reach the agreements to purchase a new house contributes to a rise in delinquencies fully-indexed rate in the fourth year (if and to sell the current house. Or the and foreclosures, as appears to have the index value still did not change), borrower may need to escape an overly happened recently, then the credit and the payment would increase to burdensome payment on a current loan, tightening that may follow can injure all $2,152.49 or urgently need the cash that the loan consumers who are potentially in the In recent years many subprime will provide for a household emergency. market for a mortgage loan. lenders did not consider adequately In the subprime market in particular, Potential benefits. There does not whether borrowers would be able to consumers may accept loans knowing appear to be any benefit to consumers afford the higher payment, and they may have difficulty affording the from loans that are clearly unaffordable appeared instead to assume that payments because they do not have at origination or immediately thereafter. borrowers would be able to refinance reason to believe a more affordable loan The Board recognizes, however, that notwithstanding their very limited would be available to them. Possible some consumers may in some equity. Originators extended some 2–28 sources of this behavior, including the circumstances benefit from loans whose ARMs from 2005 to early 2007 without limited transparency of prices, products, payments would increase significantly having reason to believe the borrower and broker incentives in the subprime after an initial period of reduced would be able to afford the payment market, are discussed in part II.C. payments. For example, some after reset. Originators may have Borrowers who do not expect any consumers may expect to be relocated assumed that these borrowers would benefit from shopping further, which by their employers and therefore intend refinance before reset, an assumption can be costly, make a reasoned decision to sell their homes before their payment that proved unrealistic, at least under not to shop and to accept the terms they would increase significantly. Moreover, newly tightened lending standards, believe are the best they can get. a planned increase in the payment that when house prices fell and the Furthermore, borrowers’ own would not be affordable at consumers’ borrowers could not accumulate enough assessment of their repayment ability current incomes (as of consummation) may be influenced by their belief that a equity to refinance. In fact, some 2–28 may be affordable at the incomes lender would not provide credit to a ARMs originated in 2005 and 2006 consumers can document that they consumer who did not have the capacity appear to have been made to borrowers reasonably expect to earn when the to repay. Borrowers could reasonably who could not afford even the initial payment increases. The proposal infer from a lender’s approval of their payment. Over 10 percent of the 2–28 described below is intended to provide applications that the lender had ARMs originated in 2005 appear to have sufficient flexibility to creditors to appropriately determined that they become seriously delinquent before ensure that credit would be available would be able to repay their loans. under such circumstances. their first reset.50 While some borrowers Borrowers operating under this Consumers may also benefit from may have been able to make their impression may not independently loans with payments that could increase payments—they stopped making assess their repayment ability to the after an initial period of reduced payment because the values of their extent necessary to protect themselves payments if they have a realistic chance houses declined and they lost what little from taking on obligations they cannot of refinancing, before the payment equity they had—others may not have repay. Borrowers are likely unaware of burden increases substantially, into been able to afford even their initial market imperfections that may reduce lower-rate loans that were more payments. lenders’ incentives to fully assess affordable on a longer-term basis. This Potential reasons for unaffordable repayment ability. See part II.C. In benefit is, however, quite uncertain, and loans. There are several reasons why addition, lenders and brokers may it is accompanied by substantial risk. borrowers, especially in the subprime sometimes encourage borrowers to be Consumers would have to both improve market, would accept loans they would excessively optimistic about their ability their credit scores sufficiently and not be able to repay. In some cases, less to refinance should they be unable to accumulate enough equity to qualify for scrupulous originators may mislead sustain repayment. For example, they lower-rate loans. Concerns about the borrowers into entering into sometimes offer reassurances that affordability after reset of 2–28 and 3– unaffordable loans by understating the interest rates will remain low and house 27 ARMs originated from 2005 to early payment before closing and disclosing prices will increase; borrowers may be 2007 illustrate the hazards of counting swayed by such reassurances because on both developments occurring before 49 This example is taken from the federal payments become burdensome. agencies’ proposed subprime illustrations. Proposed they believe the sources are experts. Illustrations of Consumer Information for Subprime Injuries from unaffordable loans. Marketed as ‘‘affordability products,’’ Mortgage Lending, 72 FR 45495, 45497 n.2 & 45499, When borrowers cannot afford to meet these loans often were made with high Aug. 14, 2007. The example assumes an initial their payment obligations, they and loan-to-value ratios on the assumption index of 5.5 percent and a margin of 6 percent; their communities suffer significant that house prices would appreciate. In assumes annual payment adjustments after the initial discount period; a 3 percent cap on the injury. Such borrowers are forced to use areas where house price appreciation interest rate increase at the end of year 2; and a 2 up home equity or other assets to cover slowed or prices declined outright, the percent annual payment adjustment cap on interest the costs of refinancing. If refinancing is assumption proved unreliable. rate increases thereafter, with a lifetime payment not an option, then borrowers must Moreover, the Board is not aware of adjustment cap of 6 percent (or a maximum rate of 13 percent). make sacrifices to keep their homes. If evidence on the proportion of such 50 Figure calculated from First American they cannot keep their homes, then they borrowers who were actually able to LoanPerformance data. must sell before they had planned or raise their credit scores enough to

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qualify for lower-rate loans had they the prohibition, and to include that Other proposed clarifications. Several accumulated sufficient equity. In short, element in the proposed new other revisions are proposed for clarity. evidence from recent events is prohibition for higher-priced mortgage The phrase ‘‘as of consummation’’ consistent with a conclusion that a loans. The ‘‘pattern or practice’’ element would be added to make clear that the widespread practice of making of the prohibition is intended to balance prohibition is based on the facts and subprime loans with built-in payment potential costs and benefits of the rule. circumstances that existed as of shock after a relatively short period on Creating civil liability for an originator consummation. Under proposed the basis of assuming consumers will that fails to assess repayment ability on comment 34(a)(4)–2, events after accumulate sufficient equity and any individual loan could inadvertently consummation, such as an unusually improve their credit scores enough to cause an unwarranted reduction in the high default rate, may be relevant to refinance before the shock sets in can availability of mortgage credit to determining whether a creditor has cause consumers more injury than consumers. The ‘‘pattern or practice’’ violated § 226.34(a)(4), but events after benefit. element is intended to reduce that risk consummation do not, by themselves, The Proposed Prohibition while helping prevent originators from establish a violation. The comment making unaffordable loans on a scale would provide the following example: a HOEPA and § 226.34 prohibit a lender that could cause consumers substantial violation is not established if borrowers from engaging in a pattern or practice of injury. default after consummation because of extending credit subject to § 226.32 Whether a creditor had engaged in the serious illness or job loss. (HOEPA loans) to a consumer based on prohibited pattern or practice would In addition, to clarify the basis for the consumer’s collateral without regard depend on the totality of the determining repayment ability the to the consumer’s repayment ability, circumstances in the particular case, as regulation and existing comments including the consumer’s current and explained in an existing comment to would be revised, and new comments expected income, current obligations, § 226.34(a)(4). The comment further would be added. First, comment and employment. Under the proposal, indicates that while a pattern or practice 34(a)(4)–1 (renumbered as 34(a)(4)–3) the prohibition in § 226.34(a)(4) would is not established by isolated, random, would be revised to clarify the be revised to clarify and strengthen it. or accidental acts, it can be established regulation’s reference to employment as The revised § 226.34(a)(4) would be without the use of a statistical process. a factor in determining repayment incorporated into § 226.35(b) as one of It also notes that a creditor might act ability. The comment would indicate the restrictions that apply to higher- under a lending policy (whether written that in some circumstances it may be priced mortgage loans. Higher-priced or unwritten) and that action alone appropriate or necessary to take into mortgage loans would be defined in could establish a pattern or practice of account expected changes in § 226.35(a) as explained above. As proposed, Regulation Z would making loans in violation of the employment. For example, depending prohibit a lender from engaging in a prohibition. on all of the facts and circumstances, it pattern or practice of making higher- The Board is not proposing to adopt may be reasonable to assume that priced mortgage loans based on the a quantitative standard for determining students obtaining professional degrees value of consumers’ collateral without the existence of a pattern or practice. or certificates will obtain employment regard to consumers’ repayment ability Nor does it appear feasible for the Board upon receiving the degree or certificate. as of consummation, including to give examples, as the inquiry Second, the regulation would be consumers’ current and reasonably depends on the totality of the revised to refer not just to current expected income, current and circumstances. Comment is sought, obligations but also to expected reasonably expected obligations, however, on whether further guidance obligations. This would make the employment, and assets other than the would be appropriate and specific reference to obligations parallel to the collateral. Each of the elements of this suggestions are solicited. statute and regulation’s references to proposed standard is discussed below. ‘‘Current and expected income.’’ The current and expected income. Proposed Collateral-based lending. The statute and regulation both prohibit a comment 34(a)(4)(i)(A)–2 would clarify proposal would prohibit a pattern or creditor from disregarding a consumer’s that, where two different creditors are practice of collateral-based lending with repayment ability, including current extending loans simultaneously to the higher-priced mortgage loans. The and expected income. The Board same consumer, one a first-lien loan and Board recognizes that this proposal may proposes to retain the references to the other a subordinate-lien loan, each reduce the availability of credit for expected and current income, and to creditor would generally be expected to consumers whose current and expected clarify that expectations of income must verify the obligation the consumer is income and non-collateral assets are not be reasonable. The Board believes undertaking with the other creditor. A sufficient to demonstrate repayment consumers may benefit if a creditor is pattern or practice of failing to do so ability. For example, unemployed permitted to take into account would create a presumption of a borrowers with limited assets apart from reasonably expected increases in violation. their homes may have more difficulty income. For example, a consumer Third, the revised regulation would obtaining mortgage credit under this seeking a professional degree or make clear that creditors may rely on proposal if their combined risk factors certificate may, depending on the job assets other than the collateral to are high enough that the APR of their market and other relevant determine repayment ability. An potential loan would exceed the circumstances, reasonably anticipate an existing comment would be revised to proposed threshold in § 226.35(a). increase in income after obtaining the give these examples: A savings accounts ‘‘Pattern or practice.’’ The Board is degree or certificate. Under the or investments that can be used by the not proposing to prohibit making an proposal, a creditor could consider such consumer. The Board believes it is individual loan without regard to an increase. For consumers who do not appropriate for lenders to consider non- repayment ability, either for HOEPA have a current income and cannot collateral assets such as these in loans or for higher-priced mortgage demonstrate a reasonable expectation of determining repayment ability, and for loans. Instead, the Board is proposing to income, creditors may consider assets consumers to be free to substitute assets retain the pattern or practice element in other than the collateral. for income in meeting their obligations.

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Fourth, minor revisions would be revised to refer explicitly to the aspects The Board also seeks comment on made to § 226.34(a)(4) solely for clarity. of repayment ability identified in whether this presumption should be The term ‘‘consumer’’ in the regulation § 226.34(a)(4), namely, borrower’s modified to accommodate loans with would be put in the plural, current and reasonably expected income balloon payments and, if so, how it ‘‘consumers,’’ to reflect that the and assets, current and reasonably should be modified. prohibition concerns a pattern or expected obligations, and employment. Borrower debt-to-income ratio and practice. The phrase ‘‘based on It would also refer to the verification residual income. The proposed consumers’ collateral’’ would be revised requirements stated in § 226.35(b)(2)(i). presumptions of a violation for failure to to read ‘‘based on the value of Under § 226.35(b)(2), a lender would be consider the debt-to-income ratio consumers’ collateral.’’ No change in required to verify amounts the lender (§ 226.34(a)(4)(i)(D)) or residual income meaning is intended. relies on by the consumer’s Internal ((§ 226.34(a)(4)(i)(E)) reflect the fact that Revenue Service Form W–2, tax returns, this information generally is part of a Proposed Presumptions payroll receipts, financial institution responsible determination of repayment Section 226.34(a)(4) contains a records, or other third-party documents ability. Comment 34(a)(4)(i)(D)–1 would provision creating a rebuttable that provide reasonably reliable clarify, however, that the Board is not presumption of a violation where a evidence of the consumer’s income and proposing a specific debt-to-income lender engages in a pattern or practice assets. See part VII.C. A new comment ratio that would create a presumption of of failing to verify and document would clarify that a pattern or practice a violation; nor is the Board proposing repayment ability. The proposed of failing to verify obligations would a specific ratio that would be a safe regulation would retain this also trigger a presumption of a violation. harbor. Similarly, comment presumption, which would be It would indicate, however, that a credit 34(a)(4)(i)(E)–1 would indicate that the incorporated in proposed § 226.35(b)(1). report generally may be used to verify regulation does not require a specific The Board is also proposing to add new, obligations. level of residual income. rebuttable presumptions to Ability to make fully-indexed, fully- The Board is concerned that making § 226.34(a)(4) and, by incorporation, amortizing payments. Variable rate a specific debt-to-income ratio or § 226.35(b)(1). These would be mortgages with discounted initial rates residual income level either a presumptions of a violation for engaging have become common in the subprime presumptive violation or a safe harbor in a pattern or practice of failing to market. In a typical example, a loan could limit credit availability without consider: consumers’ ability to pay the would have an index and margin at providing adequate off-setting benefits. loan based on the interest rate specified consummation of 11.5 percent but a These are but two of many factors that in the regulation (§ 226.34(a)(4)(i)(B)); discounted initial rate for the first two determine repayment ability. For consumers’ ability to make fully- years of 7 percent. Determining example, depending on the amortizing loan payments that include repayment ability on the basis of the circumstances, the repayment risk expected property taxes and initial rate would not give a realistic implied by a high debt-to-income ratio homeowners insurance picture of the borrower’s ability to could be offset by other factors that (§ 226.34(a)(4)(i)(C)); the ratio of afford the loan once the rate began reduce the risk, such as a high credit borrowers’ total debt obligations to adjusting according to the agreed index score and a substantial down payment. income as of consummation and margin.51 The Board is proposing in The Board is reluctant to adopt a (§ 226.34(a)(4)(i)(D)); and borrowers’ § 226.34(a)(4)(i)(B) that a pattern or quantitative standard for one or two residual income (§ 226.34(a)(4)(i)(E)). practice of failing to consider a underwriting factors when repayment A new comment 34(a)(4)(i)–1 would borrower’s repayment ability at the ability depends on the totality of many clarify that the presumption for failing fully-indexed rate would create a inter-relating factors. to verify income as well as the proposed presumption of a violation of It is possible, however, that adopting new presumptions would be rebuttable § 226.34(a)(4) (or § 226.35(b)(1)). a quantitative standard for the debt-to- by the lender with evidence that the Section 226.34(a)(4)(i)(B) would also income ratio or other underwriting lender did not disregard repayment address the case of a step-rate loan, a factors would provide at least some ability. The comment would also clarify loan in which specific interest rate benefit to creditors and, by extension, that the presumptions are not changes are agreed to in advance. For consumers, by providing bright lines. exhaustive. That is, a creditor may example, the parties could agree that the The Board seeks comment on whether it violate § 226.34(a)(4) (or § 226.35(b)(1)) interest rate on the loan would be 5 should adopt a presumption of a by patterns or practices other than those percent for two years, 6 percent for two violation, or a safe harbor, at a 50 specified in paragraph 34(a)(4)(i). years, and 7 percent thereafter. The percent debt-to-income ratio, or at a Each of the proposed presumptions is regulation would provide that, for such lower or higher ratio. What exceptions discussed in turn below. Comment is loans, a failure to consider the would be necessary for borrowers with sought generally on the appropriateness borrower’s repayment ability at the high incomes or substantial assets, or for of the proposed presumptions, and on highest interest rate possible within the other cases? Comment is also sought on whether additional presumptions first seven years of the loan’s term whether the Board should in addition, should be adopted. (seven percent in the example) would or instead, adopt quantitative standards Failure to verify. Section 226.34(a)(4) create a presumption of a violation. The for presumptive violations, or safe contains a provision creating a Board seeks comment on whether a harbors, based on other underwriting rebuttable presumption of a violation shorter period, such as five years, would factors. where a lender engages in a pattern or be appropriate. Property taxes and insurance. Section practice of failing to verify and 226.34(a)(4)(i)(C) would create a document repayment ability. The 51 As discussed in part IV above, concerns about separate presumption of a violation of proposed regulation would retain this underwriting practices for products with § 226.34(a)(4) (or § 226.35(b)(1)) for a presumption, though it would be introductory rates or payments led the Board and pattern or practice of failing to consider the other federal supervisory agencies to issue placed, along with other proposed new guidance advising institutions to qualify borrowers the borrower’s repayment ability based presumptions, in new sub-paragraph (i) using the fully-indexed rate and fully amortizing on a fully-amortizing payment that of § 226.34(a)(4). It would also be payments. includes expected property taxes,

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homeowners insurance, and other §§ 226.34(a)(4) and 226.35(b)(1) would loan or to enable the originator to make specified housing expenses. This is ensure that creditors adequately a larger loan, which might have higher intended to address concerns that some consider repayment ability without payments that were less affordable to creditors would determine a borrower’s unduly constraining credit availability. the consumer. To address these ability to repay a nontraditional loan The Board seeks data and information concerns, these commenters favored that offered an option to defer principal that could help the Board evaluate the requiring creditors to obtain some or interest for several years on the basis costs and benefits of the proposal as it documentation to support a consumer’s of a payment that was non-amortizing would affect the subprime market and statement of income or assets. Some (interest only) or negatively amortizing any portion of the alt-A market to which suggested that documentation be (less than interest). Negative the proposal may apply. required only for subprime loans, while amortization also can arise on variable- others suggested it be required for all rate transactions with annual payment C. Verification of Income and Assets loans. caps. The proposed presumption would Relied on—§ 226.35(b)(2) In contrast, most financial institution encourage lenders to consider the fully- Proposed § 226.35(b)(2) would and financial services trade group amortizing payment, as the Subprime prohibit creditors in a transaction commenters opposed prohibiting stated Guidance advises lenders to do. See part subject to § 226.35(a) from relying on income loans. These commenters argued V. The fully-amortizing payment would amounts of assets or income, including that financial institutions should retain be based on the term of the loan. For expected income, in extending credit flexibility to accommodate borrowers example, the amortizing payment for a unless the creditor verifies such who may have difficulty fully 2–28 ARM would be calculated based amounts. Creditors who fail to verify documenting their income, or whose on a 30-year amortization schedule. income or assets before extending credit credit risk profile is strong enough that are given a safe harbor if they can show their income is not used as an Proposed Time Horizon that the amounts of the consumer’s underwriting factor. Some of these The Board recognizes that it may not income or assets relied on were not commenters did, however, support the be reasonable, or to consumers’ benefit, materially greater than what the creditor banking agencies’ use of guidance, such to hold creditors responsible for could have documented at as the Subprime Statement, to address assuring repayment ability for the life of consummation. any risks of stated income loans. One a loan. Most mortgage loans have terms major mortgage lender supported Public Comment on Stated Income of thirty years but prepay long before limiting stated income lending in Lending that. The Board seeks to ensure that subprime loans by a new regulation, if consumers retain the ability to exchange In the hearing notice, the Board the regulation allowed for mitigating lower initial payments for higher solicited comment on the following circumstances. payments later, or for a balloon payment questions: at the end of the loan. Accordingly, a • Whether stated income or low- Discussion safe harbor for creditors may be documentation loans should be Until recently, large and increasing appropriate so long as it assures prohibited for certain loans, such as numbers of home-secured loans in the payments will be affordable for a loans to subprime borrowers? subprime market were underwritten reasonable time. Proposed • Whether stated income or low- without fully verifying the borrower’s § 226.34(a)(4)(ii) would provide that a documentation loans should be income and assets.52 The share of ‘‘low creditor does not violate § 226.34(a)(4) if prohibited for higher-risk loans, for doc’’ and ‘‘no doc’’ loan originations in the creditor has a reasonable basis to example, for loans with high loan-to- the securitized subprime market rose believe that consumers will be able to value ratios? from 20 percent in 2000, to 30 percent • make loan payments for at least seven How a restriction on stated income in 2004, to 40 percent in 2006.53 Low years, considering each of the factors or low-documentation loans would and no documentation loans are more identified in § 226.34(a)(4)(i) (such as affect consumers and the type and terms prevalent in the Alt-A market, where the fully-indexed rate and the fully- of credit offered? • originations of such loans in securitized amortizing payment schedule) and any Whether lenders should be required pools rose from about 60 percent in other factors relevant to determining to disclose to the consumer that a stated 2000–2004 to 80 percent in 2006. Not all repayment ability. income loan is being offered and allow low doc or no doc loans are stated This proposal is not intended to the consumer the option to document income loans (because in some cases preclude creditors from offering loans income? originators did not rely on income or with substantial payment increases Consumer and community groups, assets as the source of repayment), but before seven years. If such loans fell individuals, and political officials, and many are. outside of the safe harbor, they could some financial institutions and groups, Lending based on unverified, or nonetheless be justified in appropriate favored greater restrictions on stated minimally verified, incomes or assets circumstances. For example, a consumer income loans for two reasons. First, can be appropriate for consumers whose with a documented intent to sell the some borrowers who could easily risk profiles justify the potential home within three years may reasonably document their income have been increased risk and who might otherwise choose a loan with a substantial harmed by receiving stated income have to incur a significant cost to payment increase in the third year. The loans that cost them more than a full document their incomes or assets. The Board seeks comment, however, on documentation loan. According to practice, however, increases the risk whether specifying a shorter time commenters, these borrowers did not horizon, such as five years, would be realize that they could have received a 52 See U.S. Gov’t Accountability Office, GAO–08– appropriate. less costly loan by documenting their 78R, Information on Recent Default and Foreclosure incomes. Second, other borrowers have Trends for Home Mortgages and Associated General Request for Comment been harmed when originators inflated Economic and Market Developments 5 (2007); Fannie Mae, Weekly Economic Commentary (Mar. In addition to the specific requests for their incomes—often without 26, 2007). comment stated above, the Board seeks consumers’ knowledge—to assure the 53 Figures calculated from First American Loan comment on whether proposed originator would be able to make the Performance data.

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that credit is extended on the basis of stated income or stated assets loan, the because collecting and reviewing inflated incomes and assets, which, in originator may fill out the financial documents could slow down the turn, can injure not just the particular statement on the standard application origination process, reduce the number borrowers whose incomes or assets were form based on information the applicant of loans an originator produces in a inflated but their neighbors, as well. The provides orally. The applicant may not period, and, therefore, reduce the practice also presents an opportunity for review the form closely enough to detect originator’s compensation for the originators to mislead consumers who errors in the stated income or assets, period. The risk that a consumer would could easily document their incomes especially if seeing the form for the first not be aware of the premium may be and assets into paying a premium for a time at the closing table. A consumer particularly acute where products are stated income or stated asset loan. These who detects errors at the closing table complex, as is often true in the concerns are addressed in turn below. may not realize their importance or may subprime market and was, at least until Risk of inflated incomes and assets. face constraints that make it particularly recently, true in the alt-A market due to There is anecdotal evidence that the difficult to walk away from the table the rapid growth of interest-only loans incomes used in stated income loans without the loan. and option ARMs. Thus, consumers were often inflated.54 There is also While some originators may inflate who can document income with little evidence in the form of a higher rate of income without consumers’ knowledge, effort may choose not to because they default for low doc and no doc loans other originators may tacitly encourage are unaware of the cost of a stated (many of which are stated income loans) applicants to knowingly state inflated income loan. Such consumers are than for full documentation loans, and incomes and assets by making it clear effectively deprived of an opportunity to in the increase in the rate of default for that their actual incomes and assets are shop for a potentially lower-rate loan low/no doc loans originated when not high enough to qualify them for the requiring full documentation. underwriting standards were loans they seek. Such originators may The Board recognizes that stated declining.55 reassure applicants that this is a benign income lending in the subprime market Stated income lending programs give and common practice. In addition, may have potential benefits. It may originators incentives as well as applicants may inflate their incomes speed credit access by several days for opportunities to inflate an applicant’s and assets on their own initiative in consumers who need credit on an income or assets, or to encourage circumstances where the originator does emergency basis. It may save some applicants to do so. Compensating the not have reason to know. consumers from expending significant originator based on loan size and Injuries from inflated income and effort to document their income, and it origination volume, common practices, assets. The injuries to consumers from may provide access to credit for may give the originator incentives to extending credit based on inflated consumers who otherwise would not maximize loan size and origination incomes and assets are apparent. have access because they actually volume at the expense of loan quality. Borrowers whose loans are underwritten cannot document their income, for Inflating income or assets can increase based on inflated income may receive whatever reason. For the reasons both loan size and origination volume, larger loans with payments larger than discussed above, however, the Board because it can cause a creditor to accept they can comfortably afford and, believes that, within the subprime an application that would otherwise therefore, face a higher risk of default as market, where risks to consumers are have been rejected or met with an offer well as a higher risk of serious already elevated, the potential benefits of a smaller loan. delinquency leading to foreclosure or to consumers of stated income/stated The nature of the application process distress sale. These risks are particularly asset lending may be outweighed by the makes it possible that an applicant pronounced for borrowers in the potential injury to consumers and would not learn that the originator had subprime market because their financial competition. Stated-income lending is a inflated the applicant’s income or situations often are more precarious. significant part of the neighboring alt-A assets. In many cases, applicants may The injuries caused by income inflation market, but, there too, it can raise not even know that they are obtaining are not limited either to the particular concerns. Until the recent tightening of stated income loans. They may have borrowers whose incomes were inflated underwriting standards in the alt-A given the originator documents by the originator, nor to particular market, stated-income lending was verifying their income and assets that borrowers who inflated their incomes increasingly layered on top of other the originator kept from the loan file so on their own. The practice can injure risks, such as loan terms that permit the that the loan could be classified as many other consumers, too. Inflating borrower to defer payment of interest or ‘‘stated income, stated assets.’’ If an applicant incomes raises the risk of principal. applicant has applied knowingly for a distress sales and foreclosures, concentrations of which can depress an The Board’s Proposal To address the injuries to consumers 54 See Mortgage Asset Research Inst., Inc., Eighth entire community. Moreover, a Periodic Mortgage Fraud Case Report to the widespread practice of inflating from stated income loans in the higher- Mortgage Bankers Association (2006) (reporting that applicant incomes in an area with rapid priced market, the Board proposes to 90 of 100 stated income loans sampled used house price appreciation—the kind of require creditors to verify the income inflated income when compared to tax return data); area where the practice may be most and assets they rely on with third-party Fitch Ratings, Drivers of 2006 Subprime Vintage Performance (Fitch 2006 Subprime Performance) likely to arise—may fuel this documents that provide reasonably (November 13, 2007) (reporting that stated income appreciation and contribute to a reliable evidence such as W–2 forms, loans with high combined loan to value ratios ‘‘bubble.’’ tax returns, payroll receipts, or financial appear to have become vehicles for fraud). Undisclosed premiums. Stated institution records. The rule is intended 55 Michelle A. Danis and Anthony Pennington- Cross, The Delinquency of Subprime Mortgages, income lending also potentially injures to be flexible and appropriately balance Journal of Economics and Business (forthcoming consumers by leading them to pay more costs with benefits. 2007); see also Fitch 2006 Subprime Performance for their loans than they otherwise The benefits of the proposal would (stating that lack of income verification, as opposed would. There is generally a premium for appear to be significant. The rule should to lack of employment or down payment verification, caused 2006 low documentation loans a stated income loan. An originator may make it more difficult for any party to delinquencies to be higher than earlier vintages’ not have sufficient incentive to disclose inflate incomes or assets on higher- low documentation loans). the premium on its own initiative priced mortgage loans and, therefore,

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reduce the frequency of the practice and from the consumer’s employer. See income and assets. The Board also the injuries to consumers the practice proposed comment 35(b)(2)–4. These requests comment on whether the rule can cause. The rule also should are but examples, and a creditor may could be made more flexible without eliminate the risk that consumers with rely on third-party documents of any undermining consumer protection. higher-priced mortgage loans who could kind so long as they are reasonably Comment on these questions is solicited document income would unknowingly reliable. The one kind of document that both with respect to the subprime pay more for a loan that did not require is categorically excluded is a statement market and any part of the alt-A market documentation. only from the consumer. that the proposed definition of ‘‘higher- The proposal could have costs as Fourth, the proposal is not intended priced mortgage loan’’ would tend to well. In general, the time from to limit creditors’ ability to adjust their cover. Comment is also sought on the application to closing could be longer if underwriting standards for consumers appropriateness of the proposed safe an applicant were required to produce, who for legitimate reasons have harbor, and on whether other safe and the creditor required to review, difficulty documenting income, such as harbors would be appropriate. third party documents verifying income. self-employed borrowers, or employed Potential alternatives. The Board Also, consumers who did not have borrowers with irregular income.57 For believes the proposed rule would documents verifying their income example, the rule would not dictate that provide consumers a significant new readily at hand would face the a creditor must have at least two year’s protection against lending based on inconvenience of obtaining such tax returns to approve an extension of income or asset inflation. It is also documents. Another cost could be credit to a self-employed borrower. As expected that creditors, regulators, and reduced access to credit for consumers another example, if a creditor relied on courts would find it relatively easy to who would have difficulty documenting a statement by an employed applicant determine compliance with the their income. As explained further that the applicant was likely to receive proposed rule. The Board recognizes, below, the Board believes the regulation an annual bonus from the employer, the however, that the rule is broad in that is sufficiently flexible to keep these creditor could verify the statement with it imposes a blanket requirement on all costs to reasonable levels relative to the third-party documents showing a creditors to verify, for every higher- expected benefits of the proposed rule. consumer’s past annual bonuses. See priced mortgage loan they originate, the Five elements of the proposal are proposed comment 35(b)(4)(i)–1. The income and assets they rely on, without intended to reduce the costs to same would hold for credit extended to consideration of the extent to which the consumers and creditors that income employees who work on commission. risks of inflating income or assets may verification may entail. First, the Fifth, creditors who have extended vary from case to case. This rule could proposed rule requires that only the credit to a consumer and wish to extend increase costs for creditors as well as income or assets the creditor relies upon new credit to the same consumer need consumers. The rule is also broad in in approving the extension of credit be not re-collect documents that the another respect: It imposes a blanket verified. For example, if a creditor does creditor previously collected from the verification requirement on creditors not rely on a part of the consumer’s consumer if the documents would not even though consumers, themselves, income, such as an annual bonus, in have changed since they were initially may inflate their stated incomes without approving the extension of credit, the verified. See proposed comment the creditor’s knowledge. Such creditor would not need to verify the 35(b)(2)(i)–4. For example, if the consumers might in some instances seek consumer’s bonus.56 creditor has collected the consumer’s to enforce the proposed rule through Second, the proposed rule specifically 2006 tax return for a loan in May 2007, civil actions. authorizes a creditor to rely on W–2 and the creditor makes another loan to For these reasons, the Board seeks forms, tax returns, payroll receipts, and that consumer in August 2007, the suggestions of narrower alternatives that financial institution records. These creditor may rely on the 2006 tax return. would impose fewer costs on creditors kinds of documents generally have Proposed safe harbor. The proposed and consumers while providing proven to be reliable sources of rule would contain a safe harbor for sufficient protection to consumers who information about borrowers’ income creditors who fail to verify income may be injured, directly or indirectly, by and assets. Moreover, most consumers before extending credit if the amounts of stated income lending. For example, can, or should be able to, produce one income or assets relied on were not should the Board, instead of adopting of these kinds of documents with little materially greater than the creditor the proposed rule, prohibit creditors difficulty. Thus, the proposed safe could have verified when the extension and mortgage brokers from inflating incomes, influencing consumers to harbor for relying on one of these kinds of credit was consummated. See inflate incomes, or extending credit of documents should protect consumers proposed § 226.35(b)(2)(ii) and comment while having reason to believe that a while minimizing costs. 35(b)(2)(ii)–1. The proposed safe harbor consumer inflated income or was Third, creditors may use any other would cover cases where the creditor’s influenced to inflate income? Would a third-party documents that provide failure to verify income would not have rule attempting to distinguish cases reasonably reliable evidence of the altered the decision to extend credit to where creditors or brokers were not borrower’s income and assets. Examples the consumer or the terms of the credit. of other third-party documents that complicit in applicants’ inflating provide reasonably reliable evidence of Requests for Comment incomes be cost-effective and the borrower’s income include check- The Board seeks comment on practicable? If such a rule were adopted, cashing receipts or a written statement whether, and in what specific should it provide a safe harbor for circumstance, the proposed rule would verifying income? Subordinate-lien loans. The Board’s 56 Creditors would, however, still be prohibited reduce access to credit for certain proposal covers both first-lien and from engaging in a pattern or practice of extending borrowers, such as the self-employed, higher-priced mortgage loans to consumers based subordinate-lien loans, but the Board who may have difficulty documenting on the collateral without regard to repayment requests comment on whether the ability. See proposed § 226.35(b)(1). Consequently, creditors would not be able to evade the proposed 57 For depository institutions and their affiliates, proposed rule should make an income verification rule by consistently declining safety and soundness considerations would exception for all subordinate-lien loans, to consider income or assets. continue to govern underwriting, as always. or for subordinate-lien loans in amounts

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less than a specified dollar amount, or loan officers have at least some prepayment penalty, including a less than a specified percentage of the discretion to decide what interest rate to penalty on a fixed-rate loan. home’s value. Requiring income and offer borrowers. In general, the higher Discussion asset verification for subordinate-lien the rate, the greater the compensation loans could in some cases increase costs the lender pays the originator. Because Prepayment risk measures the without providing meaningful the lender seeks to recover this possibility that a loan will be repaid protection to consumers. For example, if compensation from the borrower, the before the end of the loan term.58 a consumer has a record of making lender prefers loans with prepayment Because a prepayment results in timely payments on a first-lien loan, payment penalties in case the borrower payment of the principal ahead of then verifying income or assets for a refinances the loan. Consumer and schedule, the lender (or secondary- small subordinate-lien loan—assuming community group commenters stated market investor) must reinvest the funds the creditor relied on income or assets that consumers shopping for home loans at the new market rate, which may be to make the credit decision—may not do not consider back-end costs such as lower than the old rate, particularly in provide sufficient additional prepayment penalties but rather focus the case of a refinancing. A lender also information about the borrower’s ability on monthly payments or ‘‘teaser’’ may incur certain fixed costs, such as to repay the debt to justify the cost of interest rates on ARMs. In addition, they payments to a mortgage broker, that the verification. Thus, the Board seeks maintained that prepayment penalties lender seeks to recover even if the loan suggestions for potential exemptions for discourage borrowers from refinancing is repaid early. Lenders generally subordinate-lien loans that would not unaffordable loans or cause them to lose account for the risk of prepayment in undermine consumer protection. home equity when the penalty amount setting the interest rate on the loan, and is included in the principal amount of usually in the subprime market (but D. Prepayment Penalties—§ 226.32(d)(6) a refinance loan. only occasionally in the prime market) and (7); § 226.35(b)(3) Accordingly, most consumer and also account for the risk by including a Pursuant to TILA Section 129(c), a community groups recommended that prepayment penalty clause in the loan HOEPA-covered loan may not provide the Board ban prepayment penalties on agreement. for a prepayment penalty unless: the subprime home loans, a In principle, a lender may offer a borrower’s debt-to-income (DTI) ratio at recommendation also made by state and consumer a choice between a loan with consummation does not exceed 50 local government officials and a trade a prepayment penalty and a loan that percent (and debt and income are group representing community does not have a penalty but has a higher verified); prepayment is not made using development financial institutions. interest rate. Consumers in the subprime funds from a refinancing by the same Consumer and community groups market who understood the potential creditor or its affiliate; the penalty term suggested that, at a minimum, if the trade-off between the interest rate and does not exceed five years from loan Board permits prepayment penalties, it prepayment penalty might be willing to consummation; and the penalty is not should require prepayment penalties for accept a contract with a prepayment prohibited under other applicable law. fixed-rate loans to expire two years after penalty in exchange for a lower interest 15 U.S.C. 1639(c); see also 12 CFR loan origination and prepayment rate. For example, they may expect that 226.32(d)(6) and (7). The Board penalties on subprime hybrid ARMs to they will refinance their loans after proposes to apply these restrictions to terminate between sixty days and six taking some time to improve their credit higher-priced mortgage loans. In months prior to the first rate adjustment scores enough to qualify for a lower rate. addition, the Board proposes to require on the loan. These groups stated that, Such consumers may be willing to that the period during which a creditor although disclosures could be accept a penalty with a term roughly may impose a prepayment penalty improved, doing so would not solve the equivalent to the time they expect it will expire at least sixty days before the first problems associated with prepayment take them to improve their scores. date, if any, on which the periodic penalties in the subprime market. Accordingly, prepayment penalties may Most financial institutions and payment amount may increase under benefit individual borrowers in the financial services trade groups the terms of the loan. subprime market who in certain recommended that the Board circumstances would voluntarily choose Public Comments on Prepayment concentrate on improving disclosures them. Penalties and limit any regulation to requiring Prepayment penalties may also that the penalty term on a subprime In connection with its June 14, 2007 benefit borrowers in the subprime hybrid ARM end before the first rate HOEPA hearing, the Board requested market overall. Investors may find public comment on the following adjustment. A majority of these commenters recommended that prepayment patterns more difficult to questions: predict for subprime loans than for • Should prepayment penalties be borrowers be allowed to refinance prime loans because prepayment of restricted? For example, should without penalty starting sixty days prior subprime loans depends not only on prepayment penalties that extend the first reset; a few commenters interest rate changes (as does beyond the first adjustment period on recommended thirty days. These prepayment of prime loans) but also on an ARM be prohibited? commenters stated that additional changes to borrowers’ credit profiles • Would enhanced disclosure of restrictions on prepayment penalties that affect their chances of qualifying for prepayment penalties help address would reduce the amount of credit a lower-rate loan. To the extent that concerns about abuses? lenders and investors make available in • How would a prohibition or the affected market. With respect to penalties make the cash flow from restriction on prepayment penalties fixed-rate loans, some financial investments backed by subprime affect consumers and the type and terms institutions and industry trade groups mortgage more predictable, the of credit offered? stated that a three-year limit on the term secondary market may become more Consumer and community groups of a prepayment penalty would be 58 Robert B. Avery, Glenn B. Canner & Robert E. generally commented that prepayment appropriate. Some credit union trade Cook, New Data Reported under HMDA and Its penalties are linked to higher loan costs groups recommended a maximum term, Application in Fair Lending Enforcement, 2005 Fed. for some borrowers. Many brokers and such as one or two years, for a Reserve Bulletin 344, 368.

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liquid. A more liquid secondary market prepayment penalties as part of its increase would help prevent consumers may benefit borrowers by lowering ongoing review of closed-end TILA who had been enticed by a discounted interest rates and increasing credit rules, but the Board recognizes that initial payment from being trapped availability. disclosure has its limits. The when the payment increased. Thus, the Prepayment penalties, however, also prepayment penalty may be a term that proposal would prohibit prepayment impose substantial costs on borrowers highlights those limits. It is complicated penalties in circumstances indicating a that may not be clear to them. These for borrowers to process and of higher risk of injury. penalties can prevent borrowers who secondary importance to them The proposal is also intended to cannot afford to pay the penalty, either compared to other loan terms. preserve the potential benefits of in cash or from home equity, from Accordingly, the Board is proposing to penalties to consumers in cases where exiting unaffordable or high-cost loans. restrict prepayment penalties on higher- the penalties may present less risk to Moreover, borrowers who refinance and priced mortgage loans. them. Apart from the riskier penalty pay a penalty decrease their home clauses that would be prohibited, equity and increase their loan balance if The Board’s Proposal—In General individual consumers would retain a they finance the penalty into the new The Board proposes to apply potential option to choose between a loan—as is likely if they are refinancing HOEPA’s prepayment penalty penalty clause and a higher interest rate. because of financial distress. The loss of restrictions to a broader segment of the There are legitimate concerns that home equity and the payment of interest market, higher-priced mortgage loans, consumers are not frequently offered a on the financed penalty amount are and to add a new restriction for clear and genuine choice. The Board particularly concerning if the refinance mortgages whose payments may will be seeking to determine through loan represents a loan ‘‘flipping’’ abuse. increase, such as ARMs. A HOEPA— consumer testing whether it can develop The injuries prepayment penalties covered loan may not provide for a a clear and effective disclosure of a may cause consumers are particularly prepayment penalty unless: the consumer’s options. There are also concerning because of serious questions borrower’s DTI ratio at consummation legitimate concerns that, no matter how as to whether borrowers knowingly does not exceed 50 percent (and debt clearly the choice is disclosed, product accept the risk of such injuries. Current and income are verified); prepayment is complexity and other constraints will disclosures of prepayment penalties, not made using funds from a refinancing tend to undermine individual consumer including the disclosure of penalties in by the same creditor or its affiliate; the decision making. See part II.C. In this Regulation Z § 226.18(k), do not appear penalty term does not exceed five years proposal, however, the Board is adequate to ensure transparency. from loan consummation; and the weighing against such concerns the Moreover, a Federal Trade Commission penalty is not prohibited under other potential benefit to all consumers in the report concluded, based on consumer applicable law. 15 U.S.C. 1639(c); subprime market from the increased testing, that even an improved § 226.32(d)(6) and (7). The Board liquidity that prepayment penalties may disclosure of the prepayment penalty proposes to apply these restrictions to provide. left a substantial portion of the prime higher-priced mortgage loans. In and subprime consumers interviewed addition, the Board proposes to require Specific Restrictions without a basic understanding of the that the period during which a creditor Debt-to-income ratio. TILA and penalty.59 It is questionable whether may impose a prepayment penalty Regulation Z prohibit a prepayment consumers can accurately factor a expire at least sixty days before the first penalty on a HOEPA loan if the contingent cost such as a prepayment date, if any, on which the periodic borrower’s DTI ratio at consummation penalty into the price of a loan; unlike payment amount may increase under exceeds 50 percent. 15 U.S.C. the interest rate and points, a the terms of the loan.60 1639(c)(2)(A)(i); § 226.32(d)(7)(iii). The prepayment penalty is not included in The proposal is intended to prohibit Board proposes to apply this rule to the APR. prepayment penalties in cases where higher-priced mortgage loans. Proposed The lack of transparency is they may pose the greatest risk of injury staff comments would give examples of particularly troubling when originators to consumers. The 50 percent DTI cap, funds and obligations that creditors have incentives to impose prepayment while not a perfect measure of commonly classify as ‘‘debt’’ or penalty clauses on consumers without affordability, may tend to reduce the ‘‘income.’’ Further, the proposal giving them a genuine choice. likelihood that an unaffordable loan will specifies that creditors may, but need Individual originators may be able to have a prepayment penalty, which not, look to widely accepted earn larger commissions or yield spread would hinder a consumer’s ability to governmental and non-governmental premiums on subprime loans by exit the loan by refinancing the loan or underwriting standards to determine securing loan agreements with selling the house. The same-creditor how to classify particular funds or penalties, which increase a lender’s restriction may reduce the likelihood obligations as ‘‘debt’’ or ‘‘income.’’ The certainty of recouping from the that a creditor could ‘‘pack’’ a Board does not propose to require consumer its payment to the originator. prepayment penalty into a loan as part creditors to use any particular standard Originators may seek to impose of a strategy to strip the borrower’s for calculating debt or income. A prepayment penalty clauses on equity by flipping the loan in a short creditor would not violate the consumers simply to increase their own time. The five-year restriction would prepayment penalty rule if its particular compensation. This risk appears prevent creditors from ‘‘trapping’’ calculation method deviated from those particularly high in the subprime consumers in a loan for an exceedingly in widely-used underwriting handbooks market, where most loans have had long period. The mandatory expiration or manuals, so long as the creditor’s prepayment penalties and borrowers of the penalty before a possible payment method was reasonable. may not have had a realistic opportunity The 50 percent DTI cap, while not a to negotiate for a loan without a penalty. 60 The interagency Statement on Subprime perfect measure of affordability, may The Board plans to use consumer Lending provides that borrowers with certain ARMs tend to reduce the likelihood that an should be given a reasonable period of time testing to improve the disclosure of (typically, at least sixty days) prior to the first rate unaffordable loan will have a reset to refinance without penalty. 72 FR 37569, prepayment penalty, which would 59 Improving Mortgage Disclosures, at 110. 37574, July 10, 2007. hinder a consumer’s ability to exit the

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loan by refinancing the loan or selling with an affiliated creditor, the same- For example, if a payment-option ARM the house. Loans with high borrower lender refinance rule covers loans by a allows minimum monthly payments for DTI ratios can be affordable, depending creditor’s affiliate. The Board requests one year and the first adjustment to the on the borrower’s circumstances. A comment on the effect of imposing the monthly payment is scheduled for one borrower whose DTI ratio exceeds 50 same-creditor restriction on a market year after origination, a prepayment percent at consummation, however, will where loans are frequently sold. penalty term would have to end at least likely have greater difficulty repaying a Five-year limit. HOEPA limits the sixty days before the end of the first particular loan, all other things being term of a prepayment penalty on a year. equal, than a borrower with a lower DTI HOEPA loan to five years after loan Furthermore, if monthly payments ratio. origination. 15 U.S.C. 1639(c)(2)(C). The may change before the first scheduled TILA Section 129(c)(2)(A)(ii) states Board believes it would be appropriate payment adjustment, a prepayment that the consumer’s income and to apply the same limitation to penalty term would have to end at least expenses are to be verified by a financial prepayment penalties on higher-priced sixty days before the first date on which statement signed by the consumer, by a mortgage loans. The Board seeks such an unscheduled payment change credit report, and in the case of comment, however, on whether five could occur. For instance, the first employment income, by payment years is the appropriate limit adjustment on a loan may be scheduled records or by verification from the considering both the need to protect for three years after loan origination, but employer of the consumer (which consumers from abuse and the potential the creditor may have the right to make verification may be in the form of a copy benefits of prepayment penalties for an unscheduled payment change if of a pay stub or other payment record consumers. As discussed below, under negative amortization causes the loan’s supplied by the consumer). 15 U.S.C. the proposal a prepayment penalty principal amount to exceed a certain 1639(c)(2)(A)(ii). The Board’s proposal, would have to expire earlier than five threshold. In this case, a prepayment however, does not permit verification of years if the payment may increase penalty could not be charged fewer than income, whether from employment by before then. sixty days before the first date on which another person or self-employment, by a Payment increase. In addition to negative amortization possibly could signed statement of the borrower alone. extending the coverage of HOEPA’s lead to an increase in the borrower’s The proposed rule cross-references prepayment penalty restrictions to a monthly payments. proposed § 226.35(b)(2)(i), which broader segment of the market, the The mandatory expiration would requires that income relied upon be Board proposes to require that, for apply only when required payments verified by reasonably reliable third higher-priced mortgage loans, the period may increase, not when consumers may party documents. during which a penalty may be imposed opt to pay more than their agreement There are three bases for the proposal expire at least sixty days prior to the requires. Moreover, it would not apply to strengthen the statute’s verification first date, if any, on which the periodic to a payment increase due to a requirement. First, under TILA Section payment amount may increase. borrower’s late payment, default, or 129(l)(2), the Board has a broad Mandatory expiration of the penalty delinquency. authority to update HOEPA’s before a possible payment increase HMDA data for 2004 through 2006 protections as needed to prevent unfair would help prevent consumers who had suggest that a sixty-day period before a practices. 15 U.S.C. 1639(l)(2)(A). For been enticed by a discounted initial payment change would be enough time the reasons discussed in part VII.C., the payment from being trapped when the for a significant majority of subprime Board believes that relying on a payment increased. borrowers to shop for a new loan to borrower’s statement alone is unfair to The proposed rule would depend on refinance the existing obligation. consumers, regardless of whether the when the rate may increase under the Creditors report price data on first-lien consumer is employed by another loan agreement, and not on when the loans if the difference between a loan’s person, self-employed, or unemployed. rate actually does increase. Although a APR and the yield on the comparable Second, the Board has a broad authority periodic payment may not actually Treasury security is equal to or greater under Section 129(l)(2) to update increase on a rate adjustment date, a than 3 percentage points. For 90 percent HOEPA’s protections as needed to creditor may not know whether a of the first-lien higher-priced loans, the prevent their evasion. 15 U.S.C. borrower’s payment will increase in period between loan application and 1639(l)(2)(A). A signed financial enough time for the creditor to give the origination was less than fifty days. For statement declaring all or most of a borrower a long enough pre-adjustment 75 percent of the first-lien higher-priced consumer’s income to be self- window in which to refinance without loans, the period was less than forty-two employment income or income from penalty. The proposed bright-line rule days. sources other than employment could would enable creditors and borrowers to Requests for Comment be used to evade the statute. Third, know with certainty, at or before loan adopting a single income verification consummation, the date after which The Board asks for comment on standard throughout proposed creditors may no longer require a whether the proposal appropriately § 226.35(b) would facilitate compliance. borrower to pay a prepayment penalty. balances the potential benefits and Same creditor. HOEPA does not Periodic payments may increase for a potential costs of prepayment penalties permit a prepayment penalty on a variety of reasons, including a to consumers who have higher-priced HOEPA loan if a prepayment is made scheduled shift from a discounted mortgage loans. The Board asks for with amounts obtained by the consumer interest rate to a fully indexed rate, a specific comment on whether the term through a refinancing with the creditor change in index value on a non- allowed for a prepayment penalty or an affiliate of the creditor. 15 U.S.C. discounted ARM, or mandatory should be shorter than five years. 1639(c)(2)(B). A prohibition on charging amortization of principal when deferred Specific comment is also sought on the a prepayment penalty in the event of a principal or interest exceeds a certain proposal to strengthen the statute’s same-lender refinance discourages threshold. For the sake of simplicity, the income verification requirement, and on originators from seeking to ‘‘flip’’ the proposal would set a single standard for the potential effects of the same-creditor loan. To foreclose evasion by creditors all higher-priced mortgage loans for restriction in a market where creditors who might direct borrowers to refinance which periodic payments may increase. sell many of their loans.

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The Board also requests comment on and otherwise favorable compared to • How would escrow requirements the proposal to require that a available alternatives. affect consumers and the type of and prepayment penalty period on a higher- An argument can be made that no terms of credit offered? priced loan expire at least sixty days separate notice of the upcoming Consumer and community groups that prior to the first date on which a expiration of a prepayment penalty commented or testified urged the Board periodic payment may increase. In period is necessary. Unlike a payment to require escrows on subprime loans. particular, the Board asks for comment change, the amount of which may They cited the infrequency of escrows on the number of days before a possible remain uncertain until relatively close in the subprime market—one group payment increase that a prepayment to the date of any such change, both the cited a statistic in a servicing trade penalty should expire. In addition, the creditor and the borrower will have publication indicating that as few as Board solicits comments on whether information at loan consummation one-quarter of subprime loans have this provision should apply only to needed to determine when the escrow accounts. Commenters stated loans whose periodic payment may prepayment penalty period will expire. that escrows have long been a staple of change within a certain number of years On the other hand, consumers may the prime lending market and suggested (for example, three or five years) after benefit from being reminded when they that borrowers in the subprime market loan consummation. The Board also may prepay without penalty. would benefit as much or more if escrows were available or required. seeks comment on whether particular The Board proposes to defer revising loan types (for example, graduated They argued that lack of escrows in the § 226.20(c) or drafting of new disclosure subprime market enables originators to payment, step-rate, or growth equity requirements connected with the transactions) should be exempted from advertise and quote low monthly proposed prepayment penalty period payments that do not include tax and a rule on prepayment penalty expiration regulation until the Board expiration. insurance obligations, misleading proposes comprehensive amendments borrowers, especially first-time Comment on these matters is sought to Regulation Z’s closed-end disclosure both with respect to the subprime homebuyers. Current homeowners provisions. Deferral would enable whose monthly payments include market and any part of the alt-A market consumer testing of different disclosure the proposal may cover. Comment is contributions to an escrow account may options. In the interim, however, believe that the originator who quotes also sought both with respect to higher- consumers might lack adequate priced mortgage loans and with respect them a payment without escrow information about when they may contributions can lower the to the sub-category of HOEPA loans. prepay without penalty. Accordingly, homeowner’s mortgage payment. In Notice of Change to Interest Rate and the Board requests comment on reality, the payment on the new loan Payment whether, if it adopts the proposed could be as high, or higher, when prepayment penalty expiration property taxes and homeowners Under Regulation Z § 226.20(c), an requirement, the Board should insurance are taken into account. adjustment to the interest rate with or specifically address the requirement’s Commenters also stated that first-time without a corresponding adjustment to interaction with § 226.20(c). homebuyers as well as current the payment in a variable-rate homeowners with escrow accounts may transaction requires new disclosures to E. Requirement to Escrow— § 226.35(b)(4) not be aware of the need to save on their the consumer. At least 25, but no more own for tax and insurance payments if than 120, calendar days before a The Board proposes to prohibit a they are provided loans without payment at a new level is due, creditor from making higher-priced escrows. These borrowers may struggle disclosures must be delivered or placed loans secured by a first lien without to meet those obligations when they in the mail that state, among other establishing an escrow account for come due, leaving them vulnerable to things, the new rate and payment property taxes and homeowners loan flipping and equity stripping. amount, if any. A notice that combined insurance. Under the proposal, creditors Many lenders and financial services information about a new payment and may allow a borrower to ‘‘opt out’’ of trade groups that testified or commented interest rate with information about the the escrow, but not at or before agree that escrowing taxes and impending expiration of a prepayment consummation, only twelve months insurance is generally beneficial to penalty period could potentially benefit after. The proposed rule would appear subprime borrowers as well as lenders, consumers. in § 226.35(b)(4). servicers, and investors. Some of these Reconciling the current notice with commenters favor a regulation to the proposed prepayment penalty Public Comment on Escrows mandate escrows, assuming it provides period could, however, be difficult. For The June 14, 2007 hearing notice them ample time to come into example, some creditors set a solicited comment on the following compliance. Some of these commenters, consumer’s new payment or rate 30 or questions: however, would prefer that the Board 45 days before the first possible change • adopt guidance rather than a regulation in the monthly payment—after the Should escrows for taxes and insurance be required for subprime to allow flexibility. Other commenters proposal would require a prepayment believe that consumers are generally penalty period to end. Also, notice of mortgage loans? • well-enough informed about tax and expiration might be more clear and If escrows were required, should insurance obligations to save on their conspicuous to a borrower if provided consumers be permitted to ‘‘opt out’’ of own for these payments. These separately from the § 226.20(c) escrows? commenters contend that, if escrows disclosures. Allowing a combined • Should lenders be required to were mandated, some potential notice might distort borrower decision disclose the absence of escrows to borrowers would not be able to fund the making. For example, consumers might consumers and if so, at what point escrow account at closing. mistake a notice of their ability to during a transaction? Should lenders be refinance without penalty as a required to disclose an estimate of the Discussion recommendation that they refinance, consumer’s tax and insurance The Board is concerned that the though their loan may remain affordable obligations? subprime market does not appear to

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offer borrowers a genuine opportunity to states address this cost at least in part permitted them to opt out before closing escrow. Subprime servicers may not set by requiring that an escrow earn or soon thereafter. up an escrow infrastructure at all, and interest, but others do not impose such State Escrow Laws subprime originators have disincentives requirements. Moreover, the cost of to require or encourage borrowers to setting up and administering escrows is The Board recognizes that some state take advantage of escrows when they are passed on at least in part to consumers. laws limit creditors’ ability to require available. A collective action problem The Board has considered these costs in escrows. In addition, certain state laws prevails if each individual originator formulating the following proposal. provide consumers a right to cancel an fears that offering escrows would put it escrow that the consumer may exercise The Board’s Proposal at a disadvantage relative to sooner than twelve months after closing. competitors, even if originators The Board is proposing to make The Board’s proposal would not be collectively would benefit from escrow accounts mandatory on first-lien consistent with such laws and, if escrows.61 Each originator may fear higher-priced mortgage loans and adopted, would preempt them to the losing business if it escrows. An permit, but not require, creditors to offer extent of the inconsistency. The Board originator that escrowed would have to borrowers an option to cancel escrows seeks information about which state quote a monthly payment that included twelve months after consummation. The laws would be inconsistent with this taxes and insurance. Competitors that Board proposes to define ‘‘escrow proposal. account’’ by reference to the definition did not escrow could poach potential or Other Proposals on Escrows actual customers of the originator by not of ‘‘escrow account’’ in the U.S. including taxes and insurance in their Department of Housing and Urban Other parts of this proposal address quotes. So an originator may be Development’s Regulation X (Real Estate other issues with escrows. Proposed unwilling to escrow without assurance Settlement Procedures Act (RESPA)). § 226.35(b)(1) would require creditors to that its competitors also would escrow, The Board believes the proposed take into account taxes and insurance though if all originators escrowed then remedy for the injuries caused by the when determining whether a borrower all would likely benefit. subprime market’s failure to offer can repay a loan. Proposed This market failure causes consumers escrow accounts appropriately balances § 226.24(f)(3)(i)(C) would require substantial injury. A lack of escrows in the benefits and costs of escrows. advertisements that state a payment the subprime market may make it more Creditors would have an option to allow amount that does not include taxes and likely that borrowers inadvertently take consumers to limit the opportunity cost insurance to disclose that in close on mortgages they cannot afford because of escrow accounts by opting out after proximity to the payment amount. one year. The Board is proposing an they focus only on the payment of F. Evasion Through Spurious Open-end ‘‘opt out’’ rather than an ‘‘opt in’’ regime principal and interest. A lack of escrows Credit—§ 226.35(b)(5) may also facilitate misleading payment because ‘‘opt in’’ would allow some quotes, which distort competition. Lack originators to discourage borrowers from The Board’s proposal to exclude of escrows also may make it more likely escrowing, creating pressure on other HELOCs from the new rules in § 226.35 that borrowers who have trouble saving originators to follow suit and leaving the is discussed in subpart A. above. As on their own initiative and would prefer collective action problem unresolved. noted, the Board recognizes this could a forced saving plan such as an escrow Moreover, an ‘‘opt out’’ available at lead some creditors to attempt to evade will not have the resources to pay tax closing or immediately thereafter would the requirements in § 226.35 by and insurance bills when they come be subject to manipulation. If a structuring credit as open-end instead of due. This problem may be particularly consumer could opt out at, or soon after, closed-end. Regulation Z § 226.34(b) acute in the subprime market, where closing, then some originators might addresses this risk as to HOEPA borrowers are more likely to be cash- still quote payments without taxes and coverage by prohibiting structuring a strapped. Failure to pay taxes and insurance and tell consumers that they transaction that does not meet the insurance is generally an act of default could keep their payments from going definition of ‘‘open-end credit’’ as a which may subject the property to a up by signing a piece of paper at or HELOC to evade HOEPA. The Board public auction or an acquisition by a shortly after closing. A fairly long proposes to extend this approach to new public agency. Borrowers who face a tax period may be required to prevent such § 226.35. Proposed § 226.35(b)(5) would or insurance bill they cannot pay are circumvention, and to educate prohibit a creditor from structuring a particularly vulnerable to predatory borrowers to the benefits of escrowing; closed-end transaction—that is, a home equity loans because their the Board proposes twelve months. transaction that does not meet the definition of ‘‘open-end credit’’—as a situation is urgent. Requests for Comment While failure to escrow can cause HELOC to evade the limitations in consumers substantial injury, escrows The Board seeks comment on whether § 226.35. can also impose costs on consumers. the benefits of the proposed regulation The Board recognizes that consumers Some borrowers may not be able to outweigh the costs. Comment is sought may prefer HELOCs to closed-end home afford the cost of funding an escrow at both with respect to the subprime equity loans because of the added closing. Escrowing also creates an market and with respect to any part of flexibility HELOCs provide them. It is opportunity cost for borrowers who the alt-A market this proposal may not the Board’s intention to limit could use the funds for a more cover. consumers’ ability to choose between productive purpose and still meet their The Board also seeks comment on these two ways of structuring home tax and insurance obligations. Some whether creditors should be required, equity credit. An overly broad anti- rather than permitted, to allow evasion rule could potentially limit 61 An industry representative at the Board’s 2007 borrowers to opt out. Comment is also consumer choices by casting doubt on hearing indicated that her company’s internal sought on whether a mandatory escrow the validity of legitimate open-end analysis showed that escrows clearly improved loan period different from twelve months plans. The Board seeks comment on the performance. Transcript of HOEPA Hearing at 66 (Jun. 14, 2007), available at http:// would be appropriate, and on whether extent to which the proposed anti- www.federalreserve.gov/events/publichearings/ consumers could effectively be evasion rule could have this hoepa/2007/20070614/transcript.pdf. protected from manipulation if the rule consequence, and solicits suggestions

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for a more narrowly tailored rule. For second where a creditor can settlement service providers.) The example, the primary concern would demonstrate that its payments to a creditor’s payment to the broker based appear to be with HELOCs that are mortgage broker are not determined by on the interest rate is an alternative to substituted for closed-end home reference to the transaction’s interest the consumer’s paying the broker purchase loans and refinancings, which rate. directly from the consumer’s preexisting are usually first-lien loans, rather than resources or from the loan proceeds. Public Comment on Creditor Payments with HELOCs taken for home Preexisting resources or loan proceeds to Mortgage Brokers improvement or other consumer may not be sufficient to cover the purposes. The Board seeks comment on Although the Board did not solicit broker’s total fee, or may appear to the whether it should limit an anti-evasion comment on mortgage broker consumer to be a more costly way to rule to HELOCs secured by first liens compensation in its notice of the June finance those costs if the consumer where the consumer draws down all or 2007 hearing, a number of commenters expects to prepay the loan in a relatively most of the entire line of credit and some panelists raised the topic. In short period. Thus, consumers immediately after the account is addition, the Board received potentially benefit from having an opened. Would such a rule be effective information about broker compensation option to pay brokers for their services in preventing evasion or would it be from panelists in the 2006 hearings. indirectly by accepting a higher interest easily evaded itself? Consumer and creditor rate. representatives alike have raised The Board shares concerns, however, VIII. Proposed Rules for Mortgage concerns about the fairness and that creditor payments to mortgage Loans—§ 226.36 transparency of creditor payments to brokers are not transparent to Proposed § 226.35, discussed above, brokers, known as yield spread consumers and are potentially unfair to would apply certain new protections to premiums. Several commenters and them. Creditor payments to brokers higher-priced mortgage loans. In panelists stated that consumers are not based on the interest rate give brokers contrast, proposed § 226.36 would apply aware of the payments creditors make to an incentive to provide consumers loans other new protections to mortgage loans brokers, or that such payments increase with higher interest rates. Some brokers generally, though only if secured by the consumers’ interest rates. They also may refrain from acting on this consumer’s principal dwelling. The stated that consumers may mistakenly incentive out of legal, business, or proposal would prohibit: (1) Creditors believe that a broker seeks to obtain the ethical considerations. Moreover, from paying mortgage brokers more than best interest rate available. Consumer competition in the mortgage loan market an amount the broker disclosed to the groups have expressed particular may often limit brokers’ ability to act on consumer in advance as its total concern about increased payments to the incentive. The market often leaves compensation; (2) creditors or mortgage brokers for delivering loans both with brokers room to act on the incentive brokers from coercing or influencing higher interest rates and prepayment should they choose, however, especially appraisers to misrepresent the value of penalties. Consumer groups suggested, as to consumers who are less a dwelling; and (3) servicers from variously, prohibiting creditors paying sophisticated and less likely to shop engaging in unfair fee and billing brokers yield spread premiums, among either loans or brokers. practices. As with proposed § 226.35, imposing on brokers that accept yield Large numbers of consumers are however, proposed § 226.36 would not spread premiums a fiduciary duty to simply not aware the incentive exists. apply to HELOCs. consumers, imposing on creditors that Many consumers do not know that pay yield spread premiums liability for creditors pay brokers based on the A. Creditor Payments to Mortgage broker misconduct, or including yield interest rate, and current legally Brokers—§ 226.36(a) spread premiums in the points and fees required disclosures seem to have only The Board proposes to prohibit a test for HOEPA coverage. Several limited effect.62 Some consumers may creditor from paying a mortgage broker creditors and creditor trade associations not even know that creditors pay in connection with a covered advocated requiring brokers to disclose brokers: a common broker practice of transaction unless the payment does not whether the broker represents the charging a small part of its exceed an amount the broker has agreed consumer’s interests, and how and by compensation directly to the consumer, in advance with the consumer will be whom the broker is to be compensated. to be paid from the consumer’s existing the broker’s total compensation. The Some of these commenters resources or loan proceeds, may lead agreement must also disclose that the recommended requiring brokers to consumers to believe, incorrectly, that consumer will pay the entire disclose their total compensation to the this amount is all the consumer will pay compensation even if all or part is paid consumer and prohibiting creditors or the broker will receive. Consumers directly by the creditor, and that a from paying brokers more than the who do understand that the creditor creditor’s payment to a broker can disclosed amount. pays the broker based on the interest influence the broker to offer the rate may not fully understand the consumer loan terms or products that Discussion implications of the practice. They may are not in the consumer’s interest or are A yield spread premium is the present not appreciate the full extent of the not the most favorable the consumer dollar value of the difference between incentive this gives the broker to could obtain. Creditors could the lowest interest rate the wholesale increase the rate because they do not demonstrate compliance with the lender would have accepted on a provision by obtaining a copy of the particular transaction and the interest 62 This is true not only of state-mandated broker-consumer agreement and rate the broker actually obtained for the disclosures but also of the early federal disclosure currently in place under the Real Estate Settlement ensuring their payment to the broker lender. This dollar amount is usually Procedures Act (RESPA), the good faith estimate of does not exceed the amount stated in paid to the mortgage broker, though it settlement costs (GFE). As the Department of the agreement. The proposal would may also be applied to other closing Housing and Urban Development (HUD) has noted, provide creditors two alternative means costs. (This proposal would restrict only the current GFE does not convey to consumers an adequate understanding of how mortgage brokers to comply, one where the creditor amounts paid to and retained by the are paid. RESPA Simplification, 67 FR 49134, complies with a state law that provides broker, however, and not amounts the 49140–41, Jul. 29, 2002 (proposed rule under consumers equivalent protection, a broker is obligated to pass on to other RESPA).

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know the dollar amount of the creditor’s these disclosures, which the Board proposal would not permit disclosing a payment. anticipates testing with consumers. The range of fees or a percentage figure. The Moreover, consumers often wrongly broker and consumer must have entered Board recognizes that disclosure in believe that brokers agree, or are into the agreement before the consumer these or other forms has been common. required, to obtain the best interest rate had paid a fee to any person or The Board is concerned, however, that available. Several commenters in submitted a written application to the disclosure in a form other than a flat connection with the 2006 hearings broker, whichever occurred earlier. dollar amount, however, would not be suggested that mortgage broker The proposal is intended to limit the meaningful to consumers. marketing cultivates an image of the potential for unfairness, deception, and Timing. The proposal would require broker as a ‘‘trusted advisor’’ to the abuse in creditor payments to brokers in that the broker-consumer agreement consumer. Consumers who have this exchange for higher interest rates while have been entered into before the perception may rely heavily on a preserving this option for consumers to consumer pays a fee to any person in broker’s advice, and there is some finance their obligations to brokers. connection with the transaction or evidence that such reliance is common. Conditioning such payments on a submits an application. This is intended In a 2003 survey of older borrowers who broker’s advance commitment to the to ensure the consumer has not already had obtained prime or subprime consumer to limit its compensation to a become ‘‘locked in’’ to a relationship refinancings, seventy percent of specified dollar amount may increase with the broker by paying a fee or respondents with broker-originated transparency and improve competition submitting an application. The early refinance loans reported that they had in the market for brokerage services. timing requirement may also tend to relied ‘‘a lot’’ on their brokers to find the Improved competition could lower the limit the risk that a broker would price best mortgage for them.63 price of brokerage services, improve the discriminate on the basis of the If consumers believe that brokers quality of those services, or both. When sophistication and market options of the protect consumers’ interests by consumers are aware how much they borrower. shopping for the lowest rates available, will pay for a broker’s services, they The Board recognizes that requiring a then consumers will be less likely to may be more likely to shop and broker who seeks to be paid by the take steps to protect their own interests negotiate among brokers based on creditor to commit to its fee this early when dealing with a broker. For broker fees, broker services, and other in its relationship with the consumer example, they may be less likely to shop terms of broker contracts. may lead brokers to price their services rates across retail and wholesale Disclosing that the consumer on the basis of the average cost of a channels simultaneously to assure ultimately pays the broker’s transaction rather than separately for themselves the broker is providing a compensation would help ensure that each transaction. Average cost pricing competitive rate. They may also be less the disclosure of a compensation figure can potentially create some inefficiency. likely to shop and negotiate brokers’ was meaningful and not undermined by The Board believes, however, that this services, obligations, or compensation a consumer’s perception that the cost may be outweighed by the up-front, or at all. For example, they creditor, not the consumer, shoulders increased efficiency from improved may be less likely to seek out brokers the broker fee. Disclosing that the transparency. who will promise in writing to obtain creditor’s payment may influence the Loans covered. The proposed rule the lowest rate available. broker not to serve the best interests of would apply to the prime market as well the consumer would help ensure that as the subprime market. The Board The Board’s Proposal consumers were on notice of the need recognizes that injury to consumers in The Board proposes to prohibit a to protect their own interests when the prime market is likely more limited creditor from paying a mortgage broker dealing with a mortgage broker rather than injury in the subprime market in connection with a covered than assume that the broker would fully because loans in the prime market have transaction unless the payment does not protect their interests. a much narrower range of interest rates, exceed an amount the broker has agreed The rule is intended to impose a fairly which limits the rents that can be with the consumer in advance will be minimal compliance burden. A creditor extracted from consumers. The Board is the broker’s total compensation. The would demonstrate compliance by concerned, however, that the lack of proposal would restrict only amounts obtaining a copy of a timely executed transparency discussed above may the broker retains, not amounts the broker-consumer agreement and injure borrowers in the prime market, broker distributes to other settlement ensuring that it did not pay the broker too, even if not to the same degree. service providers. The agreement must more than the amount stated in the Originators covered. The proposal is also disclose that the consumer will pay agreement, reduced by any amount paid limited to creditor payments to brokers. the entire compensation even if all or directly by the consumer. The amount A broker would be defined as a person, part is paid directly by the creditor, and paid directly by the consumer, if any, other than a creditor’s employee, who that a creditor’s payment to a broker can would appear on the HUD–1 Settlement for monetary gain arranges, negotiates, influence the broker to offer the Statement prepared in accordance with or otherwise obtains an extension of consumer loan terms or products that the Real Estate Settlement Procedures credit for a consumer. See proposed are not in the consumer’s interest or are Act. § 226.36(c). A person who met this not the most favorable the consumer The Board considered imposing a definition would be considered a could obtain. The commentary would disclosure obligation directly on mortgage broker even if the credit provide model language for each of brokers. It does not appear, however, obligation was initially payable to the that a disclosure alone would provide person, unless the person funded the 63 Kellie K. Kim-Sung & Sharon Hermanson, consumers adequate protection. More transaction from its own resources, from Experiences of Older Refinance Mortgage Loan protection is provided where creditors deposits, or from a bona fide warehouse Borrowers: Broker- and Lender-Originated Loans, are prohibited from paying more than line of credit. Data Digest No. 83 (AARP Public Policy Inst., the amount disclosed. The Board is aware of concerns that Washington, D.C.), Jan. 2003, at 3, available at http://www.aarp.org/research/credit-debt/ Compensation amount. The proposal a rule restricting, and encouraging mortgages/experiences_of_older_refinance would require that the compensation be disclosure of, lender payments to _mortgage_loan_borro.html. disclosed as a flat dollar amount. The brokers but not lender payments to their

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employees could create an ‘‘uneven obligation on a mortgage broker not to The Proposed Rule’s Relationship to playing field’’ between brokers and puts its own interests ahead of the Other Laws lenders. Creditors sometimes pay their consumer’s and required the broker to The Board recognizes that HUD has employed loan officers on a basis disclose this obligation in an agreement issued policy statements regarding similar to their payment of yield spread with the consumer. creditor payments to mortgage brokers premiums to independent brokers. To The second alternative is for a under RESPA and guidance as to the extent a loan originated through an disclosure of such payments on the employee exceeds the creditor’s ‘‘par’’ creditor that can demonstrate that the Good Faith Estimate and HUD–1 rate, the creditor may realize a gain from compensation it pays to a mortgage Settlement Statement. The Board is also selling the loan on the secondary market broker in connection with a transaction aware that HUD has announced its and it may share some of this gain with is not determined, in whole or in part, intention to propose improved the employee. Such payments give by reference to the transaction’s interest disclosures for broker compensation employees an incentive to increase the rate. For instance, if a creditor can show under RESPA in the near future. The interest rate. that it pays brokers the same flat fee for The Board does not propose, however, all transactions regardless of the interest Board intends that its proposal would to restrict creditor payments to their rate, the creditor would not be subject complement any proposal by HUD and operate in combination with that own employees. The Board is not aware to the restriction on payments to brokers proposal to meet the agencies’ shared of significant evidence that consumers under § 226.36(a)(1). perceive lenders’ employees the way objectives of fair and transparent they often perceive independent Requests for Comment markets for mortgage loans and for brokers—as trusted advisors who shop mortgage brokerage services. The Board The Board seeks comment generally for the best loan for a consumer among and HUD have discussed their mutual a wide variety of sources. Accordingly, on the costs and benefits of the desire and intention to work together to it is not clear that a key premise of the proposal, including the proposed achieve these objectives while proposal to restrict creditor payments to alternatives means of compliance. The minimizing any duplication between brokers—that consumers expect a broker Board seeks specific comment on their regulations. Accordingly, the has a legal or professional obligation to whether it would be appropriate to proposed restriction of creditor give disinterested advice and find the apply the proposed rule, or a similar payments to mortgage brokers is consumer the best loan available—holds rule, to lender payments to loan intended to be consistent with HUD’s true for creditor payments to their own originators in their employ and, if so, existing guidance regarding creditor employees. In addition, extending the how the rule would address practical compensation to brokers under Section proposal to creditor payments to their difficulties such as those discussed 8 of RESPA, 12 U.S.C. 2607. employees could present difficult above. Further, the Board seeks The Board is also aware that many practical problems. For example, a comment on whether the benefits of states regulate brokers and their creditor may not know even as of applying the proposed rule to the prime compensation in various respects. consummation whether it will sell a market would outweigh the costs, Under TILA Section 111, the proposed particular loan in the secondary market. including potential unintended rule would not preempt such state laws except to the extent they are If the creditor is nonetheless certain to consequences. The Board seeks specific inconsistent with the proposal’s sell the loan, it may not know until near comment on whether the proposed rule requirements. 15 U.S.C. 1610. The or at consummation what its gain will should be limited to higher-priced be or, therefore, how much it will pay Board seeks comment on the mortgage loans as defined in proposed its employee. relationship of this proposal to state Compliance alternatives. The § 226.35(a). laws. proposal would provide creditors two The Board also seeks comment on the B. Coercion of Appraisers—§ 226.36(b) alternative ways to comply, one where proposed condition that the broker- the creditor complies with a state law consumer agreement have been entered The Board proposes to prohibit that provides consumers equivalent into before the consumer pays a fee to creditors and mortgage brokers from protection, a second where a creditor any person in connection with the coercing appraisers to misrepresent the can demonstrate that its payments to a transaction or submits an application. value of a consumer’s principal mortgage broker are not determined by Would brokers have a reduced incentive dwelling. The Board also proposes to reference to the transaction’s interest to shop actively among potential prohibit creditors from extending credit rate. The first safe harbor is for a sources of financing for the lowest when creditors know or have reason to creditor payment to a broker for a possible rate? Would a broker know, at or before loan consummation, transaction in connection with a state potentially terminate its relationship that an appraiser has misstated a statute or regulation that (a) expressly dwelling’s value. The regulation would with a consumer without obtaining a prohibits the broker from being apply to all consumer credit loan for the consumer because the compensated in a manner that would transactions secured by a consumer’s influence a broker to offer loan products consumer’s particular needs would be principal dwelling. or terms not in the consumer’s interest more difficult to meet than the broker Discussion or not the most favorable the consumer anticipated when it set its could obtain; and (b) requires that a compensation? If these are concerns, Some responses to the Board’s request mortgage broker provide consumers would it be appropriate for the Board to for public comment urged the Board to with a written agreement that includes provide a narrow allowance for address coercion of appraisers, even a description of the mortgage broker’s renegotiation of the broker’s though the Board did not specifically role in the transaction and the broker’s compensation later in the application request comment on that issue. For relationship to the consumer, as defined process? How should such a permission example, the National Association of by such statute or regulation. An be crafted to ensure transparency and Attorneys General and many consumer example would be a state statute or protect consumers from unfair practices and community groups cited inflated regulation that imposed a fiduciary such as ‘‘bait and switch’’? appraisals as a problem in the home

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mortgage market. A lender trade appraisers’ property valuations.65 dwelling’s value, the creditor could association suggested that the Board Several states have banned coercion of extend credit based on the appraiser’s require appraisers to report instances of appraisers or enacted general laws valuation. The proposed commentary improper pressure and ban inflation of against mortgage fraud that may be used states that, alternatively, the creditor appraisals. Appraiser trade associations to combat appraiser coercion.66 In 2006, could extend credit based on another and several consumer and community forty-nine states and the District of appraisal untainted by improper groups urged the Board to prohibit Columbia (collectively, the Settling influence. coercion of appraisers as an unfair or States) entered into a settlement The commentary to the proposed deceptive act or practice. Also, agreement with ACC Capital Holdings regulation gives examples of acts that testimony before Congress has cited data Corporation and several of its would violate the regulation: implying that suggests that appraisers frequently subsidiaries, including Ameriquest to an appraiser that retention of the are subject to coercion.64 Mortgage Company (collectively, the appraiser depends on the amount at Pressuring an appraiser to overstate, Ameriquest Parties). The Settling States which the appraiser values a consumer’s or understate, the value of a consumer’s alleged that the Ameriquest Parties had principal dwelling; failing to dwelling distorts the lending process engaged in deceptive or misleading acts compensate an appraiser or to retain the and harms consumers. If the appraisal is that resulted in the Ameriquest Parties’ appraiser in the future because the inflated on a home purchase loan, a obtaining inflated appraisals of homes’ appraiser does not value a consumer’s consumer may pay more for the house value.67 To settle the complaints, the principal dwelling at or above a certain than the consumer otherwise would Ameriquest Parties agreed to abide by amount; and conditioning an appraiser’s have. Inflated appraisals also may lead policies designed to ensure appraiser compensation on loan consummation. consumers to think they have more independence and accurate valuations. The commentary also lists examples of equity in their homes than they really Also, the Attorneys General of New acts that would not violate the have, and consumers may borrow or York and Ohio recently have filed regulation: requesting that an appraiser make other financial decisions based on actions that allege, among other consider additional information for, this incorrect information. For example, violations, the exertion of improper provide additional information about, or a consumer who purchases a home influence over appraisers. correct factual errors in a valuation; based on an inflated appraisal may obtaining multiple appraisals of a overestimate her ability to refinance and The Board’s Proposal dwelling (provided that the creditor or may take on a riskier loan than she To address the harm from improper mortgage broker selects appraisals based otherwise would have. Moreover, the influencing of appraisers, the Board on reliability rather than on the value consumer would not necessarily be proposes to prohibit creditors and stated); withholding compensation from aware that an appraisal had been mortgage brokers and their affiliates an appraiser for breach of contract or inflated or appreciate the risk that from pressuring an appraiser to substandard performance of services or appraisal inflation entailed. Understated misrepresent a dwelling’s value, for all terminating a relationship for violation appraisals, though perhaps less closed-end consumer credit transactions of legal or ethical standards; and taking common, can cause consumers to be secured by a consumer’s principal action permitted or required by denied access to credit for which they dwelling. The proposed regulation applicable federal or state statute, were qualified. defines the term ‘‘appraiser’’ as a person regulation, or agency guidance. Inflated appraisals of homes who engages in the business of A regulation under HOEPA that concentrated in a neighborhood may providing, or offering to provide, expressly prohibits creditors and affect other appraisals, since appraisers assessments of the value of dwellings. brokers from pressuring appraisers to factor the value of comparable Further, the Board’s proposed misstate or misrepresent the value of a properties into their property valuation. regulation prohibits a creditor from consumer’s dwelling would provide For the same reason, understated extending credit if the creditor knew or enforcement agencies in every state with appraisals may affect appraisals of had reason to know that a broker had a specific legal basis for an action neighboring properties. Thus, inflated or coerced an appraiser to misstate a alleging appraiser coercion. The Board understated appraisals can harm dwelling’s value, unless the creditor requests comments on the potential consumers other than those who are acted with reasonable diligence to costs and benefits of its proposed party to the transaction with the inflated determine that the appraisal was appraiser influence regulation. The appraisal. Moreover, these consumers accurate. For example, an appraiser Board seeks specific comment on the are not in a position to know of the might notify a creditor that a mortgage appropriateness of proposed examples practice or avoid it. broker had tried—and failed—to get the of actions that would or would not State legislatures and enforcement appraiser to inflate a dwelling’s value. violate the proposed regulation. agencies have addressed concerns about If, after reasonable, documented C. Servicing Abuses—§ 226.36(d) parties who exert undue influence over investigation, the creditor found that the The Board proposes to prohibit appraiser had not misstated the 64 For example, on June 26, 2007, at a hearing of certain practices on the part of servicers the U.S. Senate Committee on Banking, the of closed-end consumer credit President of the Appraisal Institute testified for 65 The federal financial institution regulatory several appraiser trade organizations about threats agencies have issued regulations to the institutions transactions secured by a consumer’s to appraiser independence. He cited a 2007 survey they supervise that explain, among other things, principal dwelling. Proposed by the October Research Corporation that found that how those institutions should promote appraiser § 226.36(d) would provide that no 90 percent of appraisers reported having been independence. The Board’s proposal is not servicer shall: (1) Fail to credit a pressured to report higher property values, a intended to alter those regulations or any other percentage almost twice as high as reported in a federal or state statutes, regulations, or agency consumer’s periodic payment as of the 2003 survey. Ending Mortgage Abuse: Safeguarding guidance related to appraisals. date received; (2) impose a late fee or Homebuyers: Hearing before the Subcomm. on 66 See, e.g., Colo. Rev. Stat. § 6–1–717; Iowa Code delinquency charge where the only late Hous., Transp., & Comm’y Dev. of the S. Comm. on § 543D.18A; Ohio Rev. Code Ann. §§ 1322.07(G), fee or delinquency charge is due to a Banking, Hous., and Urban Affairs 4, 110th Cong. 1345.031(B)(10), 4763.12(E). (2007) (statement of Alan Hummel, Chair, 67 See, e.g., Iowa ex rel. Miller v. Ameriquest consumer’s failure to include in a Government Relations Committee, Appraisal Mortgage Co., No. 05771 EQCE–053090 (Iowa D. Ct. current payment a delinquency charge Institute). 2006) (Pls. Pet. 5). imposed on earlier payments; (3) fail to

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provide a current schedule of servicing fees—including default charges—that proposal would prohibit a servicer from fees and charges within a reasonable the consumer must pay. failing to provide to a consumer, within time of request; or (4) fail to provide an A potential consequence of the a reasonable time after receiving a accurate payoff statement within a ‘‘originate-to-distribute’’ model request, a schedule of all specific fees reasonable time of request. discussed in part II.C. above is the and charges it imposes in connection misalignment of incentives between with mortgage loans it services, Discussion consumers, servicers, and investors. including the dollar amount and an Although the Board did not solicit Servicers contract directly with explanation of each fee and the comment on whether certain mortgage investors, and consumers are not a party circumstances under which it will be servicer practices should be prohibited to the contract. The investor is imposed. Fourth, the proposal would or restricted in its notices of the 2006 or principally concerned with maximizing prohibit a servicer from failing to 2007 hearings, some commenters raised returns on the mortgage loans. So long provide, within a reasonable time after the topic in that context. The issue has as returns are maximized, the investor receiving a request, an accurate also been presented in recent may be indifferent to the fees the statement of the amount currently congressional testimony. Consumer servicer charges the borrower. required to pay the obligation it services advocates have raised concerns that Consumers do not have the ability to in full, often referred to as a payoff some servicers may be charging shop for servicers and have no ability to statement. Under proposed consumers unwarranted or excessive change servicers (without refinancing). § 226.36(d)(3), the term ‘‘servicer’’ and fees, such as late fees and other As a result, servicers do not compete in ‘‘servicing’’ are given the same ‘‘service’’ fees, in the normal course of any direct sense for consumers. Thus, meanings as provided in Regulation X, mortgage servicing, as well as in there may not be sufficient market 24 CFR 3500.2. foreclosure scenarios. There is anecdotal pressure on servicers to ensure As described in part V above, TILA evidence that significant numbers of competitive practices. Section 129(l)(2) authorizes protections As a result, as described above, against unfair practices by non-creditors consumers have complained about substantial anecdotal evidence of and against unfair or deceptive practices servicing practices, and instances of servicer abuse exists. For example, outside of the origination process, when unfair practices have been cited in court servicers may not timely credit, or may such practices are ‘‘in connection with cases.68 In 2003, the FTC announced a misapply, payments, resulting in mortgage loans.’’ 15 U.S.C. 1639(l)(2). $40 million settlement with a large improper late fees. Even where the first The Board believes that unfair or mortgage servicer and its affiliates to late fee is properly assessed, servicers deceptive servicing practices fall address allegations of abusive may apply future payments to the late squarely within the purview of Section behavior.69 Consumer advocates have fee first, making it appear future 129(l)(2) because servicing is an integral also raised concerns that consumers are payments are delinquent even though part of the life of a mortgage loan and, sometimes unable to understand the they are, in fact, paid in full within the therefore, has a close and direct basis upon which fees are charged, in required time period, and permitting the ‘‘connection with mortgage loans.’’ part because disclosure and other forms servicer to charge additional late fees— Accordingly, the Board bases its of notice to consumers of servicer fees a practice commonly referred to as proposal to prohibit certain unfair or are limited. ‘‘pyramiding’’ of late fees. The Board is deceptive servicing practices on its The Board shares concerns about also concerned about the transparency authority under Section 129(l)(2), 15 abusive servicing practices. Before of servicer fees and charges, especially U.S.C. 1639(l)(2). securitization became commonplace, a because consumers may have no notices lending institution would often act as of such charges prior to their Late Payments both originator and collector—that is, it assessment. Consumers may be faced The proposed rule prohibiting the would service its own loans. Today, with charges that are confusing, failure to credit payments as of the date however, separate servicing companies excessive, or cannot easily be linked to received would be substantially similar play a key role: they are chiefly a particular service. In addition, to the existing provision requiring responsible for account maintenance servicers may fail to provide payoff prompt crediting of payment on open- activities, including collecting payments statements in a timely fashion, thus end transactions in § 226.10. (and remitting amounts due to impeding consumers from refinancing Accordingly, proposed § 226.36(d)(1)(i) investors), handling interest rate existing loans. would require a servicer to credit a adjustments, and managing payment to the consumer’s loan account The Board’s Proposal delinquencies or foreclosures. Servicers as of the date of receipt, except when a also act as the primary point of contact The Board is proposing to restrict delay in crediting does not result in a for consumers. In exchange for certain servicing practices and to finance or other charge or in the performing these services, servicers provide more transparency in the reporting of negative information to a generally receive a fixed per-loan or servicing market. Proposed § 226.36(d) consumer reporting agency except as monthly fee, float income, and ancillary would prohibit four servicing practices provided in § 226.36(d)(2). As the that are likely to harm consumers. First, proposed commentary would make 68 See, e.g., Islam v. Option One Mortgage Corp., the proposal would prohibit a servicer clear, the proposal would not require 432 F. Supp. 2d 181 (D. Mass 2006); In Re Coates, from failing to credit a payment to a that a servicer physically enter the 292 B.R. 894 (D. Ill. 2003); In Re Gorshstein, 285 consumer’s account as of the same date payment on the date received, but B.R. 118 (S.D.N.Y. 2002); In re Tate, 253 B.R. 653 it is received. Second, the proposal would require only that it be credited as (2000); Rawlings v. Dovenmuehle Mortgage Inc., 64 F. Supp. 2d 1156 (M.D. Ala. 1999); Ronemus v. FTB would prohibit ‘‘pyramiding’’ of late of the date received. Thus, a servicer Mortgage Servs., 201 B.R. 458 (1996). fees, by prohibiting a servicer from that receives a payment on or before its 69 Consent Order, United States v. Fairbanks imposing a late fee on a consumer for due date and does not enter the Capital Corp., Civ. No. 03–12219-DPW (D. Mass making an otherwise timely payment payment on its books until after the due Nov. 21, 2003, as modified Sept. 4, 2007). See also Ocwen Federal Bank FSB, Supervisory Agreement, that would be the full amount currently date does not violate the requirement as OTS Docket No. 04592 (Apr. 19, 2004) (settlement due but for its failure to include a long as the entry does not result in the resolving mortgage servicing issues). previously assessed late fee. Third, the imposition of a late charge, interest, or

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other charge to the consumer. The Board including a dollar amount and an Loan Payoff Statement seeks comment on whether (and if so, explanation of each and the how) partial payments should be circumstances under which it may be Proposed § 226.36(d)(1)(iv) would addressed in this provision. imposed. The Board believes that prohibit a servicer from failing to Similar to § 226.10(b), proposed making the fee schedule available to provide, within a reasonable time after § 226.36(d)(2) would require a servicer consumers upon request will bring receiving a request from the consumer that specifies payment requirements in transparency to the market and will or any person acting on behalf of the writing, but that accepts a non- make it more difficult for unscrupulous consumer, an accurate statement of the conforming payment, to credit the servicers to camouflage or inflate fees. full amount required to pay the payment within five days of receipt. The Therefore, the proposal would require obligation in full as of a specified date, proposed commentary is also similar to the servicer to provide, upon request, a often referred to as a payoff statement. the commentary accompanying fee schedule that is specific both as to Servicers’ delay in providing payoff § 226.10(b); for example, it explains that the amount and reason for each charge, statements has impeded consumers the servicer may specify in writing to prevent servicers from disguising fees from refinancing existing loans or reasonable requirements for making by lumping them together or giving otherwise clearing title. Such delays payments, such as setting a cut-off hour them generic names. increase transaction costs and may for payment to be received. The Board The proposed commentary would also discourage consumers from pursuing a seeks comment on whether the explain that a dollar amount may be refinance opportunity. The proposed commentary should include a safe expressed as a flat fee or, if a flat fee is commentary states that under normal harbor as to what constitutes a not feasible, as an hourly rate or market conditions, three business days reasonable payment requirement, for percentage. Thus, if the services of a would be a reasonable time to provide example, a cut-off time of 5 p.m. for foreclosure attorney are required, the the payoff statements; however, the receipt of a mailed check. servicer might list the attorney’s hourly commentary states that a reasonable Pyramiding Late Fees rate because it would be difficult for a time might be longer than three business days when servicers are experiencing an The prohibition on pyramiding late servicer to determine a flat dollar unusually high volume of refinancing fees parallels the existing prohibition in amount. However, it might not be requests. the ‘‘credit practices rule,’’ under difficult for a servicer to determine a flat section 5 of the FTC Act, 15 U.S.C. 45. delivery service fee. The Board believes Under this provision, the servicer See, e.g., 12 CFR 227.15 (Board’s that disclosure of a dollar figure for each would be required to respond to the Regulation AA). Proposed fee will discourage abusive servicing request of a person acting on behalf of § 226.36(d)(1)(ii) would prohibit practices by enhancing the consumer’s the consumer; this is to ensure that the servicers from imposing any late fee or understanding of servicing charges. The creditor with whom the consumer is delinquency charge on the consumer in Board seeks comment on the refinancing receives the payoff connection with a payment, when the effectiveness of this approach, and on statement in a timely manner. It also only delinquency is attributable to late any alternative methods to achieve the ensures that others who act on the fees or delinquency charges assessed on same objective. consumer’s behalf, such as a non-profit an earlier payment, and the payment is Further, the proposed commentary homeownership counselor, can obtain a otherwise a full payment for the would clarify that ‘‘fees imposed’’ by payoff statement for the consumer applicable period and is paid on its due the servicer include third party fees or within a reasonable time. date or within an applicable grace charges passed on by the servicer to the period. The proposed commentary consumer. The Board recognizes that D. Coverage—§ 226.36(e) servicers may have difficulty identifying provides that the prohibition should be Proposed § 226.36 would apply new construed consistently with the credit third party charges with complete certainty, because third party fees may protections to mortgage loans generally, practices rule. Servicers are currently if primarily for a consumer purpose and subject to this rule, whether they are vary depending on the circumstances (for example, fees may vary by secured by the consumer’s principal banks (Regulation AA), thrifts (12 CFR dwelling, because the Board believes 535.4), or other kinds of institutions (16 geography). The Board seeks comment on whether the benefit of increasing the that the concerns addressed by CFR 444.4). Consumers may proposed § 226.36 also apply to the nevertheless benefit if the Board transparency of third party charges would outweigh the costs associated prime market. However, the Board adopted the same requirement under proposes to exclude HELOCs from TILA Section 129(l)(2), 15 U.S.C. with a servicer’s uncertainty as to such charges. coverage of § 226.36 because the risks to 1639(l)(2). This would permit state consumers addressed by the proposal attorneys general to enforce the rule The proposed commentary would may be lower in connection with uniformly, where currently they may be clarify that a servicer who receives a HELOCs than with closed-end limited to enforcing the rule through request for the schedule of fees may transactions. Most originators of state statutes that may vary. either mail the schedule to the HELOCs hold them in portfolio rather Accordingly, violations of the anti- consumer or direct the consumer to a than sell them, which aligns these pyramiding rule by servicers would specific Web site where the schedule is originators’ interests in loan provide state attorneys general an located. The Board believes that having performance more closely with their additional means of enforcement. the option to post the schedule on a Web site will greatly reduce the burden borrowers’ interests. Further, consumers Schedule of Fees and Charges on servicers to provide schedules. with HELOCs can be protected in other The third proposed rule would However, the proposed commentary ways besides regulation under HOEPA. require a servicer to provide to a provides that any such Web site address Unlike closed-end transactions, HELOCs consumer upon request a schedule of all reference must be specific enough to are concentrated in the banking and specific fees and charges that may be inform the consumer where the thrift industries, where the federal imposed in connection with the schedule is located, rather than solely banking agencies can use their servicing of the consumer’s account, referring to the servicer’s home page. supervisory authority to protect

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consumers.70 Similarly, TILA and borrower’s interest. 12 CFR 226.32(d)(8) law also restricts steering. If a creditor Regulation Z already contain a prompt and 226.34(a)(3). steered borrowers to higher-rate loans or crediting rule for HELOCs, 12 CFR The Board seeks comment on whether to certain loan products on the basis of 226.10, of the kind the Board is any of these restrictions should be borrowers’ race, ethnicity, or other proposing in § 226.36(d). applied to higher-priced mortgage loans. prohibited factors, the creditor would The Board seeks comment on whether Is there evidence that any of these violate the Equal Credit Opportunity there is a need to apply any or all of the practices has caused consumers in the Act, 15 U.S.C. 1601 et seq., and proposed prohibitions in § 226.36 to subprime market substantial injury or Regulation B, 12 CFR 202, as well as the HELOCs. For example, one source has the potential to do so? Would the Fair Housing Act, 42 U.S.C. 3601 et seq. reports that the proportion of HELOCs benefits of applying the restriction to Moreover, two parts of this proposal originated through mortgage brokers is higher-priced mortgage loans outweigh would help to address steering quite small.71 This may suggest that the the costs, considering both the subprime regardless whether the steering had a risks of improper creditor payments to market and the part of the alt-A market racial basis or other prohibited basis. brokers or broker coercion of appraisers that may be covered by the proposal? First, proposed § 226.36(a) would limit Negative amortization has been a in connection with HELOCs is limited. creditor payments to mortgage brokers particular concern in recent years Are mortgage brokers growing as a to an amount the broker had agreed with because of the rapid spread of channel for HELOC origination such the consumer in advance—before the nontraditional mortgages that permit that regulation under §§ 226.36(a) broker could know what rate the consumers to defer for a time paying consumer would qualify for—would be through 226.36(c) is necessary? Do any principal and to pay less than the the broker’s total compensation. This originators contract out HELOC interest due. What are the costs and provision also would prohibit the servicing often enough to necessitate the benefits for consumers of negative payment unless the broker had given the proposed protections of § 226.36(d)? If amortization in the part of the market consumer a written notice that a broker coverage should be extended to that would be covered under the that receives payments from a creditor HELOCs, the Board also solicits definition of higher-priced mortgage may have incentives not to provide the comment as to whether such coverage loans? Would proposed § 226.35(b)(1), consumer the best or most suitable rates should be limited to specific types of which would generally prohibit a or terms. These restrictions are intended HELOCs. For example, do purchase pattern or practice of extending higher- to reduce the incentive and ability of a money HELOCs, which are often used in priced mortgage loans without regard to mortgage broker to offer a consumer a combination with first-lien closed-end consumers’ repayment ability—taking higher rate simply so that the broker, loans to purchase a home, mirror the into account a fully-amortizing without the consumer’s knowledge, risks associated with first-lien loans? payment—adequately address concerns could receive a larger payment from the IX. Other Potential Concerns about negative amortization on such creditor. Second, proposed loans? § 226.35(b)(1) would prohibit a creditor A. Other HOEPA Prohibitions Historically, loans with balloon from engaging in a pattern or practice of As discussed in part VII, the Board is payments also have been of concern in extending higher-priced mortgage loans proposing to extend to higher-priced the subprime market. What are the costs based on the collateral without regard to mortgage loans two of the restrictions and benefits for consumers of balloon repayment ability. Thus, if a creditor HOEPA currently applies only to loans in the part of the market that steered borrowers into higher-priced HOEPA loans, concerning would be covered under the definition mortgage loans that the borrower may determinations of repayment ability and of higher-priced mortgage loans? Should not have the ability to repay—or prepayment penalties. See TILA Section the Board prohibit balloon payments accepted loans from brokers that had 129(c) and (h), 15 U.S.C. 1639(c) and with such loans and, if so, should done so—the creditor would risk (h). HOEPA also prohibits negative balloon payments be permitted on loans violating proposed § 226.35(b)(1). with terms of more than five years, as amortization, interest rate increases after X. Advertising default, balloon payments on loans with HOEPA now permits? Proposed The Board proposes to amend the a term of less than five years, and § 226.35(b)(1) would provide creditors a advertising rules for open-end home- prepaid payments. TILA Section safe harbor from the prohibition against equity plans under § 226.16, and for 129(d)–(g), 15 U.S.C. 1639(d)–(g). In a pattern or practice of lending without closed-end credit under § 226.24 to addition, the statute prohibits creditors regard to repayment ability if the address advertisements for home- from paying home improvement creditor has a reasonable basis to believe consumers will be able to make loan secured loans. For open-end home- contractors directly unless the consumer equity plan advertisements, the two consents in writing. TILA Section 129(j), payments for at least seven years after consummation of the transaction. most significant changes relate to the 15 U.S.C. 1639(j). In 2002, the Board clear and conspicuous standard and the added to these limitations on HOEPA Would this safe harbor tend to encourage creditors to restrict balloon advertisement of introductory terms. For loans a regulatory prohibition on due- advertisements for closed-end credit on-demand clauses and on refinancings payments to the eighth year, or later? If so, would the proposal provide secured by a dwelling, the three most by the same creditor (or assignee) within significant changes relate to one year unless the refinancing is in the consumers adequate protections from balloon loans without a regulation strengthening the clear and conspicuous specifically addressing them? standard for advertising disclosures, 70 See, e.g., Interagency Credit Risk Management regulating the disclosure of rates and Guidance for Home Equity Lending, Fed. Reserve B. Steering Bd. SR Letter 05–11 (May 16, 2005); Addendum to payments in advertisements to ensure Credit Risk Management Guidance for Home Equity Consumer advocates and others have that low introductory or ‘‘teaser’’ rates Lending, Fed. Reserve Bd. SR Letter 06–15 app. 3 expressed concern that borrowers are or payments are not given undue (Nov. 26, 2006). sometimes steered into loans with emphasis, and prohibiting certain acts 71 Consumer Bankers Ass’n, 2006 Home Equity Loan Study (June 30, 2006) (reporting that about 10 prices higher than the borrowers’ risk or practices in advertisements as percent of HELOCs were originated through a profiles warrant or terms and features provided under Section 129(l)(2) of broker channel recently). not suitable to the borrower. Existing TILA.

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A. Advertising Rules for Open-end practices in advertisements for home- would elaborate on the requirement that Home-equity Plans—§ 226.16 equity plans. The Board seeks comment, certain disclosures about introductory however, on whether it should extend rates or payments in advertisements for Overview any or all of the prohibitions contained home-equity plans be prominent and in The Board is proposing to amend the in the proposed § 226.24(i) to home- close proximity to the triggering terms open-end home-equity plan advertising equity plans, or whether there are other in order to satisfy the clear and rules in § 226.16. The two most acts or practices associated with conspicuous standard when significant changes relate to the clear advertisements for home-equity plans introductory rates or payments are and conspicuous standard and the that should be prohibited. advertised and the disclosure advertisement of introductory terms in requirements of proposed § 226.16(d)(6) Current Statute and Regulation home-equity plans. Each of these apply. The disclosures would be proposed changes is summarized below. TILA Section 147, implemented by deemed to meet this requirement if they First, the Board is proposing to revise the Board in § 226.16(d), governs appear immediately next to or directly the clear and conspicuous standard for advertisements of open-end home- above or below the trigger terms, home-equity plan advertisements, equity plans secured by the consumer’s without any intervening text or consistent with the approach taken in principal dwelling. 15 U.S.C. 1665b. graphical displays. Terms required to be the advertising rules for consumer The statute applies to the advertisement disclosed with equal prominence to the leases under Regulation M. See 12 CFR itself, and therefore, the statutory and introductory rate or payment would be 213.7(b). New commentary provisions regulatory requirements apply to any deemed to meet this requirement if they would clarify how the clear and person advertising an open-end credit appear in the same type size as the conspicuous standard applies to plan, whether or not they meet the trigger terms. A more detailed advertisements of home-equity plans definition of creditor. See comment discussion of the proposed requirements with introductory rates or payments, 2(a)(2)–2. Under the statute, if an open- for introductory rates or payments is and to Internet, television, and oral end credit advertisement sets forth, found below. advertisements of home-equity plans. affirmatively or negatively, any of the The equal prominence and close The proposal would also allow specific terms of the plan, including any proximity requirements of proposed alternative disclosures for television and required periodic payment amount, then § 226.16(d)(6) would apply to all visual radio advertisements for home-equity the advertisement must also clearly and text advertisements. However, comment plans by revising the Board’s earlier conspicuously state: (1) Any loan fee the 16–4 states that electronic proposal for open-end plans that are not amount of which is determined as a advertisements that disclose home-secured to apply to home-equity percentage of the credit limit and an introductory rates or payments in a plans as well. See 12 CFR 226.16(f) and estimate of the aggregate amount of manner that complies with the Board’s 72 FR 32948, 33064 (June 14, 2007). other fees for opening the account; (2) recently amended rule for electronic Second, the Board is proposing to in any case in which periodic rates may advertisements under § 226.16(c) would amend the regulation and commentary be used to compute the finance charge, be deemed to satisfy the clear and to ensure that advertisements the periodic rates expressed as an conspicuous standard. See 72 FR 63462 adequately disclose not only annual percentage rate; (3) the highest (Nov. 9, 2007). Under the rule, if an introductory plan terms, but also the annual percentage rate which may be electronic advertisement provides the rates and payments that will apply over imposed under the plan; and (4) any required disclosures in a table or the term of the loan. The proposed other information the Board may by schedule, any statement of triggering changes are modeled after proposed regulation require. terms elsewhere in the advertisement amendments to the advertising rules for The specific terms of an open-end must clearly direct the consumer to the open-end plans that are not home- plan that ‘‘trigger’’ additional location of the table or schedule. For secured. See 72 FR 32948, 33064 (June disclosures, which are commonly example, a triggering term in an 14, 2007). known as ‘‘triggering terms,’’ are the advertisement on an Internet Web site The Board is also proposing changes payment terms of the plan, or finance may be accompanied by a link that to implement provisions of the charges and other charges required to be directly takes the consumer to the Bankruptcy Abuse Prevention and disclosed under §§ 226.6(a) and additional information. See comment Consumer Protection Act of 2005 which 226.6(b). If an advertisement for a home- 16(c)(1)–2. requires disclosure of the tax equity plan states a triggering term, the An electronic advertisement may implications of certain home-equity regulation requires that the require consumers to scroll down a plans. See Pub. L. No. 109–8, 119 Stat. advertisement also state the terms page, or click a link, to access important 23. Other technical and conforming required by the statute. See 12 CFR rate or payment information under the changes are also proposed. 226.16(d)(1); see also comments 16(d)– current rule. For example, an electronic The Board is not proposing to extend 1, and 16(d)–2. advertisement may state a low to home-equity plan advertisements the introductory payment and require the prohibitions it proposes to apply to Discussion consumer to click a link to find out that advertisements for closed-end credit Clear and conspicuous standard. The the payment applies for only two years secured by a dwelling. As discussed Board is proposing to add comments and the payments that will apply after below in connection with its proposed 16–4 to 16–7 to clarify how the clear that. Using links in this manner may changes to § 226.24, the Board is and conspicuous standard applies to permit Internet advertisements to proposing to prohibit certain acts or advertisements for home-equity plans. continue to emphasize low, practices connected with Currently, comment 16–1 explains introductory ‘‘teaser’’ rates or payments, advertisements for closed-end mortgage that advertisements for open-end credit while de-emphasizing rates or payments credit under TILA § 129(l)(2). See are subject to a clear and conspicuous that apply for the term of a plan, as discussion of § 226.24(i) below. Based standard set out in § 226.5(a)(1). The sometimes occurs with the use of on its review of advertising copy and Board is not prescribing specific rules footnotes. However, the Board outreach efforts, the Board has not regarding the format of advertisements. recognizes that electronic identified similar misleading acts or However, proposed comment 16–4 advertisements may be displayed on

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devices with small screens, such as on 226.16(d)(2). The Board proposes to balloon payment will occur when only Internet-enabled cellphones or personal revise this section to require that the minimum payments are made must also digital assistants, that might necessitate triggered disclosures be stated with state the fact that a balloon payment scrolling in order to view additional equal prominence and in close will result (not merely that a balloon information. The Board seeks comment proximity to the statement of the initial payment ‘‘may’’ result). The Board on whether it should amend the rules APR. The Board believes that this will proposes to incorporate the language for electronic advertisements for home- enhance consumers’ understanding of from comment 16(d)–7 into the text of equity plans to require that all the cost of credit for the home-equity § 226.16(d)(3) with technical revisions. information about rates or payments plan being advertised. The comment would be revised and that apply for the term of the plan be Proposed comment 16(d)–6 would renumbered as comment 16(d)–9. The stated in close proximity to introductory provide safe harbors for what required disclosures regarding balloon rates or payments in a manner that does constitutes a ‘‘reasonably current index payments must be stated with equal not require the consumer to click a link and margin’’ as used in § 226.16(d)(2) as prominence and in close proximity to to access the information. The Board well as § 226.16(d)(6). Under the the minimum periodic payment. The also solicits comment on the costs and proposed comment, the time period Board believes that this will enhance practical limitations, if any, of imposing during which an index and margin consumers’ ability to notice and this close proximity requirement on would be considered reasonably current understand the potential financial electronic advertisements. would depend on the medium in which impact of making only minimum The Board is also proposing to the advertisement was distributed. For payments. interpret the clear and conspicuous direct mail advertisements, a reasonably standards for Internet, television, and current index and margin would be one 226.16(d)(4)—Tax Implications oral advertisements of home-equity that was in effect within 60 days before Section 1302 of the Bankruptcy Act plans. Proposed comment 16–5 explains mailing. For advertisements in amends TILA Section 147(b) to require that disclosures in the context of visual electronic form, a reasonably current additional disclosures for text advertisements on the Internet must index and margin would be one that advertisements that are disseminated in not be obscured by techniques such as was in effect within 30 days before the paper form to the public or through the graphical displays, shading, coloration, advertisement was sent to a consumer’s Internet, relating to an extension of or other devices, and must comply with e-mail address, or for advertisements credit secured by a consumer’s principal all other requirements for clear and made on an Internet Web site, when dwelling that may exceed the fair conspicuous disclosures under viewed by the public. For printed market value of the dwelling. Such § 226.16(d). Proposed comment 16–6 advertisements made available to the advertisements must include a likewise explains that textual general public, a reasonably current statement that the interest on the disclosures in television advertisements index and margin would be one that portion of the credit extension that is must not be obscured by techniques was in effect within 30 days before greater than the fair market value of the such as graphical displays, shading, printing. dwelling is not tax deductible for coloration, or other devices, must be Federal income tax purposes. 15 U.S.C. 226.16(d)(3)—Balloon Payment displayed in a manner that allows the 1665b(b). The statute also requires a consumer to read the information, and If an advertisement for a home-equity statement that the consumer should must comply with all other plan contains a statement about any consult a tax adviser for further requirements for clear and conspicuous minimum periodic payment, the information on the deductibility of the disclosures under § 226.16(d). Proposed advertisement must also state, if interest. comment 16–7 would explain that oral applicable, that a balloon payment may The Bankruptcy Act also requires that advertisements, such as by radio or result. See 12 CFR 226.16(d)(3). The disclosures be provided at the time of television, must provide disclosures at a Board proposes to revise this section to application in cases where the extension speed and volume sufficient for a clarify that only statements about the of credit may exceed the fair market consumer to hear and comprehend amount of any minimum periodic value of the dwelling. See 15 U.S.C. them. In this context, the word payment trigger the required disclosure, 1637a(a)(13). The Board intends to ‘‘comprehend’’ means that the and to require that the disclosure of a implement the application disclosure disclosures must be intelligible to balloon payment be equally prominent portion of the Bankruptcy Act during its consumers, not that advertisers must and in close proximity to the statement forthcoming review of closed-end and ensure that consumers understand the of a minimum periodic payment. HELOC disclosures under TILA. meaning of the disclosures. The Board Consistent with comment 5b(d)(5)(ii)–3, However, the Board requested comment is also proposing to allow the use of a the Board proposes to clarify that the on the implementation of both the toll-free telephone number as an disclosure is triggered when an advertising and application disclosures alternative to certain oral disclosures in advertisement contains a statement of under this provision of the Bankruptcy television or radio advertisements. any minimum periodic payment and a Act for open-end credit in its October balloon payment may result if only 17, 2005, ANPR. 70 FR 60235, 60244 226.16(d)(2)—Discounted and Premium minimum periodic payments are made, (Oct. 17, 2005). A majority of comments Rates even if a balloon payment is uncertain on this issue addressed only the If an advertisement for a variable-rate or unlikely. Additionally, the Board application disclosure requirement, but home-equity plan states an initial proposes to clarify that a balloon some commenters specifically annual percentage rate that is not based payment results if paying the minimum addressed the advertising disclosure on the index and margin used to make periodic payments would not fully requirement. One industry commenter later rate adjustments, the advertisement amortize the outstanding balance by a suggested that the advertising disclosure must also state the period of time the specified date or time, and the requirement apply only in cases where initial rate will be in effect, and a consumer must repay the entire the advertised product allows for the reasonably current annual percentage outstanding balance at such time. credit to exceed the fair market value of rate that would have been in effect using Current comment 16(d)–7 states that the dwelling. Other industry the index and margin. See 12 CFR an advertisement for a plan where a commenters suggested that the

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requirement apply only to introductory rates, while this proposal margin will be used to make rate or advertisements for products that are would apply to the advertisement of payment adjustments under the plan. intended to exceed the fair market value both introductory rates and payments. The Board solicits comment on whether of the dwelling. and to what extent multiple indexes and 226.16(d)(6)(i)—Definitions The Board proposes to revise margins are used in home-equity plans § 226.16(d)(4) and comment 16(d)–3 to The Board proposes to define the and whether additional or different implement TILA Section 147(b). The terms ‘‘introductory rate,’’ ‘‘introductory rules are needed for such products. Board’s proposal clarifies that the new payment,’’ and ‘‘introductory period’’ in Proposed comment 16(d)–5.v clarifies requirements apply to advertisements § 226.16(d)(6)(i). In a variable-rate plan, how the concept of introductory for home-equity plans where the the term ‘‘introductory rate’’ means any payments applies in the context of advertised extension of credit may, by annual percentage rate applicable to a advertisements for non-variable-rate its terms, exceed the fair market value home-equity plan that is not based on plans. Specifically, the proposed of the dwelling. The Board seeks the index and margin that will be used comment provides that if the advertised comment on whether the new to make rate adjustments under the payment is calculated in the same way requirements should only apply to plan, if that rate is less than a as other payments under the plan based advertisements that state or imply that reasonably current annual percentage on an assumed balance, the fact that the the creditor provides extensions of rate that would be in effect based on the payment could increase solely if the credit greater than the fair market value index and margin that will be used to consumer made an additional draw does of the dwelling. make rate adjustments under the plan. not make the payment an introductory The term ‘‘introductory payment’’ payment. For example, if a payment of 226.16(d)(6)—Introductory Rates and means, in the case of a variable-rate $500 results from an assumed $10,000 Payments plan, the amount of any payment draw, and the payment would increase The Board is proposing to add applicable to a home-equity plan for an to $1000 if the consumer made an § 226.16(d)(6) to address the introductory period that is not derived additional $10,000 draw, the payment is advertisement of introductory rates and from the index and margin that will be not an introductory payment. payments in advertisements for home- used to determine the amount of any equity plans. The proposed rule other payments under the plan and, 226.16(d)(6)(ii)—Stating the Term provides that if an advertisement for a given an assumed balance, is less than ‘‘Introductory’’ home-equity plan states an introductory any other payment that will be in effect Proposed § 226.16(d)(6)(ii) would rate or payment, the advertisement must under the plan based on a reasonably require creditors to state either the term use the term ‘‘introductory’’ or ‘‘intro’’ current application of the index and ’’introductory’’ or its commonly- in immediate proximity to each mention margin that will be used to determine understood abbreviation ’’intro’’ in of the introductory rate or payment. The the amount of such payments. For a immediate proximity to each listing of proposed rule also provides that such non-variable-rate plan, the term the introductory rate or payment in an advertisements must disclose the ‘‘introductory payment’’ means the advertisement for a home-equity plan. following information in a clear and amount of any payment applicable to a Proposed comment 16(d)–5.ii clarifies conspicuous manner with each listing of home-equity plan for an introductory that placing the word ‘‘introductory’’ or the introductory rate or payment: the period if that payment is less than the ‘‘intro’’ within the same sentence as the period of time during which the amount of any other payments that will introductory rate or introductory introductory rate or introductory be in effect under the plan given an payment satisfies the immediately payment will apply; in the case of an assumed balance. The term proximate standard. introductory rate, any annual percentage ‘‘introductory period’’ means a period of 226.16(d)(6)(iii)—Stating the rate that will apply under the plan; and, time, less than the full term of the loan, in the case of an introductory payment, that the introductory rate or payment Introductory Period and Post- the amount and time periods of any may be applicable. Introductory Rate or Payments payments that will apply under the Proposed comment 16(d)–5.i clarifies Proposed § 226.16(d)(6)(iii) provides plan. In variable-rate transactions, how the concepts of introductory rates that if an advertisement states an payments that will be determined based and introductory payments apply in the introductory rate or introductory on application of an index and margin context of advertisements for variable- payment, it must also clearly and to an assumed balance shall be rate plans. Specifically, the proposed conspicuously disclose, with equal disclosed based on a reasonably current comment provides that if the advertised prominence and in close proximity to index and margin. Although annual percentage rate or the advertised the introductory rate or payment, the introductory rates are addressed, in part, payment is based on the index and following, as applicable: the period of by § 226.16(d)(2), which deals with the margin that will be used to make rate or time during which the introductory rate advertisement of discounted and payment adjustments over the term of or introductory payment will apply; in premium rates, § 226.16(d)(6) is broader the loan, then there is no introductory the case of an introductory rate, any because it is not limited to initial rates, rate or introductory payment. On the annual percentage rate that will apply but applies to any advertised rate that other hand, if the advertised annual under the plan; and, in the case of an applies for a limited period of time. percentage rate, or the advertised introductory payment, the amount and Proposed § 226.16(d)(6) is similar to payment, is not based on the index and time periods of any payments that will the approach taken by the Board with margin that will be used to make rate or apply under the plan. In variable-rate regard to the advertisement of payment adjustments, and a reasonably transactions, payments that will be introductory rates for open-end (not current application of the index and determined based on application of an home-secured) plans in the June 2007 margin would result in a higher annual index and margin to an assumed proposal to amend the Regulation Z percentage rate or, given an assumed balance shall be disclosed based on a open-end advertising rules. See 72 FR balance, a higher payment, then there is reasonably current index and margin. 32948, 33064 (June 14, 2007). However, an introductory rate or introductory Proposed comment 16(d)–5.iii the June 2007 proposal would only payment. The proposed revisions provides safe harbors for satisfying the apply to the advertisement of generally assume that a single index and closely proximate or equally prominent

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requirements of proposed would be to state each of the disclosures advertisements that is modeled after a § 226.16(d)(6)(iii). Specifically, the required by current §§ 226.16(b)(1) and proposed revision to the advertising required disclosures will be deemed to (d)(1) at a speed and volume sufficient rules for open-end (not home-secured) be closely proximate to the introductory for a consumer to hear and comprehend plans. See 72 FR 32948, 33064 (June 14, rate or payment if they are in the same them. Another option would be for the 2007). paragraph as the introductory rate or advertisement to state orally the APR Second, the Board is proposing to payment. Information disclosed in a applicable to the home-equity plan, and amend the regulation and commentary footnote will not be deemed to be the fact that the rate may be increased to address the advertisement of rates closely proximate to the introductory after consummation, and provide a toll- and payments for home-secured loans. rate or payment. Consumer testing of free telephone number that the The proposed revisions are designed to account-opening and other disclosures consumer may call to receive more ensure that advertisements adequately undertaken in conjunction with the information. Given the space and time disclose all rates or payments that will Board’s open-end Regulation Z proposal constraints on television and radio apply over the term of the loan and the suggests that placing information in a advertisements, the required disclosures time periods for which those rates or footnote makes it much less likely that may go unnoticed by consumers or be payments will apply. Many the consumer will notice it. The difficult for them to retain. Thus, advertisements for home-secured loans required disclosures will be deemed providing an alternative means of place undue emphasis on low, equally prominent with the introductory disclosure may be more effective in introductory ‘‘teaser’’ rates or payments rate or payment if they are in the same many cases given the nature of the that will apply for a limited period of type size as the introductory rate or media. time. Such advertisements do not give payment. This approach is also similar to the consumers accurate or balanced Proposed comment 16(d)–5.iv approach taken in the advertising rules information about the costs or terms of clarifies that the requirement to disclose for consumer leases under Regulation the products offered. the amount and time periods of any M, which also allows the use of toll-free The proposed revisions would also payments that will apply under the plan numbers in television and radio prohibit advertisements from disclosing may require the disclosure of several advertisements. See 12 CFR an interest rate lower than the rate at payment amounts, including any 213.7(f)(1)(ii). which interest is accruing. Instead, the balloon payments. The comment only rates that could be included in provides an example of a home-equity B. Advertising Rules for Closed-end advertisements for home-secured loans plan with several payment amounts Credit—§ 226.24 are the APR and one or more simple over the repayment period to illustrate Overview annual rates of interest. Many the disclosure requirements. Proposed advertisements for home-secured loans comment 16(d)–6, which is discussed The Board is proposing to amend the promote very low rates that do not above, would provide safe harbor closed-end credit advertising rules in appear to be the rates at which interest definitions for the phrase ‘‘reasonably § 226.24 to address advertisements for is accruing. The advertisement of current index and margin.’’ home-secured loans. The three most interest rates lower than the rate at significant changes relate to which interest is accruing is likely 226.16(d)(6)(iv)—Envelope Excluded strengthening the clear and conspicuous confusing for consumers. Taken Proposed § 226.16(d)(6)(iv) provides standard for advertising disclosures, together, the Board believes that the that the requirements of regulating the disclosure of rates and proposed changes regarding the § 226.16(d)(6)(iii) do not apply to payments in advertisements to ensure disclosure of rates and payments in envelopes, or to banner advertisements that low introductory or ‘‘teaser’’ rates advertisements for home-secured loans and pop-up advertisements that are or payments are not given undue will enhance the accuracy of advertising linked to an electronic application or emphasis, and prohibiting certain acts disclosures and benefit consumers. solicitation provided electronically. In or practices in advertisements as Third, pursuant to TILA Section the Board’s view, because banner provided under Section 129(l)(2) of 129(l)(2), 15 U.S.C. 1639(l)(2), the Board advertisements and pop-up TILA, 15 U.S.C. 1639(l)(2). Each of these is proposing to prohibit seven specific advertisements are used to direct proposed changes is summarized below. acts or practices in connection with consumers to more detailed First, the Board is proposing to add a advertisements for home-secured loans advertisements, they are similar to provision setting forth the clear and that the Board finds to be unfair, envelopes in the direct mail context. conspicuous standard for all closed-end deceptive, associated with abusive advertisements and a number of new lending practices, or otherwise not in 226.16(f)—Alternative Disclosures— commentary provisions applicable to the interest of the borrower. Television or Radio Advertisements advertisements for home-secured loans. Bankruptcy Act changes. The Board is The Board is proposing to expand The regulation would be revised to also proposing several changes to clarify § 226.16(f) to allow for alternative include a clear and conspicuous certain provisions of the closed-end disclosures of the information required standard for advertising disclosures, advertising rules, including the scope of for home-equity plans under consistent with the approach taken in the certain triggering terms, and to § 226.16(d)(1), where applicable, the advertising rules for Regulation M. implement provisions of the Bankruptcy consistent with its proposal for credit See 12 CFR 213.7(b). New commentary Abuse Prevention and Consumer cards and other open-end plans. See provisions would be added to clarify Protection Act of 2005 requiring proposed § 226.16(f) and 72 FR 32948, how the clear and conspicuous standard disclosure of the tax implications of 33064 (June 14, 2007). applies to rates or payments in home-secured loans. See Pub. L. No. The Board’s proposed revision advertisements for home-secured loans, 109–8, 119 Stat. 23. Technical and follows the general format of the Board’s and to Internet, television, and oral conforming changes to the closed-end earlier proposal for alternative advertisements of home-secured loans. advertising rules are also proposed. disclosures for oral television and radio The proposal would also add a Outreach. The Board’s staff conducted advertisements. If a triggering term is provision to allow alternative extensive research and outreach in stated in the advertisement, one option disclosures for television and radio connection with developing the

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proposed revisions to the closed-end TILA Section 105(a) authorizes the proximity to other rate or payment advertising rules. Board staff collected Board to adopt regulations to ensure information would be deemed to meet and reviewed numerous examples of meaningful disclosure of credit terms so this requirement if they appear advertising copy for home-secured that consumers will be able to compare immediately next to or directly above or loans. Board staff also consulted with available credit terms and avoid the below the trigger terms, without any representatives of consumer and uninformed use of credit. 15 U.S.C. intervening text or graphical displays. community groups and Federal Trade 1604(a). TILA Section 122 authorizes Terms required to be disclosed with Commission staff to identify areas the Board to require that information, equal prominence to other rate or where the advertising disclosures could including the information required payment information would be deemed be improved, as well as to identify acts under Section 144, be disclosed in a to meet this requirement if they appear or practices connected with clear and conspicuous manner. 15 in the same type size as other rates or advertisements for home-secured loans U.S.C. 1632. TILA Section 129(l)(2) payments. A more detailed discussion that should be prohibited. This research authorizes the Board to prohibit acts or of the proposed requirements for and outreach indicated that many practices in connection with mortgage disclosing rates or payments is found advertisements prominently disclose loans that the Board finds to be unfair below. terms that apply to home-secured loans or deceptive. TILA Section 129(l)(2) also The equal prominence and close for a limited period of time, such as low authorizes the Board to prohibit acts or proximity requirements of proposed introductory ‘‘teaser’’ rates or payments, practices in connection with the § 226.24(f) would apply to all visual text while disclosing with much less refinancing of mortgage loans that the advertisements. However, comment prominence, often in a footnote, the Board finds to be associated with 24(b)–2 states that electronic rates or payments that apply over the abusive lending practices, or that are advertisements that disclose rates or full term of the loan. Board staff also otherwise not in the interest of the payments in a manner that complies identified through this research and borrower. 15 U.S.C. 1639(l)(2). with the Board’s recently amended rule outreach effort particular advertising for electronic advertisements under 226.24(b)—Clear and Conspicuous acts or practices that can mislead current § 226.24(d) would be deemed to Standard consumers. satisfy the clear and conspicuous The Board is proposing to add a clear standard. See 72 FR 63462 (Nov. 9, Current Statute and Regulation and conspicuous standard in § 226.24(b) 2007). Under the rule, if an electronic TILA Section 144, implemented by that would apply to all closed-end advertisement provides the required the Board in § 226.24, governs advertising. This provision would disclosures in a table or schedule, any advertisements of credit other than supplement, rather than replace, the statement of triggering terms elsewhere open-end plans. 15 U.S.C. 1664. TILA clear and conspicuous standard that in the advertisement must clearly direct Section 144 thus applies to applies to all closed-end credit the consumer to the location of the table advertisements of closed-end credit, disclosures under Subpart C of or schedule. For example, a triggering including advertisements for closed-end Regulation Z and that requires all term in an advertisement on an Internet credit secured by a dwelling (also disclosures be in a reasonably Web site may be accompanied by a link referred to as ‘‘home-secured loans’’). understandable form. See 12 CFR that directly takes the consumer to the The statute applies to the advertisement 226.17(a)(1); comment 17(a)(1)–1. The additional information. See comment itself, and therefore, the statutory and new provision provides a framework for 24(d)–4. regulatory requirements apply to any clarifying how the clear and The Board recognizes that electronic person advertising closed-end credit, conspicuous standard applies to advertisements may be displayed on whether or not such person meets the advertisements that are not in writing or devices with small screens that might definition of creditor. See comment in a form that the consumer may keep, necessitate scrolling to view additional 2(a)(2)–2. Under the statute, if an or that emphasize introductory rates or information. The Board seeks comment, advertisement states the rate of a finance payments. however, on whether it should amend charge, the advertisement must state the Currently, comment 24–1 explains the rules for electronic advertisements rate of that charge as an APR. In that advertisements for closed-end for home-secured loans to require that addition, closed-end credit credit are subject to a clear and all information about rates or payments advertisements that contain certain conspicuous standard based on that apply for the term of the loan be terms must also include additional § 226.17(a)(1). The existing comment stated in close proximity to other rates disclosures. The specific terms of would be renumbered as comment or payments in a manner that does not closed-end credit that ‘‘trigger’’ 24(b)–1 and revised to reference the require the consumer to click a link to additional disclosures, which are proposed format requirements for access the information. The Board also commonly known as ‘‘triggering terms,’’ advertisements of rates or payments for solicits comment on the costs and are (1) the amount of the downpayment, home-secured loans. The Board is not practical limitations, if any, of imposing if any, (2) the amount of any installment prescribing specific rules regarding the this close proximity requirement on payment, (3) the dollar amount of any format of advertising disclosures electronic advertisements. finance charge, and (4) the number of generally. However, proposed comment The Board is also proposing to installments or the period of repayment. 24(b)–2 would elaborate on the interpret the clear and conspicuous If an advertisement for closed-end credit requirement that certain disclosures standards for Internet, television, and states a triggering term, then the about rates or payments in oral advertisements of home-secured advertisement must also state any advertisements for home-secured loans loans. Proposed comment 24(b)–3 downpayment, the terms of repayment, be prominent and in close proximity to explains that disclosures in the context and the rate of the finance charged other information about rates or of visual text advertisements on the expressed as an APR. See 12 CFR payments in the advertisement in order Internet must not be obscured by 226.24(b)–(c); see also comments 24(b)– to satisfy the clear and conspicuous techniques such as graphical displays, (c) (as redesignated to proposed standard and the disclosure shading, coloration, or other devices, §§ 226.24(c)–(d) and comments 24(c)– requirements of proposed § 226.24(f). and must comply with all other (d)). Terms required to be disclosed in close requirements for clear and conspicuous

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disclosures under § 226.24. Proposed rates and payments in advertisements payment mortgages. Today, however, comment 24(b)–4 likewise explains that for home-secured loans. some advertisers appear to rely on this visual text advertisements on television Buydowns. Comment 24(b)–3, which comment when advertising rates for a must not be obscured by techniques addresses ‘‘buydowns,’’ would be variety of home-secured loans, such as such as graphical displays, shading, renumbered as comment 24(c)–3 and negative amortization loans and option coloration, or other devices, must be revised. A buydown is where a seller or ARMs. In these circumstances, the displayed in a manner that allows a creditor offers a reduced interest rate advertisement of rates lower than the consumer to read the information and reduced payments to a consumer rate at which interest is accruing for required to be disclosed, and must for a limited period of time. Comment these products is not helpful to comply with all other requirements for 24(c)–3 allows the seller or creditor, in consumers, particularly consumers who clear and conspicuous disclosures the case of a buydown, to advertise the may not fully understand how these under § 226.24. Proposed comment reduced simple interest rate, the limited non-traditional home-secured loans 24(b)–5 would explain that oral term to which the reduced rate applies, work. advertisements, such as by radio or and the simple interest rate applicable Discounted variable-rate transactions. television, must provide the disclosures to the balance of the term. The Comment 24(b)–5 would be renumbered at a speed and volume sufficient for a advertisement may show the effect of as comment 24(c)–4 and revised to consumer to hear and comprehend the buydown agreement on the payment explain that an advertisement for a them. In this context, the word schedule for the buydown period. The discounted variable-rate transaction ‘‘comprehend’’ means that the Board proposes to revise the comment which advertises a reduced or disclosures be intelligible to consumers, to explain that additional disclosures discounted simple annual rate must not that advertisers must ensure that would be required when an show with equal prominence and in consumers understand the meaning of advertisement includes information close proximity to that rate, the limited all of the disclosures. Proposed showing the effect of the buydown term to which the simple annual rate § 226.24(g) provides an alternative agreement on the payment schedule. applies and the annual percentage rate method of disclosure for television or Such advertisements would have to that will apply after the term of the radio advertisements when trigger terms provide the disclosures required by initial rate expires. current § 226.24(c)(2) because showing are stated orally and is discussed more The comment would also be revised the effect of the buydown agreement on fully below. to explain that additional disclosures the payment schedule is a statement 226.24(c)—Advertisement of Rate of about the amount of any payment, and would be required when an Finance Charge thus is a triggering term. See 12 CFR advertisement includes information showing the effect of the discount on Disclosure of simple annual rate or 226.24(c)(1)(iii). In these circumstances, the additional disclosures are necessary the payment schedule. Such periodic rate. If an advertisement states advertisements would have to provide a rate of finance charge, it shall state the for consumers to understand the costs of the loan and the terms of repayment. the disclosures required by current rate as an APR. See 12 CFR 226.24(b) (as § 226.24(c)(2). Showing the effect of the redesignated to proposed § 226.24(c)). Consistent with these changes, the examples of statements about buydowns discount on the payment schedule is a An advertisement may also state, in statement about the number of conjunction with and not more that an advertisement may make without triggering additional payments or the period of repayment, conspicuously than the APR, a simple disclosures would be removed. and thus is a triggering term. See 12 CFR annual rate or periodic rate that is Effective rates. The Board is 226.24(c)(1)(ii). In these circumstances, applied to an unpaid balance. proposing to delete current comment the additional disclosures are necessary The Board proposes to renumber 24(b)–4. The current comment allows for consumers to understand the costs of § 226.24(b) as § 226.24(c), and revise it. the advertisement of three rates: the the loan and the terms of repayment. The revised rule would provide that APR; the rate at which interest is Consistent with these changes, the advertisements for home-secured loans accruing; and an interest rate lower than examples of statements about shall not state any rate other than an the rate at which interest is accruing, discounted variable-rate transactions APR, except that a simple annual rate which may be referred to as an effective that an advertisement may make that is applied to an unpaid balance rate, payment rate, or qualifying rate. without triggering additional may be stated in conjunction with, but The comment also contains an example disclosures would be removed. not more conspicuously than, the APR. of how to disclose the three rates. Advertisement of a periodic rate, other 226.24(d)—Advertisement of Terms The Board is proposing to delete this That Require Additional Disclosures than the simple annual rate, or any comment for the reasons stated below. other rates would no longer be First, the disclosure of three rates is Required disclosures. The Board permitted in connection with home- unnecessarily confusing for consumers proposes to renumber § 226.24(c) as secured loans. and the disclosure of an interest rate § 226.24(d) and revise it. The proposed Comment 24(b)–2 would be lower than the rate at which interest is rule would clarify the meaning of the renumbered as comment 24(c)–2 and accruing does not provide meaningful ‘‘terms of repayment’’ required to be revised to clarify that a simple annual information to consumers about the cost disclosed. Specifically, the terms of rate or periodic rate is the rate at which of credit. Second, when the effective repayment must reflect ‘‘the repayment interest is accruing. A rate lower than rates comment was adopted in 1982, the obligations over the full term of the the rate at which interest is accruing, Board noted that the comment was loan, including any balloon payment,’’ such as an effective rate, payment rate, designed ‘‘to address the advertisement not just the repayment terms that will or qualifying rate, is not a simple annual of special financing involving ‘effective apply for a limited period of time. This rate or periodic rate. The example in rates,’ ‘payment rates,’ or ‘qualifying proposed revision is consistent with renumbered comment 24(c)–2 also rates.’’ ’ See 47 FR 41338, 41342 (Sept. other proposed changes and is designed would be revised to reference proposed 20, 1982). At that time, when interest to ensure that advertisements for closed- § 226.24(f), which contains rates were quite high, these terms were end credit, especially home-secured requirements regarding the disclosure of used in connection with graduated- loans, adequately disclose the terms that

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will apply over the full term of the loan, advertisement. A balloon payment requests comment on whether these or not just for a limited period of time. results if paying the minimum payments different standards should be applied to Consistent with these proposed does not fully amortize the outstanding oral advertisements for home-secured changes, comment 24(c)(2)–2 would be balance by a specified date or time, loans. renumbered as comment 24(d)(2)–2 and usually the end of the term of the loan, 226.24(f)(2)—Disclosure of Rates revised. Commentary regarding and the consumer must repay the entire advertisement of loans that have a outstanding balance at such time. The Proposed § 226.24(f)(2) addresses the graduated-payment feature would be proposed comment explains that if a disclosure of rates. Under the proposed removed from comment 24(d)(2)–2. balloon payment will occur if the rule, if an advertisement for credit In advertisements for home-secured consumer only makes the minimum secured by a dwelling states a simple loans where payments may vary because payments specified in an advertisement, annual rate of interest and more than of the inclusion of mortgage insurance the advertisement must state with equal one simple annual rate of interest will premiums, the comment would explain prominence and in close proximity to apply over the term of the advertised that the advertisement may state the the minimum payment statement the loan, the advertisement must disclose number and timing of payments, the amount and timing of the balloon the following information in a clear and amounts of the largest and smallest of payment that will result if the consumer conspicuous manner: (a) Each simple those payments, and the fact that other makes only the minimum payments for annual rate of interest that will apply. payments will vary between those the maximum period of time that the In variable-rate transactions, a rate amounts. consumer is permitted to make such determined by an index and margin In advertisements for home-secured minimum payments. The Board believes must be disclosed based on a reasonably loans with one series of low monthly that disclosure of the balloon payment current index and margin; (b) the period payments followed by another series of in advertisements that promote such of time during which each simple higher monthly payments, the comment minimum payments is necessary to annual rate of interest will apply; and would explain that the advertisement inform consumers about the repayment (c) the annual percentage rate for the may state the number and time period terms that will apply over the full term loan. If the rate is variable, the annual of each series of payments and the of the loan. percentage rate must comply with the amounts of each of those payments. Current comments 24(c)(2)–3 and accuracy standards in §§ 226.17(c) and However, the amount of the series of 24(c)(2)–4 would be renumbered as 226.22. higher payments would have to be comments 24(d)(2)–4 and 24(d)(2)–5 Proposed comment 24(f)–4 would based on the assumption that the without substantive change. specifically address how this consumer makes the lower series of requirement applies in the context of payments for the maximum allowable 226.24(e)—Catalogs or Other Multiple- advertisements for variable-rate period of time. For example, if a Page Advertisements; Electronic transactions. For such transactions, if consumer has the option of making Advertisements the simple annual rate that applies at interest-only payments for two years The Board is proposing to renumber consummation is based on the index and an advertisement states the amount § 226.24(d) as § 226.24(e) and make and margin that will be used to make of the interest-only payment, the technical changes to reflect the subsequent rate adjustments over the advertisement must state the amount of renumbering of certain sections of the term of the loan, then there is only one the series of higher payments based on regulation and commentary. simple annual rate and the requirements the assumption that the consumer of § 226.24(f)(2) do not apply. If, makes the interest-only payments for 226.24(f)—Disclosure of Rates and however, the simple annual rate that the full two years. The Board believes Payments in Advertisements for Credit applies at consummation is not based that without these disclosures Secured by a Dwelling on the index and margin that will be consumers may not fully understand the The Board is proposing to add a new used to make subsequent rate cost of the loan or the payment terms subsection (f) to § 226.24 to address the adjustments over the term of the loan, that may result once the higher disclosure of rates and payments in then there is more than one simple payments take effect. advertisements for home-secured loans. annual rate and the requirements of The proposed revisions to The primary purpose of these provisions § 226.24(f)(2) apply. The proposed renumbered comment 24(d)(2)–2 would is to ensure that advertisements do not revisions generally assume that a single apply to all closed-end advertisements. place undue emphasis on low index and margin will be used to make The Board believes that the terms of introductory ‘‘teaser’’ rates or payments, rate or payment adjustments under the repayment for any closed-end credit but adequately disclose the rates and loan. The Board solicits comment on product should be disclosed for the full payments that will apply over the term whether and to what extent multiple term of the loan, not just for a limited of the loan. The specific provisions of indexes and margins are used in home- period of time. The Board also does not proposed subsection (f) are discussed secured loans and whether additional or believe that this proposed change will below. different rules are needed for such significantly impact advertising products. practices for closed-end credit products 226.24(f)(1)—Scope Finally, the proposed rule establishes such as auto loans and installment loans Proposed § 226.24(f)(1) provides that a clear and conspicuous standard for the that ordinarily have shorter terms than the new section applies to any disclosure of rates in advertisements for home-secured loans. advertisement for credit secured by a home-secured loans. Under this New comment 24(d)(2)–3 would be dwelling, other than television or radio standard, the information required to be added to address the disclosure of advertisements, including promotional disclosed by § 226.24(f)(2) must be balloon payments as part of the materials accompanying applications. disclosed with equal prominence and in repayment terms. The proposed The Board does not believe it is feasible close proximity to any advertised rate comment notes that in some to apply the requirements of this that triggered the required disclosures, transactions, a balloon payment will section, notably the close proximity and except that the annual percentage rate occur when the consumer only makes prominence requirements, to oral may be disclosed with greater the minimum payments specified in an advertisements. However, the Board prominence than the other information.

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Proposed comment 24(f)–1 would insurance premiums are not included in electronic application or solicitation provide safe harbors for compliance the payment must be prominently provided electronically. In the Board’s with the equal prominence and close disclosed and in close proximity to the view, banner advertisements and pop- proximity standards. Proposed comment advertised payments. The Board up advertisements are similar to 24(f)–2 provides a cross-reference to believes that requiring the disclosure envelopes in the direct mail context. comment 24(b)–2, which provides about taxes and insurance premiums to 226.24(g)—Alternative Disclosures— further guidance on the clear and be equally prominent could distract Television or Radio Advertisements conspicuous standard in this context. consumers from the key payment and time period information. As noted The Board is proposing to add a new 226.24(f)(3)—Disclosure of Payments above, proposed comment 24(f)–1 § 226.24(g) to allow alternative Proposed § 226.24(f)(3) addresses the would provide safe harbors for disclosures to be provided in oral disclosure of payments. Under the compliance with the equal prominence television and radio advertisements proposed rule, if an advertisement for and close proximity standards. pursuant to its authority under TILA credit secured by a dwelling states the Proposed comment 24(f)–2 provides a §§ 105(a), 122, and 144. One option amount of any payment, the cross-reference to the comment 24(b)–2, would be to state each of the disclosures advertisement must disclose the which provides further guidance required by current § 226.24(c)(2) at a following information in a clear and regarding the application of the clear speed and volume sufficient for a conspicuous manner: (a) The amount of and conspicuous standard in this consumer to hear and comprehend them each payment that will apply over the context. if a triggering term is stated in the term of the loan, including any balloon Proposed comment 24(f)–3 clarifies advertisement. Another option would be payment. In variable-rate transactions, how the rules on disclosures of rates for the advertisement to state orally the payments that will be determined based and payments in advertisements apply APR applicable to the loan, and the fact on application of an index and margin to the use of comparisons in that the rate may be increased after must be disclosed based on a reasonably advertisements. This comment covers consummation, if applicable, at a speed current index and margin; (b) the period both rate and payment comparisons, but and volume sufficient for a consumer to of time during which each payment will in practice, comparisons in hear and comprehend them. However, apply; and (c) in an advertisement for advertisements usually focus on instead of orally disclosing the required credit secured by a first lien on a payments. information about the amount or dwelling, the fact that the payments do Proposed comment 24(f)(3)–1 clarifies percentage of the downpayment and the not include amounts for taxes and that the requirement to disclose the terms of repayment, the advertisement insurance premiums, if applicable, and amounts and time periods of all could provide a toll-free telephone that the actual payment obligation will payments that will apply over the term number that the consumer may call to be greater. These requirements are in of the loan may require the disclosure receive more information. Given the addition to the disclosure requirements of several payment amounts, including space and time constraints on television of current § 226.24(c). any balloon payment. The comment and radio advertisements, the required Proposed comment 24(f)(3)–2 would provides an illustrative example. disclosures may go unnoticed by specifically address how this Proposed comment 24(f)–5 would consumers or be difficult for them to requirement applies in the context of provide safe harbors for what retain. Thus, providing an alternative advertisements for variable-rate constitutes a ‘‘reasonably current index means of disclosure may be more transactions. For such transactions, if and margin’’ as used in § 226.24(f). effective in many cases given the nature the payment that applies at Under the proposed comment, the time of television and radio media. consummation is based on the index period during which an index and This approach is consistent with the and margin that will be used to make margin would be considered reasonably approach taken in the proposed subsequent payment adjustments over current would depend on the medium revisions to the advertising rules for the term of the loan, then there is only in which the advertisement was open-end plans (other than home- one payment that must be disclosed and distributed. For direct mail secured plans). See 72 FR 32948, 33064 the requirements of § 226.24(f)(3) do not advertisements, a reasonably current (June 14, 2007). This approach is also apply. If, however, the payment that index and margin would be one that similar, but not identical, to the applies at consummation is not based was in effect within 60 days before approach taken in the advertising rules on the index and margin that will be mailing. For advertisements in under Regulation M. See 12 CFR used to make subsequent payment electronic form, a reasonably current 213.7(f). Section 213.7(f)(1)(ii) of adjustments over the term of the loan, index and margin would be one that Regulation M permits a leasing then there is more than one payment was in effect within 30 days before the advertisement made through television that must be disclosed and the advertisement was sent to a consumer’s or radio to direct the consumer to a requirements of § 226.24(f)(3) apply. e-mail address, or for advertisements written advertisement in a publication The proposed rule establishes a clear made on an Internet Web site, when of general circulation in a community and conspicuous standard for the viewed by the public. For printed served by the media station. The Board disclosure of payments in advertisements made available to the has not proposed this option because it advertisements for home-secured loans. general public, a reasonably current may not provide sufficient, readily- Under this standard, the information index and margin would be one that accessible information to consumers required to be disclosed under was in effect within 30 days before who are shopping for a home-secured § 226.24(f)(3) regarding the amounts and printing. loan and because advertisers, time periods of payments must be particularly those advertising on a 226.24(f)(4)—Envelope Excluded disclosed with equal prominence and in regional or national scale, are not likely close proximity to any advertised Proposed § 226.24(f)(4) provides that to use this option. payment that triggered the required the requirements of §§ 226.24(f)(2) and disclosures. The information required to (3) do not apply to envelopes or to 226.24(h)—Tax Implications be disclosed under § 226.24(f)(3) banner advertisements and pop-up Section 1302 of the Bankruptcy Act regarding the fact that taxes and advertisements that are linked to an amends TILA Section 144(e) to address

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advertisements that are disseminated in 226.24(i)—Prohibited Acts or Practices prominently refer to a ‘‘30-Year Fixed paper form to the public or through the in Mortgage Advertisements Rate Loan’’ or ‘‘Fixed Pay Rate Loan’’ on Internet, as opposed to by radio or Section 129(l)(2) of TILA gives the the first page. A footnote on the last television, and that relate to an Board the authority to prohibit acts or page of the advertisements discloses in extension of credit secured by a practices in connection with mortgage small type that the loan product is a consumer’s principal dwelling that may loans that it finds to be unfair or payment option ARM in which the fully exceed the fair market value of the deceptive. Section 129(l)(2) of TILA also indexed rate and fully amortizing dwelling. Such advertisements must gives the Board the authority to prohibit payment will be applied after the first five years. The Board finds that the use include a statement that the interest on acts or practices in connection with the of the word ‘‘fixed’’ in this manner can the portion of the credit extension that refinancing of mortgage loans that the mislead consumers into believing that is greater than the fair market value of Board finds to be associated with the advertised product is a fixed-rate the dwelling is not tax deductible for abusive lending practices, or that are mortgage with rates and payments that Federal income tax purposes. 15 U.S.C. otherwise not in the interest of the will not change during the term of the 1664(e). For such advertisements, the borrower. 15 U.S.C. 1639(l)(2). Through loan. statute also requires inclusion of a an extensive review of advertising copy Proposed § 226.24(i)(1) would statement that the consumer should and other outreach efforts described prohibit the use of the term ‘‘fixed’’ in consult a tax adviser for further above, Board staff identified a number advertisements for credit secured by a information on the deductibility of the of acts or practices connected with dwelling, unless certain conditions are interest. mortgage and mortgage refinancing satisfied. The proposal would prohibit advertising that appear to be The Bankruptcy Act also requires that the use of the term ‘‘fixed’’ in inconsistent with the standards set forth disclosures be provided at the time of advertisements for variable-rate in Section 129(l)(2) of TILA. transactions, unless two conditions are application in cases where the extension Accordingly, the Board is proposing to of credit may exceed the fair market satisfied. First, the phrase ‘‘Adjustable- add § 226.24(i) to prohibit seven acts or Rate Mortgage’’ or ‘‘Variable-Rate value of the dwelling. See 15 U.S.C. practices connected with 1638(a)(15). The Board intends to Mortgage’’ must appear in the advertisements of home-secured loans. advertisement before the first use of the implement the application disclosure The Board solicits comment on the portion of the Bankruptcy Act during its word ‘‘fixed’’ and be at least as appropriateness of the seven proposed conspicuous as every use of the word forthcoming review of closed-end and prohibitions and whether any additional ‘‘fixed.’’ Second, each use of the word HELOC disclosures under TILA. acts or practices should be prohibited by ‘‘fixed’’ must be accompanied by an However, the Board requested comment the regulation. equally prominent and closely on the implementation of both the proximate statement of the time period advertising and application disclosures 226.24(i)(1)—Misleading Advertising for ‘‘Fixed’’ Rates, Payments or Loans for which the rate or payment is fixed under this provision of the Bankruptcy and the fact that the rate may vary or the Act for open-end credit in its October Advertisements for home-secured payment may increase after that period. 17, 2005, ANPR. 70 FR 60235, 60244 loans often refer to a rate or payment, Based on the advertising copy reviewed, (Oct. 17, 2005). A majority of comments or to the credit transaction, as ‘‘fixed.’’ particularly the first example described on this issue addressed only the Such a reference is appropriate when above, the Board believes there are application disclosure requirement, but used to denote a fixed-rate mortgage in legitimate and appropriate some commenters specifically which the rate or payment amounts do circumstances for using the term addressed the advertising disclosure not change over the full term of the ‘‘fixed,’’ even in advertisements for requirement. One industry commenter loan. Indeed, some credit counselors variable-rate transactions. Therefore, the suggested that the advertising disclosure often encourage consumers to shop only Board is not proposing an absolute ban requirement apply only in cases where for fixed-rate mortgages. on use of the term ‘‘fixed’’ in the advertised product allows for the The Board has found that some advertisements for variable-rate credit to exceed the fair market value of advertisements also use the term transactions. The Board believes that the dwelling. Other industry ‘‘fixed’’ in connection adjustable-rate this more targeted approach will curb commenters suggested that the mortgages, or with fixed-rate mortgages deceptive advertising practices. requirement apply only to that include low initial payments that The proposal would also prohibit the advertisements for products that are will increase. Some of these use of the term ‘‘fixed’’ to refer to the intended to exceed the fair market value advertisements make clear that the rate advertised payment in advertisements of the dwelling. or payment is only ‘‘fixed’’ for a defined solely for transactions other than period of time, but after that the rate or variable-rate transactions where the The Board proposes to add § 226.24(h) payment may increase. For example, advertised payment may increase (i.e., and comment 24(h)–1 to implement one advertisement reviewed fixed-rate mortgage transactions with an TILA Section 144(e). The Board’s prominently discloses that the product initial lower payment that will proposal clarifies that the new is an ‘‘Adjustable-Rate Mortgage’’ in increase), unless each use of the word requirements apply to advertisements large type, and clearly discloses in ‘‘fixed’’ to refer to the advertised for home-secured loans where the standard type that the rate is ‘‘fixed’’ for payment is accompanied by an equally advertised extension of credit may, by the first three, five, or seven years prominent and closely proximate its terms, exceed the fair market value depending upon the product selected statement of the time period for which of the dwelling. The Board seeks and may increase after that. the payment is fixed and the fact that comment on whether the new However, other advertisements do not the payment may increase after that requirements should only apply to adequately disclose that the interest rate period. advertisements that state or imply that or payment amounts are ‘‘fixed’’ only Finally, the proposal would prohibit the creditor provides extensions of for a limited period of time, rather than the use of the term ‘‘fixed’’ in credit greater than the fair market value for the full term of the loan. For advertisements for both variable-rate of the dwelling. example, some advertisements reviewed transactions and non-variable-rate

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transactions, unless certain conditions insurance premiums, but the payments practices in advertisements focused on are satisfied. First, the phrase for the advertised product do not debt consolidation. The Board solicits ‘‘Adjustable-Rate Mortgage,’’ ‘‘Variable- include those amounts. These practices comment on whether comparisons Rate Mortgage,’’ or ‘‘ARM’’ must appear make comparison between the based on the assumed refinancing of in the advertisement with equal consumer’s current obligations and the non-mortgage debt into a new home- prominence as any use of the word lower advertised rates or payments secured loan are associated with abusive ‘‘fixed.’’ Second, each use of the term misleading. lending practices or otherwise not in the ‘‘fixed’’ to refer to a rate, payment, or to Proposed § 226.24(i)(2) would interest of the borrower and should the credit transaction, must clearly refer prohibit any advertisement for credit therefore be prohibited as well. solely to transactions for which rates are secured by a dwelling from making any 226.24(i)(3)—Misrepresentations About fixed and, if used to refer to an comparison between an actual or Government Endorsement advertised payment, be accompanied by hypothetical consumer’s current an equally prominent and closely payments or rates and the payment or Some advertisements for home- proximate statement of the time period simple annual rate that will be available secured loans characterize the products for which the advertised payment is under the advertised product for less offered as ‘‘government loan programs,’’ fixed and the fact that the payment will than the term of the loan, unless two ‘‘government-supported loans,’’ or increase after that period. Third, if the conditions are satisfied. First, the otherwise endorsed or sponsored by a term ‘‘fixed’’ refers to the variable-rate comparison must include with equal federal or state government entity, even transactions, it must be accompanied by prominence and in close proximity to though the advertised products are not an equally prominent and closely the ‘‘teaser’’ payment or rate, all government-supported loans, such as proximate statement of a time period for applicable payments or rates for the FHA or VA loans, or otherwise endorsed which the rate or payment is fixed, and advertised product that will apply over or sponsored by any federal, state, or the fact that the rate may vary or the the term of the loan and the period of local government entity. The Board payment may increase after that period. time for which each applicable payment finds that such advertisements can The Board believes that this approach or simple annual rate will apply. mislead consumers into believing that balances the need to protect consumers Second, the advertisement must include the government is guaranteeing, from misleading advertisements about a prominent statement in close endorsing, or supporting the advertised the terms that are ‘‘fixed,’’ while proximity to the advertised payments loan product. Proposed § 226.24(i)(3) ensuring that advertisers can continue that such payments do not include would prohibit such statements unless to use the term ‘‘fixed’’ for legitimate, amounts for taxes and insurance the advertisement is for an FHA loan, non-deceptive purposes in premiums, if applicable. In the case of VA loan, or similar loan program that is, advertisements for home-secured loans, advertisements for variable-rate in fact, endorsed or sponsored by a including variable-rate transactions. transactions where the advertised federal, state, or local government payment or simple annual rate is based entity. Proposed comment 24(i)–2 226.24(i)(2)—Misleading Comparisons on the index and margin that will be illustrates that a misrepresentation in Advertisements used to make subsequent rate or about government endorsement Some advertisements for home- payment adjustments over the term of includes a statement that the federal secured loans make comparisons the loan, the comparison must include: Community Reinvestment Act entitles between an actual or hypothetical (a) An equally prominent statement in the consumer to refinance his or her consumer’s current rate or payment close proximity to the advertised mortgage at the new low rate offered in obligations and the rates or payments payment or rate that the payment or rate the advertisement is prohibited because that would apply if the consumer is subject to adjustment and the time it conveys to the consumer a misleading obtains the advertised product. The period when the first adjustment will impression that the advertised product advertised rates or payments used in occur; and (b) a prominent statement in is endorsed or sponsored by the federal these comparisons frequently are low close proximity to the advertised government. introductory ‘‘teaser’’ rates or payments payment that the payment does not that will not apply over the full term of 226.24(i)(4)—Misleading Use of the include amounts for taxes and insurance Current Mortgage Lender’s Name the loan, and do not include amounts premiums, if applicable. for taxes or insurance premiums. In Proposed comment 24(i)–1 would Some advertisements for home- addition, the current rate or payment clarify that a misleading comparison secured loans prominently display the obligations used in these comparisons includes a claim about the amount that name of the consumer’s current frequently include not only the a consumer may save under the mortgage lender, while failing to consumer’s mortgage payment, but also advertised product. For example, a disclose or to disclose adequately the possible payments for short-term, non- statement such as ‘‘save $600 per month fact that the advertisement is by a home secured, or revolving credit on a $500,000 loan’’ constitutes an mortgage lender that is not associated obligations, such as auto loans, implied comparison between the with the consumer’s current lender. The installment loans, or credit card debts. advertised product’s payment and a Board finds that such advertisements The Board finds that making consumer’s current payment. may mislead consumers into believing comparisons in advertisements can be The Board is not proposing to prohibit that their current lender is offering the misleading if the advertisement comparisons that take into account the loan advertised or that the loan terms compares the consumer’s current consolidation of non-mortgage credit, stated in the advertisement constitute a payments or rates to payments or rates such as auto loans, installment loans, or reduction in the consumer’s payment available for the advertised product that revolving credit card debt, into a single, amount or rate, rather than an offer to will only be in effect for a limited home-secured loan. Debt consolidation refinance the current loan with a period of time, rather than for the term can be beneficial for some consumers. different creditor. Proposed of the loan. Similarly, the Board finds Prohibiting the use of comparisons in § 226.24(i)(4) would prohibit any that such comparisons can be advertisements that are based solely on advertisement for a home-secured loan, misleading if the consumer’s current low introductory ‘‘teaser’’ rates or such as a letter, that is not sent by or payments include amounts for taxes and payments should address abusive on behalf of the consumer’s current

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lender from using the name of the persons working for the broker or lender mortgage transactions subject to the Real consumer’s current lender, unless the that are involved in offering, originating Estate Settlement Procedures Act advertisement also discloses with equal or selling mortgages. The Board (RESPA) and requires that ‘‘good faith prominence: (a) The name of the person recognizes that counselors and financial estimates’’ of the mortgage loan or creditor making the advertisement; advisors do play a legitimate role in disclosure be made ‘‘before the credit is and (b) a clear and conspicuous assisting consumers in selecting extended, or shall be delivered or statement that the person making the appropriate home-secured loans. placed in the mail not later than three advertisement is not associated with, or Nothing in this rule would prohibit business days after the creditor receives acting on behalf of, the consumer’s advertisements for bona fide consumer the consumer’s written application, current lender. credit counseling services, such as whichever is earlier.’’ 15 U.S.C. counseling services provided by non- 1638(b)(2). 226.24(i)(5)—Misleading Claims of Debt The Board proposes to amend Elimination profit organizations, or bona fide financial advisory services, such as Regulation Z to extend the early Some advertisements for home- services provided by certified financial mortgage loan disclosure requirement secured loans include statements that planners. for residential mortgage transactions to promise to eliminate, cancel, wipe-out, other types of closed-end mortgage waive, or forgive debt. The Board finds 226.24(i)(7)—Misleading Foreign- transactions, including mortgage that such advertisements can mislead Language Advertisements refinancings, home equity loans, and consumers into believing that they are Some advertisements for home- reverse mortgages. Consistent with the entering into a debt forgiveness program secured loans are targeted to non- existing requirement for residential rather than merely replacing one debt English speaking consumers. In general, mortgage transactions, this requirement obligation with another. Proposed this is an appropriate means of would be limited to transactions § 226.24(i)(5) would prohibit promoting home ownership or offering secured by a consumer’s principal advertisements for credit secured by a loans to under-served, immigrant dwelling. The Board also proposes to dwelling that offer to eliminate debt, or communities. In some of these require that the early mortgage loan waive or forgive a consumer’s existing advertisements, however, information disclosure be delivered before the loan terms or obligations to another about some of the trigger terms or consumer pays a fee to any person for creditor. Proposed comment 24(i)–3 required disclosures, such as a low these transactions. The Board is provides examples of claims that would introductory ‘‘teaser’’ rate or payment, is proposing an exception to the fee be prohibited. These include the provided in a foreign language, while restriction, however, for obtaining following claims: ‘‘Wipe-Out Personal information about other trigger terms or information on the consumer’s credit Debts!’’, ‘‘New DEBT-FREE Payment’’, required disclosures, such as the fully- history. ‘‘Set yourself free; get out of debt indexed rate or fully amortizing This proposal is made pursuant to today’’, ‘‘Refinance today and wipe your payment, is provided only in English. TILA Section 105(a), which mandates debt clean!’’, ‘‘Get yourself out of debt The Board finds that this practice can that the Board prescribe regulations to * * * Forever!’’, and, in the context of mislead non-English speaking carry out TILA’s purposes, and an advertisement referring to a consumers who may not be able to authorizes the Board to create such consumer’s existing obligations to comprehend the important English- classifications, differentiations, or other another creditor, ‘‘Pre-payment Penalty language disclosures. Proposed provisions, and to provide for such Waiver.’’ The proposed comment would § 226.24(i)(7) would prohibit adjustments and exceptions for any also clarify that this provision does not advertisements for home-secured loans class of transactions, as in the judgment prohibit an advertisement for a home- from providing information about some of the Board are necessary or proper to secured loan from claiming that the trigger terms or required disclosures, effectuate the purposes of TILA, to advertised product may reduce debt such as an initial rate or payment, only prevent circumvention or evasion payments, consolidate debts, or shorten in a foreign language, but providing thereof, or to facilitate compliance the term of the debt. information about other trigger terms or therewith. 15 U.S.C. 1604(a). TILA Section 102(a) provides, in pertinent 226.24(i)(6)—Misleading Claims required disclosures, such as part, that the Act’s purposes are to Suggesting a Fiduciary or Other information about the fully-indexed rate assure a meaningful disclosure of credit Relationship or fully amortizing payment, only in terms so that the consumer will be able English. Advertisements that provide all Some advertisements for home- to compare more readily the various disclosures in both English and a secured loans attempt to create the credit terms available to him and avoid foreign language or advertisements that impression that the mortgage broker or the uninformed use of credit. 15 U.S.C. are entirely in English or entirely in a lender, its employees, or its 1601(a). The proposal is intended to foreign language would not be affected subcontractors, have a fiduciary help consumers make informed use of by this prohibition. relationship with the consumer. The credit and shop among available credit Board finds that such advertisements XI. Mortgage Loan Disclosures alternatives. may mislead consumers into believing Under the current rule, creditors need that the broker or lender will consider A. Early Mortgage Loan Disclosures— not deliver mortgage loan disclosures on only the consumer’s best interest in § 226.19 non-purchase money mortgage offering a mortgage loan to the TILA Section 128(b)(1) provides that transactions until consummation. By consumer, when, in fact, the broker or the primary closed-end disclosure that time, consumers may not be in a lender may be considering its own (referred to in this subpart as the position to make meaningful use of the interests. Proposed § 226.24(i)(6) would ‘‘mortgage loan disclosure’’), which disclosure. Once consumers have prohibit advertisements for credit includes the annual percentage rate reached the settlement table, it is likely secured by a dwelling from using the (APR) and other material disclosures, too late for them to use the disclosure terms ‘‘counselor’’ or ‘‘financial must be delivered ‘‘before the credit is to shop among mortgages or to inform advisor’’ to refer to a for-profit mortgage extended.’’ 15 U.S.C. 1638(b)(1). A themselves adequately of the terms of broker or lender, its employees, or separate rule applies to residential the loan. Consumers are presented at

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settlement with a large, often is necessary to clarify what fees would XII. Civil Liability and Remedies; overwhelming, number of documents, be deemed in connection with an Administrative Enforcement and they may not reasonably be able to application. Consumer Remedies for Unfair, focus adequate attention on the The Board is proposing an exception Deceptive, or Abusive Practices mortgage loan disclosure. Moreover, by to the fee restriction, however, for the time of loan consummation, obtaining information on the The restrictions on loan terms and consumers may feel committed to the consumer’s credit history. The proposed lending practices in proposed §§ 226.35 loan because they are accessing their exception to the fee restriction and 226.36, as well as the advertising equity for an urgent need, or they have recognizes that creditors generally restrictions in proposed § 226.24(i), are already paid substantial application cannot make accurate transaction- based on the Board’s authority under fees. specific estimates without having TILA Section 129(l)(2), 15 U.S.C. The mortgage loan disclosure that considered the consumer’s credit 1639(l)(2). Consumers who bring timely consumers would receive early in the history. To require creditors to bear the actions against creditors for violations of application process under this proposal cost of reviewing credit history with these restrictions may be able to recover: includes a payment schedule, which little assurance the customer will apply (i) Actual damages; (ii) statutory would illustrate any increases in for a loan may be unduly burdensome damages in an individual action of up payments over time. The disclosure also and could undermine the utility of the to $2,000 or, in a class action, total would include an APR that reflects the disclosures. The proposed exception statutory damages for the class of up to fully indexed rate in cases of hybrid and would allow creditors to recoup the $500,000 or one percent of the creditor’s payment-option ARMs, which bona fide and reasonable amount net worth, whichever is less; (iii) special sometimes are marketed on the basis of necessary to obtain a credit report or statutory damages equal to the sum of only an initial, discounted rate or a other, similar form of information on the all finance charges and fees paid by the temporary, minimum payment. consumer’s credit history. consumer; and (iv) court costs and Providing this information within three The Board expects this proposal attorney fees. TILA Section 130(a), 15 days of application, before the consumer would impose additional costs on U.S.C. 1640(a).72 has paid a fee, would help ensure that creditors, some of which may be passed If a loan is a HOEPA loan—that is, its consumers would have a genuine on in part to consumers. Some creditors APR or fees exceed the triggers in opportunity to review the credit terms already deliver early mortgage loan § 226.32(a)—and the creditor has being offered; ensure that the terms are disclosures on non-purchase money assigned it to another person, consistent with their understanding of mortgages. Not all creditors, however, consumers may be able to obtain from the transaction; assess whether the follow this practice, and those that do the assignee all of the foregoing terms meet their needs and are not would face increased costs, both damages, including the finance charges affordable; and decide whether to go one-time costs to modify their systems and fees paid by the consumer. TILA through with the transaction or continue and ongoing costs to originate loans. Section 131(d), 15 U.S.C. 1641(d). For to shop among alternatives. The Board seeks comment on whether all other loans, TILA Section 131(e), 15 the benefits of this proposal outweigh Disclosure Before Fee Paid U.S.C. 1641(e), limits the liability of these costs or other costs commenters assignees for violations of Regulation Z The Board proposes to require that all identify. to disclosure violations that are of the early mortgage loan disclosures be Corresponding changes also would be apparent on the face of the disclosure delivered before the consumer pays a made to the staff commentary, and statement required by TILA. fee to any person in connection with the certain other conforming amendments TILA does not authorize private civil consumer’s application for a mortgage to Regulation Z and the staff actions against parties other than transaction. Consumers typically pay commentary also are proposed. fees to apply for a mortgage loan, such creditors and assignees. A creditor is the as fees for a credit report and property B. Future Plans To Improve Disclosure party to whom the debt is initially appraisal, as well as nonspecific The Board remains committed to its payable. TILA Section 103(f), 15 U.S.C. ‘‘application’’ fees. If the fee is longstanding belief that better 1602(f). A mortgage broker is not a significant, a consumer may feel information in the mortgage market can creditor unless the debt is initially constrained from shopping for improve competition and help payable to the broker. Loan servicers alternatives. This risk is particularly consumers make better decisions. This may be creditors, but often they are not. high in the subprime market, where proposal contains new rules to prevent Neither is a servicer treated as an consumers often are cash-strapped and incomplete or misleading mortgage loan assignee under TILA if the servicer is or where limited price transparency may advertisements and solicitations, and to was the owner of the obligation only for obscure the benefits of continuing to require lenders to provide mortgage 72 Section 130(a), 15 U.S.C. 1640(a), authorizes shop. See part II.C for a discussion of disclosures more quickly so that recovery of amounts of types (i), (ii), and (iv) from these points. The risk also applies to the consumers can get the information they a creditor for a failure to comply with any prime market, where many consumers need when it is most useful to them. requirement imposed under Chapter 2, which would find significant a fee of several The Board recognizes that these includes Section 129, 15 U.S.C. 1639. Section 130(a)(4), 15 U.S.C. 1640(a)(4), further authorizes hundred dollars such as the fee often disclosures need to be updated to reflect recovery of amounts of type (iii) for a failure to imposed for an appraisal and other the increased complexity of mortgage comply with any requirement under Section 129, 15 services. products. In early 2008, the Board will U.S.C. 1639, unless the creditor demonstrates that The proposed early disclosure begin testing current TILA mortgage the failure to comply is not material. Under TILA Section 103(y), 15 U.S.C. 1602(y), a reference to a obligation would be limited to fees paid disclosures and potential revisions to requirement imposed under TILA or any provision in connection with an application for a these disclosures through one-on-one thereof also includes a reference to the regulations mortgage transaction. This limitation is interviews with consumers. The Board of the Board under TILA or the provision in necessary because the obligation is expects that this testing will identify question. Therefore, Section 130(a), 15 U.S.C. 1640(a), authorizes recovery from a creditor of triggered by a fee paid to any person, potential improvements for the Board to amounts of all four types if the creditor fails to not just to the creditor. The Board seeks propose for public comment in a comply with a Board regulation adopted under comment on whether further guidance separate rulemaking. authority of Section 129(l)(2), 15 U.S.C. 1639(l)(2).

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purposes of administrative convenience creditors, assignees, or other persons, rules, as well as on whether the Board in servicing the obligation. TILA Section because those rules would be should specify a shorter implementation 131(f), 15 U.S.C. 1641(f). promulgated under the Board’s general period for certain provisions in order to rulemaking authority in TILA Section prevent unfair or deceptive practices. A Consumer’s Right to Rescind 105(a), 15 U.S.C. 1604(a). These XIV. Paperwork Reduction Act A consumer has a right to rescind a proposed rules would, however, be transaction for up to three years after subject to administrative enforcement In accordance with the Paperwork consummation when the mortgage by appropriate agencies. Reduction Act (PRA) of 1995 (44 U.S.C. contains a provision prohibited by a Proposed § 226.24(i), which would 3506; 5 CFR Part 1320 Appendix A.1), rule adopted under authority of TILA prohibit certain acts or practices in the Board reviewed the proposed rule Section 129(l)(2). See TILA Sections 125 connection with closed-end under the authority delegated to the and 129(j), 15 U.S.C. 1636 and 1639(j). advertisements for credit secured by a Board by the Office of Management and Moreover, any consumer who has the dwelling, would be promulgated under Budget (OMB). The collection of right to rescind a transaction may the Board’s authority in TILA Section information that is required by this rescind the transaction as against any 129(l)(2), 15 U.S.C. 1639(l)(2). Section proposed rule is found in 12 CFR part assignee. TILA Section 131(c), 15 U.S.C. 130(a), 15 U.S.C. 1640(a), authorizes a 226. The Federal Reserve may not 1641(c). The right of rescission does not civil action by any person against a conduct or sponsor, and an organization extend, however, to home purchase creditor who fails to comply with is not required to respond to, this loans, construction loans, or certain respect to that person with a rule information collection unless the refinancings with the same creditor. adopted under authority of Section information collection displays a TILA Section 125(e), 15 U.S.C. 1636. 129(l)(2), 15 U.S.C. 1639(l)(2). It is not currently valid OMB control number. Under current Regulation Z, 12 CFR clear, however, whether a consumer The OMB control number is 7100–0199. 226.23(a)(3), footnote 48, a HOEPA loan may bring an action against a creditor This information collection is having a prepayment penalty that does under Section 130(a), 15 U.S.C. 1640(a), required to provide benefits for not conform to the requirements of for violating an advertising restriction in consumers and is mandatory (15 U.S.C. § 226.32(d)(7) is a mortgage containing a proposed § 226.24(i) if the consumer has 1601 et seq.). The respondents/ provision prohibited by TILA Section not obtained a mortgage loan from the recordkeepers are creditors and other 129, 15 U.S.C. 1639, and, therefore, is creditor. entities subject to Regulation Z, subject to the three-year right of the including for-profit financial consumer to rescind. Proposed Administrative Enforcement institutions and small businesses. § 226.35(b)(3), which would be adopted In addition to providing consumers TILA and Regulation Z are intended under authority of Section 129(l)(2), 15 remedies against creditors and to ensure effective disclosure of the U.S.C. 1639(l)(2), would apply the assignees, the statute authorizes various costs and terms of credit to consumers. restrictions on prepayment penalties in agencies to enforce Regulation Z For open-end credit, creditors are § 226.32(d)(6) and (7) to higher-priced administratively against various parties. required, among other things, to mortgage loans, as defined in proposed The federal banking agencies may disclose information about the initial § 226.35(a). Accordingly, the Board is enforce the regulation against banks and costs and terms and to provide periodic proposing to revise footnote 48 to clarify thrifts. TILA Section 108(a), 15 U.S.C. statements of account activity, notices of that a higher-priced mortgage loan 1607(a). The Federal Trade Commission changes in terms, and statements of (whether or not it is a HOEPA loan) (FTC) is generally authorized to enforce rights concerning billing error having a prepayment penalty that does violations of Regulation Z as to any procedures. Regulation Z requires not conform to the requirements of other entity or individual. TILA Section specific types of disclosures for credit § 226.32(d)(7), as incorporated in 108(c), 15 U.S.C. 1607(c). State attorneys and charge card accounts and home- § 226.35(b)(3), is also subject to a three- general may enforce violations of equity plans. For closed-end loans, such year right of rescission. (As mentioned, regulations adopted under authority of as mortgage and installment loans, cost however, the right of rescission does not TILA Section 129(l)(2). See TILA disclosures are required to be provided extend to home purchase loans, Section 130(e), 15 U.S.C. 1640(e). prior to consummation. Special construction loans, or certain disclosures are required in connection XIII. Effective Date refinancings with the same creditor.) with certain products, such as reverse Other rules the Board is proposing Under TILA, the Board’s disclosure mortgages, certain variable-rate loans, would not be prohibitions of particular regulations are to have an effective date and certain mortgages with rates and provisions of mortgages, and violations of that October 1 which follows by at fees above specified thresholds. TILA of those rules therefore would not least six months the date of and Regulation Z also contain rules trigger the extended right of rescission. promulgation. TILA Section 105(d), 15 concerning credit advertising. Creditors U.S.C. 1604(d). However, the Board are required to retain evidence of Advertising Rules and Civil Liability may, at its discretion, lengthen the compliance for twenty-four months (12 The Board’s proposal in connection implementation period for creditors to CFR 226.25), but Regulation Z does not with advertising practices presents a adjust their forms to accommodate new specify the types of records that must be unique case with respect to civil requirements, or shorten the period retained. liability under TILA. TILA Section 130 where the Board makes a specific Under the PRA, the Federal Reserve provides for civil liability of creditors finding that such action is necessary to accounts for the paperwork burden for violations only of chapters 2, 4, and prevent unfair or deceptive disclosure associated with Regulation Z for the 5 of the act, 15 U.S.C. 1640(a), whereas practices. Id. The Board requests state member banks and other creditors the advertising provisions of TILA are comment on whether six months would supervised by the Federal Reserve that found in chapter 3. Accordingly, the be an appropriate implementation engage in lending covered by Regulation Board’s proposed rules relating to period for the proposed rules. Z and, therefore, are respondents under advertising disclosures, such as the Specifically, the Board requests the PRA. Appendix I of Regulation Z disclosures about rates or payments, comment on the length of time creditors defines the Federal Reserve-regulated would not create civil liability for may need to implement the proposed institutions as: state member banks,

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branches and agencies of foreign banks strengthening the clear and conspicuous Office of Management and Budget, (other than federal branches, federal standard for advertising disclosures, Paperwork Reduction Project (7100– agencies, and insured state branches of regulating the disclosure of rates and 0199), Washington, DC 20503. foreign banks), commercial lending payments in advertisements to ensure XV. Initial Regulatory Flexibility companies owned or controlled by that low introductory or ‘‘teaser’’ rates Analysis foreign banks, and organizations or payments are not given undue operating under section 25 or 25A of the emphasis, and prohibiting certain acts In accordance with section 3(a) of the Federal Reserve Act. Other federal or practices in advertisements that the Regulatory Flexibility Act (RFA), 5 agencies account for the paperwork Federal Reserve finds inconsistent with U.S.C. §§ 601–612, the Board is burden on other creditors. Paperwork the standards set forth in TILA Section publishing an initial regulatory burden associated with entities that are 129(l)(2). The Federal Reserve estimates flexibility analysis for the proposed not creditors will be accounted for by that 1,172 respondents regulated by the amendments to Regulation Z. The RFA other federal agencies. The current total Federal Reserve would take, on average, requires an agency either to provide an annual burden to comply with the 40 hours (one business week) to revise initial regulatory flexibility analysis provisions of Regulation Z is estimated and update their advertising materials to with a proposed rule or certify that the to be 552,398 hours for the 1,172 comply with the proposed disclosure proposed rule will not have a significant Federal Reserve-regulated institutions requirements in §§ 226.16 and 226.24. economic impact on a substantial that are deemed to be respondents for These one-time revisions would number of small entities. An entity is the purposes of the PRA. To ease the increase the burden by 46,880 hours. considered ‘‘small’’ if it has $165 burden and cost of complying with The other federal agencies are million or less in assets for banks and Regulation Z (particularly for small responsible for estimating and reporting other depository institutions; and $6.5 entities), the Federal Reserve provides to OMB the total paperwork burden for million or less in revenues for non-bank model forms, which are appended to the the institutions for which they have mortgage lenders, mortgage brokers, and regulation. administrative enforcement authority. loan servicers.73 The proposed rule would impose a They may, but are not required to, use Based on its analysis and for the one-time increase in the total annual the Federal Reserve’s burden estimates. reasons stated below, the Board believes burden under Regulation Z for all Using the Federal Reserve’s method, the that this proposed rule will have a respondents regulated by the Federal total current estimated annual burden significant economic impact on a Reserve by 46,880 hours, from 552,398 for all financial institutions subject to substantial number of small entities. A to 599,278 hours. Regulation Z, including Federal final regulatory flexibility analysis will The total estimated burden increase, Reserve-supervised institutions, would be conducted after consideration of as well as the estimates of the burden be approximately 61,656,695 hours. The comments received during the public increase associated with each major proposed rule would increase the comment period. The Board requests section of the proposed rule as set forth estimated annual burden for all public comment in the following areas. below, represents averages for all institutions subject to Regulation Z by Reasons for the Proposed Rule respondents regulated by the Federal 772,000 hours to 62,428,695 hours. The Reserve. The Federal Reserve expects above estimates represent an average Congress enacted TILA based on that the amount of time required to across all respondents and reflect findings that economic stability would implement each of the proposed variations between institutions based on be enhanced and competition among changes for a given institution may vary their size, complexity, and practices. All consumer credit providers would be based on the size and complexity of the covered institutions, of which there are strengthened by the informed use of respondent. Furthermore, the burden approximately 19,300, potentially are credit resulting from consumers’ estimate for this rulemaking does not affected by this collection of awareness of the cost of credit. One of include the burden addressing changes information, and thus are respondents the stated purposes of TILA is to to format, timing, and content for purposes of the PRA. provide a meaningful disclosure of requirements for the five main types of Comments are invited on: (1) Whether credit terms to enable consumers to open-end credit disclosures governed by the proposed collection of information compare credit terms available in the Regulation Z as announced in a separate is necessary for the proper performance marketplace more readily and avoid the proposed rulemaking (Docket No. R– of the Federal Reserve’s functions; uninformed use of credit. TILA’s 1286). including whether the information has disclosure requirements differ The Federal Reserve proposes practical utility; (2) the accuracy of the depending on whether consumer credit revisions to §§ 226.16 and 226.24 to Federal Reserve’s estimate of the burden is an open-end (revolving) plan or a require that advertisements provide of the proposed information collection, closed-end (installment) loan. TILA also accurate and balanced information, in a including the cost of compliance; (3) contains procedural and substantive clear and conspicuous manner. ways to enhance the quality, utility, and protections for consumers. TILA directs Additional proposed revisions to clarity of the information to be the Board to prescribe regulations to § 226.24 would prohibit advertisements collected; and (4) ways to minimize the carry out the purposes of the statute. that are deceptive. burden of information collection on Congress enacted HOEPA in 1994 as The proposed changes to the respondents, including through the use an amendment to TILA. TILA is advertising provisions would amend the of automated collection techniques or implemented by the Board’s Regulation open-end home-equity plan advertising other forms of information technology. Z. HOEPA imposed additional rules in § 226.16 and amend the closed- Comments on the collection of substantive protections on certain high- end credit advertising rules in § 226.24. information should be sent to Michelle cost mortgage transactions. HOEPA also The two most significant changes in Shore, Federal Reserve Board Clearance authorized the Board to prohibit acts or § 226.16 relate to the clear and Officer, Division of Research and conspicuous standard and the Statistics, Mail Stop 151–A, Board of 73 U.S. Small Business Administration, Table of Small Business Size Standards Matched to North advertisement of introductory terms in Governors of the Federal Reserve American Industry Classification System Codes; home-equity plans. The three most System, Washington, DC 20551, with available at http://www.sba.gov/idc/groups/public/ significant changes in § 226.24 relate to copies of such comments sent to the documents/sba_homepage/serv_sstd_tablepdf.pdf.

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practices in connection with mortgage The Board’s proposal also would lending and servicing. The Board is not loans that are unfair, deceptive, or require certain TILA disclosures for aware of a reliable source for the total designed to evade the purposes of closed-end mortgages to be provided to number of small entities likely to be HOEPA, and acts or practices in the consumer earlier in the loan process. affected by the proposal, and the credit connection with refinancing of mortgage The proposal would revise the provisions of TILA and Regulation Z loans that are associated with abusive Regulation Z advertising rules to ensure have broad applicability to individuals lending or are otherwise not in the that advertisements for open-end and and businesses that originate, extend interest of borrowers. closed-end mortgage loans provide and service even small numbers of The proposed regulations would accurate and balanced information home-secured credit. See § 226.1(c)(1).74 prohibit certain acts or practices in about rates and payments. All small entities that originate, extend, connection with closed-end mortgage loans to address problems that have Statement of Objectives and Legal Basis or service closed-end loans secured by been observed in the mortgage market, The SUPPLEMENTARY INFORMATION a consumer’s dwelling potentially could particularly the subprime market. Some contains this information. In summary, be subject to the proposed rule. of the proposed prohibitions or the proposed amendments to Regulation The Board can, however, identify restrictions would apply only to higher- Z are designed to achieve three goals: (1) through data from Reports of Condition priced closed-end mortgage loans Prohibit certain acts or practices for and Income (‘‘call reports’’) approximate secured by the consumer’s principal higher-priced mortgage loans secured by numbers of small depository institutions dwelling. These include: (1) Prohibiting a consumer’s principal dwelling and that would be subject to the proposed a pattern or practice of extending credit prohibit other acts or practices for rules. Based on December 2006 call based on the collateral without closed-end mortgage loans secured by a report data, approximately 6,932 small considering the borrower’s ability to consumer’s principal dwelling; (2) institutions would be subject to the repay; (2) requiring creditors to establish revise the disclosures required in proposed rule. Approximately 17,618 escrow accounts for taxes and insurance advertisements for credit secured by a depository institutions in the United for first-lien loans; (3) requiring consumer’s dwelling and prohibit States filed call report data, creditors to verify income and assets certain practices in connection with approximately 13,018 of which had total they rely upon in making loans; and (4) closed-end mortgage advertising; and (3) domestic assets of $165 million or less prohibiting prepayment penalties except require disclosures for closed-end and thus were considered small entities under certain conditions. mortgages to be provided earlier in the Other proposed prohibitions or transaction. for purposes of the Regulatory restrictions would apply generally to The legal basis for the proposed rule Flexibility Act. Of 4,558 banks, 615 closed-end mortgage loans secured by is in Sections 105(a), 122(a), and thrifts and 7,691 credit unions that filed the consumer’s principal dwelling. 129(l)(2) of TILA. A more detailed call report data and were considered These include restrictions on certain discussion of the Board’s rulemaking small entities, 4,389 banks, 574 thrifts, creditor payments to brokers, a authority is set forth in part V of the and 5,104 credit unions, totaling 10,067 prohibition on coercion of appraisers, SUPPLEMENTARY INFORMATION. institutions, extended mortgage credit. and a prohibition on certain mortgage For purposes of this analysis, thrifts Description of Small Entities to Which loan servicing practices. Finally, the include savings banks, savings and loan the Proposed Rule Would Apply proposal would prohibit certain entities, co-operative banks and advertising practices in connection with The proposed regulations would industrial banks. closed-end mortgage loans secured by a apply to all institutions and entities that consumer’s dwelling. engage in closed-end home-secured

Filed call report Filed call report data and origi- Filed call report data and origi- nated or ex- Filed call report Filed call report data and origi- nated or ex- tended mortgage data data and had as- nated or ex- tended mortgage credit with assets sets <= $165M tended mortgage credit with assets <= $165M and credit <= $165M did not file HMDA

Commercial banks...... 7,423 4,558 7,210 4,389 2,808 Thrifts 75 ...... 1,344 615 1,280 574 254 Credit unions...... 8,535 7,691 5,948 5,104 3,870 Other ...... 316 154 0 0 0

Total ...... 17,618 13,018 14,438 10,067 6,932

The Board cannot identify with depository institutions that would be certainty the number of small non- subject to the proposed rule. Home Mortgage Disclosure Act (HMDA) 76 data 74 Regulation Z generally applies to ‘‘each personal, family, or household purposes.’’ report information annually to their federal individual or business that offers or extends credit § 226.1(c)(1). supervisory agencies for each application and loan when four conditions are met: (i) The credit is 75 Thrifts include savings banks, savings and loan acted on during the calendar year. Lenders must offered or extended to consumers; (ii) the offering associations, co-operative and industrial banks. make their HMDA/LARs available to the public by or extension of credit is done regularly, (iii) the 76 The 8,886 lenders (both depository institutions March 31 following the year to which the data relate, and they must remove the two date-related credit is subject to a finance charge or is payable and mortgage companies) covered by HMDA in 2006 accounted for an estimated 80% of all home fields to help preserve applicants’ privacy. Only by a written agreement in more than four lending in the United States. Under HMDA, lenders lenders that have offices (or, for non-depository installments, and (iv) the credit is primarily for use a ’’loan/application register’’ (HMDA/LAR) to institutions, are deemed to have offices) in Continued

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indicate that 2,004 non-depository rules could affect how mortgage brokers Creditor payments to brokers. The institutions filed HMDA reports in are compensated. The precise costs that Board is aware that many states regulate 2006.77 Based on the small volume of the proposed rule would impose on brokers and their compensation in lending activity reported by these mortgage brokers are also difficult to various respects. Under TILA Section institutions, most are likely to be small. ascertain. Nevertheless, the Board 111, the proposed rule would not Certain parts of the proposal would believes that these costs will have a preempt such state laws except to the apply to mortgage brokers and mortgage significant economic effect on small extent they are inconsistent with the servicers. According to the National entities, including mortgage brokers. proposal’s requirements. 15 U.S.C. 1610. Association of Mortgage Brokers, in The Board seeks information and The Board seeks comment regarding 2004 there were 53,000 mortgage comment on any costs, compliance any state or local statutes or regulations, brokerage companies that employed an requirements, or changes in operating that would duplicate, overlap, or estimated 418,700 people.78 The Board procedures arising from the application conflict with the proposed rule. believes that most of these companies of the proposed rule to small are small entities.79 institutions. Discussion of Significant Alternatives The proposal would prohibit certain The Board considered whether Identification of Duplicative, unfair mortgage servicing practices. The improved disclosures could protect Overlapping, or Conflicting Federal Board is not aware, however, of a source consumers against unfair acts or Rules of data for the number of small mortgage practices in connection with closed-end servicers. The available data are not Other federal rules. The Board has not mortgage loans secured by a consumer’s sufficient for the Board to realistically identified any federal rules that conflict principal dwelling as well as the estimate the number of mortgage with the proposed revisions to proposed rule. While the Board servicers that would be subject to the Regulation Z. anticipates proposing improvements to proposed rule and that are small as Overlap with RESPA. Certain terms mortgage loan disclosures, it does not defined by the Small Business defined in the proposed rule, such as appear that better disclosures alone will Administration. The Board invites ‘‘escrow account,’’ ‘‘servicer’’ and address unfair, abusive, or deceptive comment and information on the ‘‘servicing,’’ cross-reference existing practices in the mortgage market, number and type of small entities definitions under the U.S. Department including the subprime market. affected by the proposed rule. of Housing and Urban Development’s The Board welcomes comments on (HUD) Regulation X (Real Estate Projected Reporting, Recordkeeping, any significant alternatives, consistent Settlement Procedures Act (RESPA). and Other Compliance Requirements with the requirements of TILA, that Overlap with HUD’s guidance. The would minimize the impact of the The compliance requirements of the Board recognizes that HUD has issued proposed rule on small entities. proposed rules are described in parts VI policy statements regarding creditor through VIII and in parts X and XI of the payments to mortgage brokers under List of Subjects in 12 CFR Part 226 SUPPLEMENTARY INFORMATION. The effect RESPA and guidance as to disclosure of Advertising, Consumer protection, of the proposed revisions to Regulation such payments on the Good Faith Federal Reserve System, Mortgages, Z on small entities is unknown. Some Estimate and HUD–1 Settlement Reporting and recordkeeping small entities would be required, among Statement. The Board is also aware that requirements, Truth in lending. other things, to modify their HUD has announced its intention to underwriting practices and home- propose improved disclosures for broker Text of Proposed Revisions secured credit disclosures to comply compensation under RESPA in the near Certain conventions have been used with the revised rules. The precise costs future. The Board intends that its to highlight the proposed revisions. to small entities of updating their proposal would complement any New language is shown inside bold systems, disclosures, and underwriting proposal by HUD. The proposed arrows, and language that would be practices are difficult to predict. These provision regarding creditor payments deleted is set off with bold brackets. costs will depend on a number of to brokers is intended to be consistent unknown factors, including, among with HUD’s existing guidance regarding Authority and Issuance other things, the specifications of the broker compensation under Section 8 of For the reasons set forth in the current systems used by such entities to RESPA. preamble, the Board proposes to amend prepare and provide disclosures and/or Identification of Duplicative, Regulation Z, 12 CFR part 226, as set solicitations and to administer and forth below: maintain accounts, the complexity of Overlapping, or Conflicting State Laws the terms of credit products that they Certain sections of the proposed rules PART 226—TRUTH IN LENDING offer, and the range of such product may result in inconsistency with certain (REGULATION Z) offerings. Additionally, the proposed state laws. Escrows. Certain states have laws 1. The authority citation for part 226 metropolitan areas are required to report under regulating escrows for taxes and is amended to read as follows: HMDA. However, if a lender is required to report, insurance. Section 226.35(b)(4) would Authority: 12 U.S.C. 3806; 15 U.S.C. it must report information on all of its home loan applications and loans in all locations, including require creditors to establish escrow 1604fl,fi [and] 1637(c)(5)fl, and 1639(l)fi. non-metropolitan areas. accounts for taxes and insurance for 77 The 2006 HMDA Data, http://www.federal first-lien higher-priced loans, but allow Subpart A—General reserve.gov/pubs/bulletin/2007/pdf/hmda06 creditors to allow borrowers to opt out draft.pdf. 2. Section 226.1 is amended by 78 http://www.namb.org/namb/Industry_Facts. of escrows 12 months after loan revising paragraph (d)(5) to read as asp?SnID=719224934 consummation. These provisions may follows: 79 In the first quarter of 2007, 77% of brokers be inconsistent with certain state laws (NAICS 522310) had fewer than five employees; that limit creditors’ ability to require § 226.1 Authority, purpose, coverage, only 0.4% had 100 or more employees, thus it escrows or provide consumers with a organization, enforcement and liability. seems likely that most have revenues below the threshold. (Bureau of Labor Statistics’ Quarterly right to opt out of an escrow sooner than * * * * * Census of Employment and Wages). 12 months after loan consummation. (d) * * *

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(5) Subpart E contains special rules (3) Balloon payment. If an rate plan, any annual percentage rate for mortgage transactions. Section advertisement contains a statement that is not based on the index and 226.32 requires certain disclosures and [about] floffi any minimum periodic margin that will be used to make rate provides limitations for loans that have payment fland a balloon payment may adjustments under the plan, if that rate rates and fees above specified amounts. result if only the minimum periodic is less than a reasonably current annual Section 226.33 requires disclosures, payments are made, even if such a percentage rate that would be in effect including the total annual loan cost rate, payment is uncertain or unlikelyfi, the under the index and margin that will be for reverse mortgage transactions. advertisement also shall state[, if used to make rate adjustments under the Section 226.34 prohibits specific acts applicable,] flwith equal prominence plan. and practices in connection with and in close proximity to the minimum (B) Introductory payment. The term mortgage transactions fl that are subject periodic payment statementfi that a ‘‘introductory payment’’ means— to § 226.32. Section 226.35 prohibits balloon payment may resultfl, if (1) For a variable-rate plan, any specific acts and practices in connection applicablefi.36e flA balloon payment payment applicable for an introductory with higher-priced mortgage loans, as results if paying the minimum periodic period that: defined in § 226.35(a). Section 226.36 payments does not fully amortize the (i) Is not derived by applying the prohibits specific acts and practices in outstanding balance by a specified date index and margin to the outstanding connection with credit secured by a or time, and the consumer is required to balance when such index and margin consumer’s principal dwellingfi. repay the entire outstanding balance at will be used to determine other * * * * * such time. If a balloon payment will payments under the plan; and occur when the consumer makes only (ii) Is less than other payments under Subpart B—Open-End Credit the minimum payments required under the plan derived by applying a the plan, an advertisement for such a reasonably current index and margin 3. Section 226.16 is amended by program which contains any statement that will be used to determine the revising paragraphs (d)(1) through of any minimum periodic payment shall amount of such payments, given an (d)(4), removing and reserving footnote also state with equal prominence and in assumed balance. 36e, and adding new paragraphs (d)(6) close proximity to the minimum (2) For a plan other than a variable- and (f) to read as follows: periodic payment statement: rate plan, any payment applicable for an § 226.16 Advertising. (i) That a balloon payment will result; introductory period if that payment is * * * * * and less than other payments that will be in (d) Additional requirements for home- (ii) The amount and timing of the effect under the plan given an assumed equity plans—(1) Advertisement of balloon payment that will result if the balance. terms that require additional consumer makes only the minimum (C) Introductory period. An disclosures. If any of the terms required payments for the maximum period of ‘‘introductory period’’ means a period of to be disclosed under § fl226.6(a)(1) or time that the consumer is permitted to time, less than the full term of the loan, (2)fi [226.6(a) or (b)] or the payment make such payments.fi that the introductory rate or terms of the plan are set forth, (4) Tax implications. An introductory payment may be affirmatively or negatively, in an advertisement that states that any applicable. advertisement for a home-equity plan interest expense incurred under the (ii) Stating the term ‘‘introductory’’. If subject to the requirements of § 226.5b, home-equity plan is or may be tax any annual percentage rate is an the advertisement also shall clearly and deductible may not be misleading in introductory rate, or if any payment is conspicuously set forth the following: this regard. flIf an advertisement an introductory payment, the term (i) Any loan fee that is a percentage distributed in paper form or through the ‘‘introductory’’ or ‘‘intro’’ must be stated of the credit limit under the plan and an Internet (rather than by radio or in immediate proximity to each listing estimate of any other fees imposed for television) is for a home-equity plan of the introductory rate or payment. opening the plan, stated as a single secured by the consumer’s principal (iii) Stating the introductory period dollar amount or a reasonable range. dwelling, and the advertised extension and post-introductory rate or payments. (ii) Any periodic rate used to compute of credit may, by its terms, exceed the If any annual percentage rate that may the finance charge, expressed as an fair market value of the dwelling, the be applied to a plan is an introductory annual percentage rate as determined advertisement shall clearly and rate, or if any payment applicable to a under § 226.14(b). conspicuously state that: plan is an introductory payment, the (iii) The maximum annual percentage (i) The interest on the portion of the following must be disclosed in a clear rate that may be imposed in a variable- credit extension that is greater than the and conspicuous manner with equal rate plan. fair market value of the dwelling is not prominence and in close proximity to (2) Discounted and premium rates. If tax deductible for Federal income tax each listing of the introductory rate or an advertisement states an initial annual purposes; and payment: percentage rate that is not based on the (ii) The consumer should consult a (A) The period of time during which index and margin used to make later tax adviser for further information the introductory rate or introductory rate adjustments in a variable-rate plan, regarding the deductibility of interest payment will apply; the advertisement also shall state and charges.fi (B) In the case of an introductory rate, flwith equal prominence and in close * * * * * any annual percentage rate that will proximity to the initial rate: fl(6) Introductory rates and apply under the plan. If such rate is (i) Tfi[t]he period of time such payments. variable, the annual percentage rate flinitialfi rate will be in effectfl;fi (i) Definitions. The following must be disclosed in accordance with and[, with equal prominence to the definitions apply for purposes if the accuracy standards in §§ 226.5b, or initial rate,] paragraph (d)(6) of this section. 226.16(b)(1)(ii) as applicable; and fl(ii) Afi[a] reasonably current (A) Introductory rate. The term (C) In the case of an introductory annual percentage rate that would have ‘‘introductory rate’’ means, in a variable- payment, the amounts and time periods been in effect using the index and of any payments that will apply under margin. 36e fl[Reserved.]fi [See footnote 10b.] the plan. In variable-rate transactions,

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payments that will be determined based consummation or settlement, whichever states a rate of finance charge, it shall on application of an index and margin is later).fi 39— state the rate as an ‘‘annual percentage shall be disclosed based on a reasonably * * * * * rate,’’ using that term. If the annual current index and margin. 5. Section 226.19 is amended by percentage rate may be increased after (iv) Envelope excluded. The revising the heading and paragraph consummation, the advertisement shall fl requirements in paragraph (d)(6)(iii) of (a)(1) to read as follows: state that fact. If an advertisement is for credit not secured by a dwelling, this section do not apply to an envelope § 226.19 Certain [residential] mortgage tfi[T]he advertisement shall not state in which an application or solicitation and variable-rate transactions. any other rate, except that a simple is mailed, or to a banner advertisement (a) [Residential m] flMfiortgage annual rate or periodic rate that is or pop-up advertisement linked to an transactions subject to RESPA— applied to an unpaid balance may be application or solicitation provided (1)fl(i)fi Time of disclosures. In a stated in conjunction with, but not more electronically.fi [residential] mortgage transaction conspicuously than, the annual * * * * * subject to the Real Estate Settlement percentage rate.fl If an advertisement is fl(f) Alternative disclosures— Procedures Act (12 U.S.C. 2601 et seq.) for credit secured by a dwelling, the television or radio advertisements. An flthat is secured by the consumer’s advertisement shall not state any other advertisement made through television principal dwelling, other than a home rate, except that a simple annual rate or radio stating any of the terms equity line of credit subject to that is applied to an unpaid balance fi requiring additional disclosures under § 226.5b, the creditor shall make good may be stated in conjunction with, but faith estimates of the disclosures paragraph (b)(1) or (d)(1) of this section not more conspicuously than, the required by § 226.18 before may alternatively comply with annual percentage rate.fi consummation, or shall deliver or place fl(d)fi[(c)] Advertisement of terms paragraph (b)(1) or (d)(1) of this section them in the mail not later than three that require additional disclosures—(1) by stating the information required by business days after the creditor receives flTriggering terms.fi If any of the paragraph (b)(1)(ii) of this section or the consumer’s written application, following terms is set forth in an paragraph (d)(1)(ii) of this section, as whichever is earlier. advertisement, the advertisement shall applicable, and listing a toll-free fl(ii) Imposition of fees. Except as meet the requirements of paragraph telephone number along with a provided in paragraph (a)(1)(iii) of this fl(d)fi[(c)](2) of this section: reference that such number may be used section, neither a creditor nor any other (i) The amount or percentage of any by consumers to obtain additional cost person may impose a fee on the downpayment. information.fi consumer in connection with the (ii) The number of payments or period consumer’s application for a mortgage of repayment. Subpart C—Closed-End Credit transaction subject to paragraph (a)(1)(i) (iii) The amount of any payment. of this section before the consumer has (iv) The amount of any finance 4. Section 226.17 is amended by received the disclosures required by charge. revising paragraph (b) and the paragraph (a)(1)(i) of this section. If the (2) flAdditional terms.fi An introductory text of paragraph (f), and disclosures are mailed to the consumer, advertisement stating any of the terms removing and reserving footnote 39 to the consumer is considered to have in paragraph fl(d)fi[(c)](1) of this read as follows: received them three business days after section shall state the following terms,49 as applicable (an example of one or § 226.17 General disclosure requirements. they are mailed. (iii) Exception to fee restriction. A more typical extensions of credit with a * * * * * creditor or other person may impose a statement of all the terms applicable to (b) Time of disclosures. The creditor fee for obtaining the consumer’s credit each may be used): shall make disclosures before report before the consumer has received (i) The amount or percentage of the consummation of the transaction. In the disclosure required by paragraph downpayment. certain [residential] mortgage (a)(1)(i) of this section, provided the fee (ii) The terms of repayment fl, which transactions, special timing is bona fide and reasonable in reflect the repayment obligations over requirements are set forth in § 226.19(a). amount.fi the full term of the loan, including any In certain variable-rate transactions, * * * * * balloon paymentfi. special timing requirements for variable- 6. Section 226.24 is revised to read as (iii) The ‘‘annual percentage rate,’’ rate disclosures are set forth in follows: using that term, and, if the rate may be § 226.19(b) and § 226.20(c). In certain increased after consummation, that fact. § 226.24 Advertising. fl(e)fi[(d)] Catalogs or other transactions involving mail or telephone multiple-page advertisements; orders or a series of sales, the timing of (a) Actually available terms. If an electronic advertisements. the disclosures may be delayed in advertisement for credit states specific credit terms, it shall state only those (1) If a catalog or other multiple-page accordance with paragraphs (g) and (h) advertisement, or an electronic of this section. terms that actually are or will be arranged or offered by the creditor. advertisement (such as an advertisement * * * * * fl(b) Clear and conspicuous appearing on an Internet Web site), (f) Early disclosures. If disclosures standard. Disclosures required by this gives information in a table or schedule required by this subpart are given before section shall be made clearly and in sufficient detail to permit the date of consummation of a conspicuously.fi determination of the disclosures transaction and a subsequent event fl(c)fi[(b)] Advertisement of rate of required by paragraph fl(d)fi[(c)](2) of makes them inaccurate, the creditor finance charge. If an advertisement this section, it shall be considered a shall disclose before consummation single advertisement if— fl(except that, for certain mortgage 39 fl[Reserved.]fi [For certain residential 49 transactions, § 226.19(a)(2) permits mortgage transactions, section 226.19(a)(2) permits fl[Reserved.]fi[An example of one or more redisclosure no later than consummation or typical extensions of credit with a statement of all redisclosure no later than settlement, whichever is later.] the terms applicable to each may be used.]

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(i) The table or schedule is clearly and disclose in a clear and conspicuous value of the dwelling, the advertisement conspicuously set forth; and manner: shall clearly and conspicuously state (ii) Any statement of the credit terms (A) The amount of each payment that that: in paragraph fl(d)fi[(c)](1) of this will apply over the term of the loan, (1) The interest on the portion of the section appearing anywhere else in the including any balloon payment. In credit extension that is greater than the catalog or advertisement clearly refers to variable-rate transactions, payments that fair market value of the dwelling is not the page or location where the table or will be determined based on the tax deductible for Federal income tax schedule begins. application of the sum of an index and purposes; and (2) A catalog or other multiple-page margin shall be disclosed based on a (2) The consumer should consult a tax advertisement or an electronic reasonably current index and margin; adviser for further information regarding advertisement (such as an advertisement (B) The period of time during which the deductibility of interest and charges. appearing on an Internet Web site) each payment will apply; and (i) Prohibited acts or practices in complies with paragraph fl(d)fi[(c)](2) (C) In an advertisement for credit advertisements for credit secured by a of this section if the table or schedule secured by a first lien on a dwelling, the dwelling. The following acts or practices of terms includes all appropriate fact that the payments do not include are prohibited in advertisements for disclosures for a representative scale of amounts for taxes and insurance credit secured by a dwelling: amounts up to the level of the more premiums, if applicable, and that the (1) Misleading advertising of ‘‘fixed’’ commonly sold higher-priced property actual payment obligation will be rates and payments. Using the word or services offered. greater. ‘‘fixed’’ to refer to rates, payments, or (ii) Clear and conspicuous fl(f) Disclosure of Rates and the credit transaction in an requirement. For purposes of paragraph Payments in Advertisements for Credit advertisement for variable-rate (f)(3)(i) of this section, a clear and Secured by a Dwelling. transactions or other transactions where conspicuous disclosure means that the (1) Scope. The requirements of this the advertised payment may increase, required information in paragraphs paragraph apply to any advertisement unless: (f)(3)(i)(A) and (B) shall be disclosed (i) In the case of an advertisement for credit secured by a dwelling, other with equal prominence and in close solely for one or more variable-rate than television or radio advertisements, proximity to any advertised payment transactions, including promotional materials that triggered the required disclosures, (A) The phrase ‘‘Adjustable-Rate accompanying applications. and that the required information in Mortgage’’ or ‘‘Variable-Rate Mortgage’’ (2) Disclosure of rates—(i) In general. paragraph (f)(3)(i)(C) shall be disclosed appears in the advertisement before the If an advertisement for credit secured by with prominence and in close proximity first use of the word ‘‘fixed’’ and is at a dwelling states a simple annual rate of to the advertised payments. least as conspicuous as every use of the interest and more than one simple (4) Envelope excluded. The word ‘‘fixed’’ in the advertisement; and annual rate of interest will apply over requirements in paragraphs (f)(2) and (B) Each use of the word ‘‘fixed’’ to the term of the advertised loan, the (f)(3) of this section do not apply to an refer to a rate or payment is advertisement shall disclose in a clear envelope in which an application or accompanied by an equally prominent and conspicuous manner: solicitation is mailed, or to a banner and closely proximate statement of the (A) Each simple annual rate of interest advertisement or pop-up advertisement time period for which the rate or that will apply. In variable-rate linked to an application or solicitation payment is fixed, and the fact that the transactions, a rate determined by provided electronically. rate may vary or the payment may adding an index and margin shall be (g) Alternative disclosures—television increase after that period; disclosed based on a reasonably current or radio advertisements. An (ii) In the case of an advertisement index and margin; advertisement made through television solely for transactions other than (B) The period of time during which or radio stating orally any of the terms variable-rate transactions where the each simple annual rate of interest will requiring additional disclosures under advertised payment may increase (e.g., a apply; and paragraph (d)(2) of this section may fixed-rate mortgage transaction with an (C) The annual percentage rate for the comply with paragraph (d)(2) of this initial lower payment), each use of the loan. If such rate is variable, the annual section either by: word ‘‘fixed’’ to refer to the advertised percentage rate shall comply with the (1) Stating orally each of the payment is accompanied by an equally accuracy standards in §§ 226.17(c) and additional disclosures required under prominent and closely proximate 226.22. paragraph (d)(2) of this section at a statement of the time period for which (ii) Clear and conspicuous speed and volume sufficient for a the payment is fixed, and the fact that requirement. For purposes of paragraph consumer to hear and comprehend the payment may increase after that (f)(2)(i) of this section, clearly and them; or period; or conspicuously disclosed means that the (2) Stating orally the information (iii) In the case of an advertisement required information in paragraphs required by paragraph (d)(2)(iii) of this for both variable-rate transactions and (f)(2)(i)(A) through (C) shall be disclosed section at a speed and volume sufficient non-variable-rate transactions, with equal prominence and in close for a consumer to hear and comprehend (A) The phrase ‘‘Adjustable-Rate proximity to any advertised rate that them, and listing a toll-free telephone Mortgage,’’ ‘‘Variable-Rate Mortgage,’’ or triggered the required disclosures. The number along with a reference that such ‘‘ARM’’ appears in the advertisement required information in paragraph number may be used by consumers to with equal prominence as any use of the (f)(2)(i)(C) may be disclosed with greater obtain additional cost information. term ‘‘fixed,’’ ‘‘Fixed-Rate Mortgage,’’ or prominence than the other information. (h) Tax implications. If an similar terms; and (3) Disclosure of payments—(i) In advertisement distributed in paper form (B) Each use of the word ‘‘fixed’’ to general. In addition to the requirements or through the Internet (rather than by refer to a rate, payment, or the credit of paragraph (c) of this section, if an radio or television) is for a loan secured transaction either refers solely to the advertisement for credit secured by a by the consumer’s principal dwelling, transactions for which rates are fixed dwelling states the amount of any and the advertised extension of credit and complies with paragraph (i)(1)(ii) of payment, the advertisement shall may, by its terms, exceed the fair market this section, if applicable, or, if it refers

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to the variable-rate transactions, is (i) Discloses with equal prominence fl(iv) The penalty period ends at least accompanied by an equally prominent the name of the person or creditor sixty days prior to the first date, if any, and closely proximate statement of the making the advertisement; and on which the principal or interest time period for which the rate or (ii) Includes a clear and conspicuous payment amount may increase under payment is fixed, and the fact that the statement that the person making the the terms of the loan.fi rate may vary or the payment may advertisement is not associated with, or * * * * * increase after that period. acting on behalf of, the consumer’s 8. Section 226.34 is amended by (2) Misleading comparisons in current lender. revising the heading and paragraph advertisements. Making any comparison (5) Misleading claims of debt (a)(4) to read as follows: in an advertisement between an actual elimination. Making any claim in an or hypothetical consumer’s current advertisement that the mortgage product § 226.34 Prohibited acts or practices in credit payments or rates and any offered will eliminate debt or result in connection with credit [secured by a payment or simple annual rate that will a waiver or forgiveness of a consumer’s consumer’s dwelling] flsubject to be available under the advertised existing loan terms with, or obligations § 226.32fi. product for less than the term of the to, another creditor. (a) * * * loan, unless: (6) Misleading claims suggesting a [(4) Repayment ability. Engage in a (i) In general. The advertisement fiduciary or other relationship. Using pattern or practice of extending credit includes: the terms ‘‘counselor’’ or ‘‘financial subject to § 226.32 to a consumer based (A) An equally prominent, closely advisor’’ in an advertisement to refer to on the consumer’s collateral without proximate comparison to all applicable a for-profit mortgage broker or mortgage regard to the consumer’s repayment payments or rates for the advertised lender, its employees, or persons ability, including the consumer’s product that will apply over the term of working for the broker or lender that are current income, current obligations, and the loan and an equally prominent, involved in offering, originating or employment. There is a presumption closely proximate statement of the selling mortgages. that a creditor has violated this period of time for which each applicable (7) Misleading foreign-language paragraph (a)(4) if the creditor engages payment or rate applies; and advertisements. Providing information in a pattern or practice of making loans (B) A prominent statement in close about some trigger terms or required subject to§ 226.32 without verifying and proximity to the payments described in disclosures, such as an initial rate or documenting consumers’ repayment paragraph (i)(2)(i)(A) of this section that payment, only in a foreign language in ability.] the advertised payments do not include an advertisement, but providing fl(4) Repayment ability. Engage in a amounts for taxes and insurance information about other trigger terms or pattern or practice of extending credit premiums, if applicable; or required disclosures, such as subject to § 226.32 to consumers based (ii) Application to variable-rate information about the fully-indexed rate on the value of consumers’ collateral transactions. If the advertisement is for or fully amortizing payment, only in without regard to consumers’ repayment a variable-rate transaction, and the English in the same advertisement.fi ability as of consummation, including advertised payment or simple annual consumers’ current and reasonably rate is based on the index and margin Subpart E—Special Rules for Certain expected income, current and that will be used to make subsequent Home Mortgage Transactions reasonably expected obligations, rate or payment adjustments over the 7. Section 226.32 is amended by employment, and assets other than the term of the loan, the advertisement revising paragraph (d)(7) to read as collateral. (i) There is a presumption that a includes: follows: (A) An equally prominent statement creditor has violated this paragraph in close proximity to the payment or § 226.32 Requirements for certain closed- (a)(4) if the creditor engages in a pattern rate that the payment or rate is subject end home mortgages. or practice of failing to— to adjustment and the time period when * * * * * (A) Verify and document consumers’ the first adjustment will occur; and (d) * * * repayment ability in accordance with (B) A prominent statement in close (7) Prepayment penalty exception. A § 226.35(b)(2)(i); proximity to the advertised payment mortgage transaction subject to this (B) Consider consumers’ ability to that the payment does not include section may provide for a prepayment make loan payments based on the amounts for taxes and insurance penalty otherwise permitted by law interest rate, determined as follows in premiums, if applicable. (including a refund calculated according the case of a loan in which the interest (3) Misrepresentations about to the rule of 78s) if: rate may increase after consummation— government endorsement. Making any (i) The penalty can be exercised only (1) For a variable rate loan, the statement in an advertisement that the for the first five years following interest rate as determined by adding product offered is a ‘‘government loan consummation; the margin and the index value as of program’’, ‘‘government-supported (ii) The source of the prepayment consummation, or the initial rate if that loan’’, or is otherwise endorsed or funds is not a refinancing by the rate is greater than the sum of the index sponsored by any federal, state, or local creditor or an affiliate of the creditor; value and margin as of consummation; government entity, unless the [and] and advertisement is for an FHA loan, VA (iii) At consummation, the consumer’s (2) For a step-rate loan, the highest loan, or similar loan program that is, in total monthly fldebt paymentsfi interest rate possible within the first fact, endorsed or sponsored by a federal, [debts] (including amounts owed under seven years of the loan’s term; state, or local government entity. the mortgage) do not exceed 50 percent (C) Consider consumers’ ability to (4) Misleading use of the current of the consumer’s monthly gross make loan payments based on a fully- lender’s name. Using the name of the income, as verified flin accordance amortizing payment that includes, as consumer’s current lender in an with § 226.35(b)(2)(i); andfi [by the applicable: expected property taxes; advertisement that is not sent by or on consumer’s signed financial statement, a homeowners’ association dues; behalf of the consumer’s current lender, credit report, and payment records for premiums for insurance against loss of unless the advertisement: employment income.] or damage to property, or against

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liability arising out of the ownership or years, securities with a maturity of the consumer’s default or other credit use of the property; premiums for any seven years; and loss; and premiums for other mortgage- guarantee or insurance protecting the (iii) For a loan with a term of seven related insurance. creditor against consumers’ default or years or less, securities with a maturity (i) A creditor may permit a consumer other credit loss; and premiums for matching the term of the transaction. to cancel the escrow account required in other mortgage related insurance; (4) The creditor shall use the yield on paragraph (b)(4) only in response to a (D) Consider the ratio of consumers’ Treasury securities as of the 15th day of consumer’s dated written request to total debt obligations to consumers’ the preceding month if the creditor cancel the escrow account that is income; or receives the application between the 1st received no earlier than twelve months (E) Consider the income consumers and the 14th day of the month and as after consummation. will have after paying debt obligations. of the 15th day of the current month if (ii) For purposes of this section, (ii) A creditor does not violate this the creditor receives the application on ‘‘escrow account’’ shall have the same paragraph (a)(4) if it has a reasonable or after the 15th day. meaning as in 24 CFR 3500.17(b) as basis to believe consumers will be able (5) Notwithstanding paragraph (a)(1) amended. to make loan payments for at least seven of this section, a higher-priced mortgage (5) Evasion; open-end credit. In years after consummation of the loan excludes a transaction to finance connection with credit secured by a transaction, considering the factors the initial construction of a dwelling, a consumer’s principal dwelling that does identified in paragraph (a)(4)(i) of this temporary or ‘‘bridge’’ loan with a term not meet the definition of open-end section and any other factors relevant to of twelve months or less, such as a loan credit in § 226.2(a)(20), a creditor shall determining repayment ability. to purchase a new dwelling where the not structure a home-secured loan as an consumer plans to sell a current (iii) This paragraph (a)(4) does not open-end plan to evade the dwelling within twelve months, a apply to temporary or ‘‘bridge’’ loans requirements of this section.fi reverse-mortgage transaction subject to with terms of twelve months or less, 10. New § 226.36 is added to read as § 226.33, or a home equity line of credit such as a loan to purchase a new follows: subject to § 226.5b. dwelling where the consumer plans to (b) Rules for higher-priced mortgage fl§ 226.36 Prohibited acts or practices in sell a current dwelling within twelve loans. Higher-priced mortgage loans are connection with credit secured by a fi months. subject to the following restrictions: consumer’s principal dwelling. * * * * * (1) Repayment ability. A creditor shall (a) Creditor payments to mortgage 9. New § 226.35 is added to read as not engage in a pattern or practice of brokers. (1) In connection with a follows: extending credit as provided in consumer credit transaction secured by § 226.34(a)(4). a consumer’s principal dwelling, except fl§ 226.35 Prohibited acts or practices in as provided in paragraph (a)(2) of this connection with higher-priced mortgage (2) Verification of income and assets loans. relied on. (i) A creditor shall not rely on section, a creditor shall not make any amounts of income, including expected payment, directly or indirectly, to a (a) Higher-priced mortgage loans. (1) income, or assets in approving an mortgage broker unless the broker enters For purposes of this section, a higher- extension of credit unless the creditor into a written agreement with the priced mortgage loan is a consumer verifies such amounts by the consumer’s consumer that satisfies the conditions credit transaction that is secured by the Internal Revenue Service Form W–2, tax set forth in this paragraph (a)(1). A consumer’s principal dwelling in which returns, payroll receipts, financial creditor payment to a mortgage broker the annual percentage rate at institution records, or other third-party subject to this paragraph (a)(1) shall not consummation will exceed the yield on documents that provide reasonably exceed the total compensation amount comparable Treasury securities by three reliable evidence of the consumer’s stated in the written agreement, reduced or more percentage points for loans income or assets. by any amounts paid directly by the secured by a first lien on a dwelling, or (ii) A creditor has not violated consumer or by any other source. The by five or more percentage points for paragraph (b)(2)(i) of this section if the written agreement must be entered into loans secured by a subordinate lien on amounts of income and assets that the before the consumer pays a fee to any a dwelling. creditor relied upon in approving the person in connection with the mortgage (2) Comparable Treasury securities are transaction are not materially greater transaction or submits a written determined as follows for variable rate than the amounts of the consumer’s application to the broker for the loans: income or assets that the creditor could transaction, whichever is earlier. The (i) For a loan with an initial rate that have verified pursuant to paragraph written agreement must include a clear is fixed for more than one year, (b)(2)(i) of this section at the time the and conspicuous statement— securities with a maturity matching the loan was consummated. (i) Of the total amount of duration of the fixed-rate period, unless (3) Prepayment penalties. A loan shall compensation the mortgage broker will the fixed-rate period exceeds seven not include a prepayment penalty receive and retain from all sources, as a years, in which case the creditor should provision except under the conditions dollar amount; use the rules applied to non-variable provided in § 226.32(d)(7). (ii) That the consumer will pay the rate loans; and (4) Failure to escrow for property entire amount of compensation that the (ii) For all other loans, securities with taxes and insurance. Prior to or at mortgage broker will receive and retain, a maturity of one year. consummation of a loan secured by a even if all or part is paid directly by the (3) Comparable Treasury securities are first lien on a dwelling, an escrow creditor, because the creditor recovers determined as follows for non-variable account must be established for such payments through a higher interest rate loans: payment of property taxes; premiums rate; and (i) For a loan with a term of twenty for insurance against loss of or damage (iii) That creditor payments to a years or more, securities with a maturity to property, or against liability arising mortgage broker can influence the of ten years; out of the ownership or use of the broker to offer certain loan products or (ii) For a loan with a term of more property; premiums for any guarantee or terms to the consumer that are not in the than seven years but less than twenty insurance protecting the creditor against consumer’s interest or are not the most

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favorable the consumer otherwise could (F) Terminating a relationship with an (iii) Fail to provide to the consumer obtain. appraiser for violations of applicable within a reasonable time after receiving (2) Paragraph (a)(1) of this section federal or state law or breaches of a consumer’s request a schedule of all does not apply to a transaction— ethical or professional standards; and specific fees and charges that the (i) That is subject to a state statute or (G) Taking action permitted or servicer may impose on the consumer in regulation that expressly imposes a duty required by applicable federal or state connection with servicing the on mortgage brokers, under which a statute, regulation, or agency guidance. consumer’s account, including a dollar mortgage broker may not offer to (2) When extension of credit amount and an explanation of each such consumers loan products or terms that prohibited. In connection with a fee and the circumstances under which are not in consumers’ interest or are less consumer credit transaction secured by it is imposed; or favorable than consumers otherwise a consumer’s principal dwelling, a (iv) Fail to provide, within a could obtain, and that requires that a creditor who knows or has reason to reasonable time after receiving a request mortgage broker provide consumers know, at or before loan consummation, from the consumer or any person acting with a written agreement that includes of a violation of § 226.36(b)(1) in on behalf of the consumer, an accurate a description of the mortgage broker’s connection with an appraisal shall not statement of the total outstanding role in the transaction and the mortgage extend credit based on such appraisal balance of the consumer’s obligation broker’s relationship to the consumer, as unless the creditor documents that it that would be required to satisfy the defined by such statute or regulation; or has acted with reasonable diligence to obligation in full as of a specified date. (ii) Where the creditor can determine that the appraisal does not (2) If a servicer specifies in writing demonstrate that the compensation it materially misstate or misrepresent the requirements for the consumer to follow pays to a mortgage broker in connection value of such dwelling. in making payments, but accepts a with a transaction is not determined, in (3) Appraiser defined. As used in this payment that does not conform to the whole or in part, by reference to the paragraph (b), an appraiser is a person requirements, the servicer shall credit transaction’s interest rate. who engages in the business of the payment within 5 days of receipt. (b) Misrepresentation of value of providing assessments of the value of (3) For purposes of this paragraph (d), consumer’s dwelling—(1) Coercion of dwellings. The term ‘‘appraiser’’ the terms ‘‘servicer’’ and ‘‘servicing’’ appraiser. In connection with a includes persons that employ, refer, or have the same meanings as provided in consumer credit transaction secured by manage appraisers and affiliates of such 24 CFR 3500.2(b), as amended. a consumer’s principal dwelling, no persons. (e) This section does not apply to a creditor or mortgage broker, and no (c) Mortgage broker defined. For home equity line of credit subject to affiliate of a creditor or mortgage broker purposes of this section, the term § 226.5b.fi shall directly or indirectly coerce, ‘‘mortgage broker’’ means a person, 11. In Supplement I to Part 226: influence, or otherwise encourage an other than an employee of a creditor, a. Under Section 226.2—Definitions appraiser to misstate or misrepresent the who for compensation or other and Rules of Construction, 2(a) value of such dwelling. monetary gain, or in expectation of Definitions, 2(a)(24) Residential (i) Examples of actions that violate compensation or other monetary gain, Mortgage Transaction, paragraphs paragraph (b)(1) of this section include: arranges, negotiates, or otherwise 2(a)(24)–1 and 2(a)(24)–5 are revised. (A) Implying to an appraiser that obtains an extension of consumer credit. b. Under Section 226.16—Advertising: current or future retention of the The term includes a person meeting this i. Paragraph 16–1 is revised, appraiser depends on the amount at definition, even if the consumer credit paragraph 16–2 is redesignated as which the appraiser values a consumer’s obligation is initially payable to such paragraph 16–6, and new paragraphs principal dwelling; person, unless the person provides the 16–2 through 16–5 are added. (B) Failing to compensate an appraiser funds for the transaction at ii. Under 16(d) Additional because the appraiser does not value a consummation out of the person’s own requirements for home equity plans, consumer’s principal dwelling at or resources, out of deposits held by the paragraph 16(d)–3 is revised, paragraphs above a certain amount; and person, or by drawing on a bona fide 16(d)–5, 16(d)–6, and 16(d)–7 are (C) Conditioning an appraiser’s warehouse line of credit. redesignated as paragraphs 16(d)–7, compensation on loan consummation. (d) Servicing practices. (1) In 16(d)–8, and 16(d)–9 respectively, (ii) Examples of actions that do not connection with a consumer credit newly designated paragraphs 16(d)–7 violate this subsection include: transaction secured by a consumer’s and 16(d)–9 and the heading of newly (A) Asking an appraiser to consider principal dwelling, no servicer shall— designated paragraph 16(d)–8 are additional information about a (i) Fail to credit a payment to the revised, and new paragraphs 16(d)–5 consumer’s principal dwelling or about consumer’s loan account as of the date and 16(d)–6 are added. comparable properties; of receipt, except when a delay in c. Under Section 226.17—General (B) Requesting that an appraiser crediting does not result in any charge Disclosure Requirements, 17(c) Basis of provide additional information about to the consumer or in the reporting of disclosures and use of estimates, the basis for a valuation; negative information to a consumer Paragraph 17(c)(1), paragraph 17(c)(1)– (C) Requesting that an appraiser reporting agency, or except as provided 8 is revised, and under 17(f) Early correct factual errors in a valuation; in paragraph (d)(2) of this section; disclosures, paragraph 17(f)–4 is (D) Obtaining multiple appraisals of a (ii) Impose on the consumer any late revised. consumer’s principal dwelling, so long fee or delinquency charge in connection d. Under Section 226.19—Certain as the creditor adheres to a policy of with a payment, when the only Residential Mortgage and Variable-Rate selecting the most reliable appraisal, delinquency is attributable to late fees Transactions, the heading is revised, rather than the appraisal that states the or delinquency charges assessed on an heading 19(a)(1) Time of disclosure is highest value; earlier payment, and the payment is redesignated as heading 19(a)(1)(i) Time (E) Withholding compensation from otherwise a full payment for the of disclosure, paragraphs 19(a)(1)(i)–1 an appraiser for breach of contract or applicable period and is paid on its due and 19(a)(1)(i)–5 are revised, new substandard performance of services as date or within an applicable grace headings 19(a)(1)(ii) Imposition of fees provided by contract; period; and 19(a)(1)(iii) Exception to fee

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restriction are added, and new iv. Under Paragraph 32(d)(7)(iii), acquired some interest to the dwelling, even paragraphs 19(a)(1)(ii)–1, 19(a)(1)(ii)–2, paragraphs 32(d)(7)(iii)–1 and though the consumer had not acquired full and 19(a)(1)(iii)–1 are added. 32(d)(7)(iii)–2 are removed, and new legal title. e. Under Section 226.24—Advertising: paragraphs 32(d)(7)(iii)–1 through ii. Examples of new transactions involving a previously acquired dwelling include the i. Paragraph 24–1 is removed; 32(d)(7)(iii)–4 are added. ii. Heading 24(d) Catalogues or other financing of a balloon payment due under a v. New heading Paragraph 32(d)(7)(iv) land sale contract and an extension of credit multiple-page advertisements; and new paragraphs 32(d)(7)(iv)–1 and made to a joint owner of property to buy out electronic advertisements is 32(d)(7)(iv)–2 are added. the other joint owner’s interest. In these redesignated as 24(e) Catalogues or g. Under Section 226.34—Prohibited instances, disclosures are not required under other multiple-page advertisements; Acts or Practices in Connection with § 226.18(q) øor section 226.19(a)¿ electronic advertisements, and newly (assumability policies øand early disclosures Credit Secured by a Consumer’s ¿ designated paragraphs 24(e)–1, 24(e)–2, Dwelling; Open-end Credit: for residential mortgage transactions ). and 24(e)–4 are revised; However, the rescission rules of §§ 226.15 i. The heading is revised. and 226.23 do apply to these new iii. Headings 24(c) Advertisement of ii. Under 34(a) Prohibited acts or terms that require additional transactions. practices for loans subject to § 226.32, iii. In other cases, the disclosure and disclosures, Paragraph 24(c)(1), and 34(a)(4) Repayment ability, paragraphs rescission rules do not apply. For example, Paragraph 24(c)(2), are redesignated as 34(a)(4)–3 and 34(a)(4)–4 are removed, where a buyer enters into a written 24(d) Advertisement of terms that paragraphs 34(a)(4)–1 and 34(a)(4)–2 are agreement with the creditor holding the require additional disclosures, redesignated as paragraphs 34(a)(4)–3 seller’s mortgage, allowing the buyer to Paragraph 24(d)(1), and Paragraph and 34(a)(4)–4 respectively and revised, assume the mortgage, if the buyer had 24(d)(2) respectively, newly designated new paragraphs 34(a)(4)–1 and 34(a)(4)– previously purchased the property and agreed with the seller to make the mortgage paragraphs 24(d)–1, 24(d)(1)–3, and 2 are added, and new headings 24(d)(2)–2 are revised, newly designated payments, § 226.20(b) does not apply Paragraph 34(a)(4)(i), Paragraph (assumptions involving residential paragraphs 24(d)(2)–3 and 24(d)(2)–4 34(a)(4)(i)(A), Paragraph 34(a)(4)(i)(B), mortgages). are further redesignated as paragraphs Paragraph 34(a)(4)(i)(D), and Paragraph * * * * * 24(d)(2)–4 and 24(d)(2)–5 respectively, 34(a)(4)(i)(E) and new paragraphs new paragraph 24(d)(2)–3 is added, and 34(a)(4)(i)–1, 34(a)(4)(i)(A)–1 and Subpart B—Open-End Credit newly designated paragraph 24(d)(2)–5 34(a)(4)(i)(A)–2, 34(a)(4)(i)(B)–1, * * * * * is revised; 34(a)(4)(i)(D)–1, and 34(a)(4)(i)(E)–1 are Section 226.16—Advertising iv. Heading 24(b) Advertisement of added. rate of finance charge is redesignated as 1. Clear and conspicuous standardfl— h. A new Section 226.35—Prohibited generalfi. Section 226.16 is subject to the 24(c) Advertisement of rate of finance Acts or Practices in Connection with charge, and newly designated general ‘‘clear and conspicuous’’ standard for Higher-priced Mortgage Loans is added. subpart B (see § 226.5(a)(1)) but prescribes no paragraphs 24(c)–2 and 24(c)–3 are i. A new Section 226.36—Prohibited specific rules for the format of the necessary revised, newly designated paragraph Acts or Practices in Connection with disclosuresø.¿fl, aside from the format 24(c)–4 is removed, newly designated Credit Secured by a Consumer’s requirements related to the disclosure of an paragraph 24(c)–5 is redesignated as Principal Dwelling is added. introductory rate under §§ 226.16(d)(6) and paragraph 24(c)–4 and revised, and 226.16(e). Aside from the terms described in newly designated paragraph 24(c)–6 is Supplement I to Part 226—Official Staff §§ 226.16(d)(6) and 226.16(e), thefi øThe¿ further redesignated as paragraph 24(c)– Interpretations credit terms need not be printed in a certain type size nor need they appear in any 5. * * * * * v. New heading 24(b) Clear and particular place in the advertisement. fl conspicuous standard is added, and Subpart A—General 2. Clear and conspicuous standard- * * * * * introductory rates or payments for home— new paragraphs 24(b)–1 through 24(b)– equity plans. For purposes of § 226.16(d)(6), 5 are added; and Section 226.2—Definitions and Rules of a clear and conspicuous disclosure means vi. New headings 24(f) Disclosure of Construction that the required information in rates or payments in advertisements for 2(a) Definitions. § 226.16(d)(6)(iii)(A)–(C) is disclosed with credit secured by a dwelling, 24(f)(3) equal prominence and in close proximity to Disclosure of payments, 24(g) * * * * * the introductory rate or payment to which it 2(a)(24) Residential mortgage transaction. applies. If the information in Alternative disclosures—television or 1. Relation to other sections. This term is radio advertisements, 24(h) Statements ø ¿ § 226.16(d)(6)(iii)(A)–(C) is the same type size important in six flfivefi provisions in the and is located immediately next to or directly of tax deductibility, and 24(i) Prohibited regulation: ø•¿ above or below the introductory rate or acts or practices in advertisements for fli.fi § 226.4(c)(7)—exclusions from payment to which it applies, without any credit secured by a dwelling, and new the finance charge. ø•¿ intervening text or graphical displays, the paragraphs 24(f)–1 through 24(f)–5, flii.fi § 226.15(f)—exemption from disclosures would be deemed to be equally 24(f)(3)–1 and 24(f)(3)–2, 24(g)–1 the right of rescission. ø•¿ prominent and in close proximity. through 24(g)–3, 24(h)–1, and 24(i)–1 fliii.fi § 226.18(q)—whether or not Notwithstanding the above, for electronic through 24(i)–3 are added. the obligation is assumable. advertisements that disclose introductory ø• Section 226.19—special timing rules.¿ f. Under Section 226.32— ø•¿ rates or payments, compliance with the fliv.fi § 226.20(b)—disclosure requirements of § 226.16(c) is deemed to Requirements for Certain Closed-End requirements for assumptions. Home Mortgages, 32(a) Coverage: ø•¿ satisfy the clear and conspicuous standard. flv.fi § 226.23(f)—exemption from 3. Clear and conspicuous standard— i. New heading Paragraph 32(a)(2) the right of rescission. and new paragraph 32(a)(2)–1 are Internet advertisements for home-equity * * * * * plans. For purposes of this section, a clear added. 5. Acquisition. i. A residential mortgage and conspicuous disclosure for visual text ii. Under 32(d) Limitations, new transaction finances the acquisition of a advertisements on the Internet for home- paragraph 32(d)–1 is added. consumer’s principal dwelling. The term equity plans subject to the requirements of iii. Under 32(d)(7) Prepayment does not include a transaction involving a § 226.5b means that the required disclosures penalty exception, new paragraph consumer’s principal dwelling if the are not obscured by techniques such as 32(d)(7)–1 is added. consumer had previously purchased and graphical displays, shading, coloration, or

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other devices and comply with all other payment) adjustments over the term of the 7.fiø5.¿ Relation to other sections. requirements for clear and conspicuous loan, then there is no introductory rate or Advertisements for home-equity plans must disclosures under § 226.16(d). See also introductory payment. If, however, the comply with all provisions in § 226.16, comment 16(c)(1)–2. advertised annual percentage rate is not flexcept for § 226.16(e),fi not solely the 4. Clear and conspicuous standard— based on (or the advertised payment is not rules in § 226.16(d). If an advertisement televised advertisements for home-equity derived from) the index and margin that will contains information (such as the payment plans. For purposes of this section, and be used to make rate (or payment) terms) that triggers the duty under except as otherwise provided by § 226.16(f) adjustments, and a reasonably current § 226.16(d) to state the annual percentage for alternative disclosures, a clear and application of the index and margin would rate, the additional disclosures in § 226.16(b) conspicuous disclosure in the context of result in a higher annual percentage rate (or, must be provided in the advertisement. visual text advertisements on television for given an assumed balance, a higher payment) While § 226.16(d) does not require a home-equity plans subject to the then there is an introductory rate or statement of fees to use or maintain the plan requirements of § 226.5b means that the introductory payment. (such as membership fees and transaction required disclosures are not obscured by ii. Immediate proximity. Including the term charges), such fees must be disclosed under techniques such as graphical displays, ‘‘introductory’’ or ‘‘intro’’ in the same § 226.16(b)(1) and (3). shading, coloration, or other devices, are sentence as the listing of the introductory fl8.fiø6.¿ Inapplicability of closed-end displayed in a manner that allows for a rate or payment is deemed to be in rules. *** consumer to read the information required to immediate proximity of the listing. fl9.fiø7.¿ Balloon payment. øIn some be disclosed, and comply with all other iii. Equal prominence, close proximity. programs, a balloon payment will occur if requirements for clear and conspicuous Information required to be disclosed in only the minimum payments under the plan disclosures under § 226.16(d). For example, § 226.16(d)(6)(iii) that is in the same are made. If an advertisement for such a very fine print in a television advertisement paragraph as the introductory rate or program contains any statement about a would not meet the clear and conspicuous payment (not in a footnote to that paragraph) minimum periodic payment, the standard if consumers cannot see and read is deemed to be closely proximate to the advertisement must also state that a balloon listing. Information required to be disclosed payment will result (not merely that a the information required to be disclosed. ¿ 5. Clear and conspicuous standard—oral in § 226.16(d)(6)(iii) that is in the same type balloon payment ‘‘may’’ result). ( See size as the introductory rate or payment is comment 5b(d)(5)(ii)–3 for øguidance on advertisements for home-equity plans. For ¿ purposes of this section, and except as deemed to be equally prominent. items flinformationfi not required to be ø ¿ fl fi otherwise provided by § 226.16(f) for iv. Amounts and time periods of payments. stated in the advertisement s , and on alternative disclosures, a clear and Section 226.16(d)(6)(iii)(C) requires situations in which the balloon payment disclosure of the amount and time periods of requirement does not apply.ø)¿ conspicuous disclosure in the context of an any payments that will apply under the plan. oral advertisement for home-equity plans * * * * * This section may require disclosure of subject to the requirements of § 226.5b, several payment amounts, including any Subpart C—Closed-End Credit whether by radio, television, the Internet, or balloon payment. For example, if an other medium, means that the required Section 226.17—General Disclosure advertisement for a home-equity plan offers Requirements disclosures are given at a speed and volume a $100,000 five-year line of credit and sufficient for a consumer to hear and assumes that the entire line is drawn * * * * * comprehend them. For example, information resulting in a payment of $800 per month for 17(c) Basis of disclosures and use of stated very rapidly at a low volume in a radio the first six months, increasing to $1,000 per estimates. or television advertisement would not meet month after month six, followed by a $50,000 * * * * * the clear and conspicuous standard if balloon payment after five years, the Paragraph 17(c)(1). consumers cannot hear and comprehend the advertisement must disclose the amount and information required to be disclosed.fi * * * * * ø ¿ time period of each of the two monthly 8. Basis of disclosures in variable-rate fl6.fi 2. Expressing the annual payment streams, as well as the amount and percentage rate in abbreviated form. *** transactions. The disclosures for a variable- timing of the balloon payment, with equal rate transaction must be given for the full * * * * * prominence and in close proximity to the term of the transaction and must be based on 16(d) Additional requirements for home- introductory payment. the terms in effect at the time of equity plans. v. Plans other than variable-rate plans. For consummation. Creditors should base the * * * * * a plan other than a variable-rate plan, if an disclosures only on the initial rate and 3. Statements of tax deductibility. An advertised payment is calculated in the same should not assume that this rate will advertisement referring to deductibility for way as other payments based on an assumed increase. For example, in a loan with an tax purposes is not misleading if it includes balance, the fact that the payment could initial rate of 10 percent and a 5 percentage a statement such as ‘‘consult a tax advisor increase solely if the consumer made an points rate cap, creditors should base the regarding the deductibility of interest.’’ flAn additional draw does not make the payment disclosures on the initial rate and should not advertisement for a home-equity plan where an introductory payment. For example, if a assume that this rate will increase 5 payment of $500 results from an assumed the plan’s terms do not allow for extensions percentage points. However, in a variable- $10,000 draw, and the payment would of credit greater than the fair market value of rate transaction with a seller buydown that increase to $1000 if the consumer made an the consumer’s dwelling need not give the is reflected in the credit contract, a consumer additional $10,000 draw, the payment is not disclosures regarding which portion of the buydown, or a discounted or premium rate, an introductory payment. interest is tax deductible. An advertisement disclosures should not be based solely on the 6. Reasonably current index and margin. for such a plan is not required to refer to initial terms. In those transactions, the For the purposes of this section, an index and deductibility for tax purposes; however, if it disclosed annual percentage rate should be a margin is considered reasonably current if: does so, it must not be misleading in this composite rate based on the rate in effect i. For direct mail advertisements, it was in regard.fi during the initial period and the rate that is effect within 60 days before mailing; the basis of the variable-rate feature for the * * * * * ii. For advertisements in electronic form, it remainder of the term. (See the commentary fl 5. Introductory rates and payments in was in effect within 30 days before the to § 226.17(c) for a discussion of buydown, advertisements for home-equity plans. advertisement is sent to a consumer’s e-mail discounted, and premium transactions and Section 226.16(d)(6) requires additional address, or in the case of an advertisement the commentary to § 226.19(a)(2) for a disclosures for introductory rates or made on an Internet Web site, when viewed discussion of the redisclosure in certain payments. by the public; or øresidential¿ mortgage transactions with a i. Variable-rate plans. In advertisements for iii. For printed advertisements made variable-rate feature). variable-rate plans, if the advertised annual available to the general public, including percentage rate is based on (or the advertised ones contained in a catalog, magazine, or * * * * * payment is derived from) the index and other generally available publication, it was 17(f) Early disclosures. margin that will be used to make rate (or in effect within 30 days before printing. * * * * *

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4. Special rules. In øresidential¿ mortgage received the disclosures required by equal prominence or be the same type size transactions subject to § 226.19, the creditor § 226.19(a)(1)(i). For example, until the as the payments triggering the required must redisclose if, between the delivery of consumer has received the disclosures, the disclosures. If the required information in the required early disclosures and creditor may not impose a fee on the §§ 226.24(f)(2)(i) and 226.24(f)(3)(i) is located consummation, the annual percentage rate consumer for an appraisal or for immediately next to or directly above or changes by more than a stated tolerance. underwriting. below the advertised rates or payments When subsequent events occur after 19(a)(1)(iii) Exception to fee restriction. triggering the required disclosures, without consummation, new disclosures are required 1. Requirements for exception. A creditor any intervening text or graphical displays, only if there is a refinancing or an or other person may impose a fee before the the disclosures are deemed to be in close assumption within the meaning of § 226.20. consumer receives the required disclosures if proximity. Notwithstanding the above, for * * * * * it is for obtaining information on the electronic advertisements that disclose rates consumer’s credit history, such as by or payments, compliance with the Section 226.19—Certain øResidential¿ purchasing a credit report(s) on the requirements of § 226.24(e) is deemed to Mortgage and Variable-Rate Transactions consumer. The fee also must be bona fide satisfy the clear and conspicuous standard. 19(a)(1)fl(i)fi Time of disclosure. and reasonable in amount. For example, a 3. Clear and conspicuous standard— 1. Coverage. This section requires early creditor may collect a fee for obtaining a Internet advertisements for credit secured by disclosure of credit terms in øresidential¿ credit report(s) if it is the creditor’s ordinary a dwelling. For purposes of this section, a mortgage transactions that are flsecured by practice to obtain such credit history clear and conspicuous disclosure for visual text advertisements on the Internet for credit a consumer’s principal dwelling andfi also information. The creditor may refer to this secured by a dwelling means that the subject to the Real Estate Settlement fee as an ‘‘application fee.’’fi required disclosures are not obscured by Procedures Act (RESPA) and its * * * * * techniques such as graphical displays, implementing Regulation X, administered by shading, coloration, or other devices and the Department of Housing and Urban Section 226.24—Advertising comply with all other requirements for clear Development (HUD). To be covered by ø1. Clear and conspicuous standard. This and conspicuous disclosures under § 226.24. § 226.19, a transaction must be øboth a section is subject to the general ‘‘clear and See also comment 24(e)–4. residential mortgage transaction under conspicuous’’ standard for this subpart but 4. Clear and conspicuous standard— ¿ prescribes no specific rules for the format of section 226.2(a) and a federally related televised advertisements for credit secured by mortgage loan under RESPA. ‘‘Federally the necessary disclosures. The credit terms a dwelling. For purposes of this section, and related mortgage loan’’ is defined under need not be printed in a certain type size nor except as otherwise provided by § 226.24(g) RESPA (12 U.S.C. 2602) and Regulation X (24 need they appear in any particular place in for alternative disclosures, a clear and ø ¿fl fi CFR 3500. 5(b) 2 ), and is subject to any the advertisement. For example, a conspicuous disclosure in the context of interpretations by HUD.fl RESPA coverage merchandise tag that is an advertisement visual text advertisements on television for includes such transactions as loans to under the regulation complies with this credit secured by a dwelling means that the purchase dwellings, refinancings of loans section if the necessary credit terms are on required disclosures are not obscured by secured by dwellings, and subordinate-lien both sides of the tag, so long as each side is ¿ techniques such as graphical displays, home-equity loans, among others. Although accessible. shading, coloration, or other devices, are RESPA coverage relates to any dwelling, * * * * * displayed in a manner that allows a § 226.19(a) applies to such transactions only fl24(b) Clear and conspicuous standard. consumer to read the information required to if they are secured by a consumer’s principal 1. Clear and conspicuous standard— be disclosed, and comply with all other dwelling. Also, home equity lines of credit general. This section is subject to the general requirements for clear and conspicuous subject to § 226.5b are not covered by ‘‘clear and conspicuous’’ standard for this disclosures under § 226.24. For example, § 226.19(a).fi subpart, see § 226.17(a)(1), but prescribes no very fine print in a television advertisement * * * * * specific rules for the format of the necessary would not meet the clear and conspicuous 5. Itemization of amount financed. In many disclosures, other than the format standard if consumers cannot see and read øresidential¿ mortgage transactions, the requirements related to the advertisement of the information required to be disclosed. itemization of the amount financed required rates and payments as described in comment 5. Clear and conspicuous standard—oral by § 226.18(c) will contain items, such as 24(b)–2 below. The credit terms need not be advertisements for credit secured by a origination fees or points, that also must be printed in a certain type size nor need they dwelling. For purposes of this section, and disclosed as part of the good faith estimates appear in any particular place in the except as otherwise provided by § 226.24(g) of settlement costs required under RESPA. advertisement. For example, a merchandise for alternative disclosures, a clear and Creditors furnishing the RESPA good faith tag that is an advertisement under the conspicuous disclosure in the context of an estimates need not give consumers any regulation complies with this section if the oral advertisement for credit secured by a itemization of the amount financed, either necessary credit terms are on both sides of dwelling, whether by radio, television, or with the disclosures provided within three the tag, so long as each side is accessible. other medium, means that the required days after application or with the disclosures 2. Clear and conspicuous standard—rates disclosures are given at a speed and volume given at consummation or settlement. and payments in advertisements for credit sufficient for a consumer to hear and fl19(a)(1)(ii) Imposition of fees. secured by a dwelling. For purposes of comprehend them. For example, information 1. Timing of fees. The consumer must § 226.24(f), a clear and conspicuous stated very rapidly at a low volume in a radio receive the disclosures required by this disclosure means that the required or television advertisement would not meet section before paying any fee to a creditor or information in §§ 226.24(f)(2)(i) and the clear and conspicuous standard if other person in connection with the 226.24(f)(3)(i)(A) and (B) is disclosed with consumers cannot hear and comprehend the consumer’s application for a mortgage equal prominence and in close proximity to information required to be disclosed.fi ø ¿ transaction that is subject to § 226.19(a)(1)(i), the advertised rates or payments triggering 24fl(c)fi (b) Advertisement of rate of except as provided in § 226.19(a)(1)(iii). If the the required disclosures, and that the finance charge. creditor delivers the disclosures to the required information in § 226.24(f)(3)(i)(C) is * * * * * consumer in person, a fee may be imposed disclosed with prominence and in close 2. Simple or periodic rates. The anytime after delivery. If the creditor places proximity to the advertised rates or payments advertisement may not simultaneously state the disclosures in the mail, the creditor may triggering the required disclosures. If the any other rate, except that a simple annual impose a fee after the consumer receives the required information in §§ 226.24(f)(2)(i) and rate or periodic rate applicable to an unpaid disclosures or, in all cases, on or after the 226.24(f)(3)(i)(A) and (B) is the same type balance may appear along with (but not more fourth business day after mailing the size as the advertised rates or payments conspicuously than) the annual percentage disclosure. triggering the required disclosures, the rate. flAn advertisement for credit secured 2. Fees restricted. A creditor or other disclosures are deemed to be equally by a dwelling may not state a periodic rate, person may not charge any fee other than to prominent. The information in other than a simple annual rate, that is obtain a consumer’s credit history, such as § 226.24(f)(3)(i)(C) must be disclosed with applied to an unpaid balance.fi For for a credit report(s), until the consumer has prominence, but need not be disclosed with examplefl,fiø:¿

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ø• I¿flifin an advertisement for øreal To illustrate using the second example in varies because of a graduated-payment estate¿ flcredit secured by a dwellingfi, a comment 17(c)(1)–10, the fact that the rate is feature or because of the inclusion of simple flannualfi interest rate may be presumed to be 11 percent in the second year mortgage insurance premiums, a creditor shown in the same type size as the annual and 12 percent for the remaining 28 years may state the number and timing of percentage rate for the advertised creditfl, need not be included in the advertisement. payments, and the amounts of the largest and subject to the requirements of section fliii.fiø•¿ The advertisement may also smallest of those payments, and the fact that 226.24(f)fi. flA simple annual rate or show the effect of the discount on the other payments will vary between those periodic rate that is applied to an unpaid payment schedule for the discount periodfl, amounts.¿ balance is the rate at which interest is but this willfi øwithout¿ triggerøing¿ the flii. In an advertisement for credit secured accruing; those terms do not include a rate additional disclosures under § 226.24(d). by a dwelling, when any series of payments lower than the rate at which interest is øFor example, the advertisement may state varies because of the inclusion of mortgage accruing, such as an effective rate, payment that ‘‘with this discount, your monthly insurance premiums, a creditor may state the rate, or qualifying rate.fi payments for the first year of the mortgage number and timing of payments, the amounts 3. Buydowns. When a third party (such as term will be only $577’’ or ‘‘this discount of the largest and smallest of those payments, a seller) or a creditor wishes to promote the will reduce your monthly payments for the and the fact that other payments will vary availability of reduced interest rates first year of mortgage term by $223.’’¿ between those amounts. (consumer or seller buydowns), the 24fl(d)fiø(c)¿ Advertisement of terms iii. In an advertisement for credit secured advertised annual percentage rate must be that require additional disclosures. by a dwelling, when one series of monthly determined in accordance with øthe rules in¿ 1. General rule. Under payments will apply for a limited period of the commentary to § 226.17(c) regarding the § 226.24fl(d)fiø(c)¿(1), whenever certain time followed by a series of higher monthly basis of transactional disclosures for triggering terms appear in credit payments for the remaining term of the loan, buydowns. The seller or creditor may advertisements, the additional credit terms the advertisement must state the number and advertise the reduced simple interest rate, enumerated in § 226.24fl(d)fiø(c)¿(2) must time period of each series of payments, and provided the advertisement shows the also appear. These provisions apply even if the amounts of each of those payments. For limited term to which the reduced rate the triggering term is not stated explicitly but this purpose, the creditor must assume that applies and states the simple interest rate may be readily determined from the the consumer makes the lower series of applicable to the balance of the term. The advertisement. For example, an payments for the maximum allowable period advertisement may also show the effect of the advertisement may state ‘‘80 percent of time. buydown agreement on the payment financing available,’’ which is in fact 3. Balloon payment; disclosure of fl schedule for the buydown period , but this indicating that a 20 percent downpayment is repayment terms. In some transactions, a fi ø ¿ ø ¿ will without trigger ing the additional required. balloon payment will occur when the disclosures under § 226.24fl(d)fiø(c)¿(2). Paragraph 24fl(d)fiø(c)¿(1). consumer only makes the minimum øFor example, the advertisement may state payments specified in an advertisement. A that ‘‘with this buydown arrangement, your * * * * * balloon payment results if paying the monthly payments for the first three years of 3. Payment amount. The dollar amount of minimum payments does not fully amortize the mortgage term will be only $350’’ or ‘‘this any payment includes statements such as: the outstanding balance by a specified date buydown arrangement will reduce your • ‘‘Payable in installments of $103’’ monthly payments for the first three years of • ‘‘$25 weekly’’ or time, usually the end of the term of the the mortgage term by $150.’’¿ fl• ‘‘$500,000 loan for just $1,650 per loan, and the consumer must repay the entire ø4. Effective rates. In some transactions the month’’fi outstanding balance at such time. If a balloon consumer’s payments may be based upon an • ‘‘$1,200 balance payable in 10 equal payment will occur when the consumer only interest rate lower than the rate at which installments’’ makes the minimum payments specified in interest is accruing. The lower rate may be In the last example, the amount of each an advertisement, the advertisement must referred to as the effective rate, payment rate, payment is readily determinable, even state with equal prominence and in close or qualifying rate. A creditor or seller may though not explicitly stated. But statements proximity to the minimum payment advertise such rates by stating the term of the such as ‘‘monthly payments to suit your statement the amount and timing of the reduced payment schedule, the interest rate needs’’ or ‘‘regular monthly payments’’ are balloon payment that will result if the upon which the reduced payments are not covered. consumer makes only the minimum calculated, the rate at which the interest is payments for the maximum period of time * * * * * that the consumer is permitted to make such in fact accruing, and the annual percentage Paragraph 24fl(d)fiø(c)¿(2). rate. The advertised annual percentage rate payments. ø ¿ that must accompany this rate must take into * * * * * 4.fi 3. Annual percentage rate. The ø account the interest that will accrue but will 2. Disclosure of repayment terms. While advertised annual percentage rate may be ¿ not be paid during this period. For example, t flTfihe phrase ‘‘terms of repayment’’ expressed using the abbreviation APR. The an advertisement may state, ‘‘An effective generally has the same meaning as the advertisement must also state, if applicable, first-year interest rate of 10 percent. Interest ‘‘payment schedule’’ required to be disclosed that the annual percentage rate is subject to ø ¿ ø ¿ being earned at 14 percent. Annual under § 226.18(g)fl.fi , s flSfiection increase after consummation. percentage rate 15 percent.’’¿ 226.24fl(d)fiø(c)¿(2)(ii) provides øgreater¿ fl5.fiø4.¿ Use of examples. flA creditor fl4fiø5¿. Discounted variable-rate flexibility to creditors in making this may usefi øFootnote 49 authorizes the use transactions. The advertised annual disclosure for advertising purposes. of¿ illustrative credit transactions to make percentage rate for discounted variable-rate Repayment terms may be expressed in a the necessary disclosures under transactions must be determined in variety of ways in addition to an exact § 226.24fl(d)fiø(c)¿(2). That is, where a accordance with comment 17(c)(1)–10 repayment schedule; this is particularly true range of possible combinations of credit regarding the basis of transactional for advertisements that do not contemplate a terms is offered, the advertisement may use disclosures for such financing. single specific transaction. flRepayment examples of typical transactions, so long as fli.fi A creditor or seller may promote the terms, however, must reflect the consumer’s each example contains all of the applicable availability of the initial rate reduction in repayment obligations over the full term of terms required by § 226.24fl(d)fiø(c)¿. The such transactions by advertising the reduced the loan, including any balloon payment, see examples must be labeled as such and must øinitial¿ flsimple annualfi rate, provided comment 24(d)(2)(iii), not just the repayment reflect representative credit terms øthat are¿ the advertisement shows flwith equal terms that will apply for a limited period of made available by the creditor to present and prominence and in close proximityfi the time.fi For example: prospective customers. limited term to which the reduced rate fli.fiø•¿ A creditor may use a unit-cost 24fl(e)fiø(d)¿ Catalogs or other multiple- applies fland the annual percentage rate that approach in making the required disclosure, page advertisements; electronic will apply after the term of the initial rate such as ‘‘48 monthly payments of $27.83 per advertisements. reduction expires. See § 226.24(f)fi. $1,000 borrowed.’’ 1. Definition. The multiple-page flii.fiø•¿ Limits or caps on periodic rate ø• In an advertisement for credit secured advertisements to which this section refers or payment adjustments need not be stated. by a dwelling, when any series of payments are advertisements consisting of a series of

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sequentially numbered pages—for example, a i. For direct mail advertisements, it was in disclosures regarding which portions of the supplement to a newspaper. A mailing effect within 60 days before mailing; interest are tax deductible. consisting of several separate flyers or pieces ii. For advertisements in electronic form, it 24(i) Prohibited acts or practices in of promotional material in a single envelope was in effect within 30 days before the advertisements for credit secured by a does not constitute a single multiple-page advertisement is sent to a consumer’s e-mail dwelling. advertisement for purposes of address, or in the case of an advertisement 1. Misleading comparisons in § 226.24fl(e)fiø(d)¿. made on an Internet Web site, when viewed advertisements—savings claims. A 2. General. Section 226.24fl(e)fiø(d)¿ by the public; or misleading comparison includes a claim permits creditors to put credit information iii. For printed advertisements made about the amount a consumer may save together in one place in a catalog or other available to the general public, including under the advertised product. For example, multiple-page advertisement or in an ones contained in a catalog, magazine, or a statement such as ‘‘save $300 per month on electronic advertisement (such as an other generally available publication, it was a $300,000 loan’’ constitutes an implied advertisement appearing on an Internet Web in effect within 30 days before printing. comparison between the advertised product’s site). The rule applies only if the 24(f)(3) Disclosure of payments. payment and a consumer’s current payment. advertisement contains one or more of the 1. Amounts and time periods of payments. 2. Misrepresentations about government triggering terms from Section 226.24(f)(3)(i) requires disclosure of ø ¿ endorsement. A statement that the federal § 226.24fl(d)fi (c) (1). A list of different the amounts and time periods of all Community Reinvestment Act entitles the annual percentage rates applicable to payments that will apply over the term of the consumer to refinance his or her mortgage at different balances, for example, does not loan. This section may require disclosure of the low rate offered in the advertisement is trigger further disclosures under several payment amounts, including any prohibited because it conveys a misleading § 226.24fl(d)fiø(c)¿(2) and so is not covered balloon payment. For example, if an impression that the advertised product is by § 226.24fl(e)fiø(d)¿. advertisement for credit secured by a endorsed or sponsored by the federal dwelling offers $300,000 of credit with a 30- * * * * * government. year loan term for a payment of $600 per 4. Electronic advertisement. If an electronic 3. Misleading claims of debt elimination. month for the first six months, increasing to advertisement (such as an advertisement The prohibition against misleading claims of $1,500 per month after month six, followed appearing on an Internet Web site) contains debt elimination or waiver or forgiveness by a balloon payment of $30,000 at the end the table or schedule permitted under does not apply to claims that the advertised ø ¿ of the loan term, the advertisement must § 226.24fl(e)fi (d) (1), any statement of product may reduce debt payments, ø ¿ disclose the amount and time periods of each terms set forth in § 226.24fl(d)fi (c) (1) consolidate debts, or shorten the term of the of the two monthly payment streams, as well appearing anywhere else in the debt. Examples of misleading claims of debt advertisement must clearly direct the as the amount and timing of the balloon payment, with equal prominence and in elimination or waiver or forgiveness of loan consumer to the location where the table or terms with, or obligations to, another creditor schedule begins. For example, a term close proximity to each other. 2. Application to variable-rate of debt include: ‘‘Wipe-Out Personal Debts!’’, triggering additional disclosures may be ‘‘New DEBT-FREE Payment’’, ‘‘Set yourself accompanied by a link that directly takes the transactions—disclosure of payments. In advertisements for variable-rate transactions, free; get out of debt today’’, ‘‘Refinance today consumer to the additional information. and wipe your debt clean!’’, ‘‘Get yourself out fl24(f) Disclosure of rates and payments in if the payment that applies at consummation is not based on the index and margin that of debt * * * Forever!’’, and ‘‘Pre-payment advertisements for credit secured by a Penalty Waiver.’’fi dwelling. will be used to make subsequent payment 1. Equal prominence, close proximity. adjustments over the term of the loan, the Subpart E—Special Rules for Certain Home Information required to be disclosed under requirements of § 226.24(f)(3)(i) apply. Mortgage Transactions §§ 226.24(f)(2)(i) and 226.24(f)(3)(i) that is in 24(g) Alternative disclosures—television or the same paragraph as the simple annual rate radio advertisements. Section 226.32—Requirements for Certain or payment amount (not in a footnote to that 1. Toll-free number, local or collect calls. Closed-End Home Mortgages paragraph) is deemed to be closely proximate In complying with the disclosure 32(a) Coverage. to the listing. Information required to be requirements of § 226.24(g), an advertisement * * * * * disclosed under §§ 226.24(f)(2)(i) and must provide a toll-free telephone number. flParagraph 32(a)(2) 226.24(f)(3)(i)(A) and (B) that is in the same Alternatively, an advertisement may provide 1. Exemption limited. Section 226.32(a)(2) type size as the simple annual rate or any telephone number that allows a lists certain transactions as being exempt payment amount is deemed to be equally consumer to reverse the phone charges when from the provisions of § 226.32. Nevertheless, prominent. calling for information. those transactions may be subject to the 2. Clear and conspicuous standard. For 2. Multi-purpose number. When an provisions of § 226.35, including any more information about the applicable clear advertised toll-free telephone number provisions of § 226.32 to which § 226.35 and conspicuous standard, see comment provides a recording, disclosures should be refers. See 12 CFR 226.35(a).fi 24(b)–2. provided early in the sequence to ensure that 3. Comparisons in advertisements. When the consumer receives the required * * * * * making any comparison in an advertisement disclosures. For example, in providing 32(d) Limitations. between an actual or hypothetical several options—such as providing directions fl1. Additional prohibitions applicable consumer’s current credit payments or rates to the advertiser’s place of business—the under other sections. Section 226.34 sets and the payments or rates available under the option allowing the consumer to request forth certain prohibitions in connection with advertised product, the advertisement must disclosures should be provided early in the mortgage credit subject to § 226.32, in state all applicable payments or rates for the telephone message to ensure that the option addition to the limitations in § 226.32(d). advertised product and the time periods for to request disclosures is not obscured by Further, § 226.35(b) prohibits certain which those payments or rates will apply, as other information. practices in connection with transactions that required by this section. 3. Statement accompanying toll free meet the coverage test in § 226.35(a). Because 4. Application to variable-rate number. Language must accompany a the coverage test in § 226.35(a) is generally transactions—disclosure of rates. In telephone number indicating that disclosures broader than the coverage test in § 226.32(a), advertisements for variable-rate transactions, are available by calling the toll-free number, most § 226.32 mortgage loans are also subject if a simple annual rate that applies at such as ‘‘call 1–800–000–0000 for details to the prohibitions set forth in § 226.35(b), in consummation is not based on the index and about credit costs and terms.’’ addition to the limitations in § 226.32(d).fi margin that will be used to make subsequent 24(h) Statements of tax deductibility. * * * * * rate adjustments over the term of the loan, 1. When disclosures not required. An 32(d)(7) Prepayment penalty exception. the requirements of § 226.24(f)(2)(i) apply. advertisement for a home-secured loan where fl1. Other application of section. The 5. Reasonably current index and margin. the loan’s terms do not allow for extensions conditions in § 226.32(d)(7) apply to For the purposes of this section, an index and of credit greater than the fair market value of prepayment penalties on mortgage margin is considered reasonably current if: the consumer’s dwelling need not give the transactions described in § 226.32(a). In

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addition, these conditions apply to mortgage rate changes, for example with a graduated or employment upon receiving the degree or transactions covered by § 226.35(a).fi step-rate transaction; or certificate. In other circumstances, a creditor Paragraph 32(d)(7)(iii). iii. Negative amortization occurs and, may have information indicating that an ø1. Calculating debt-to-income ratio. under the loan terms, triggers an increase in employed person will become unemployed. ‘‘Debt’’ does not include amounts paid by the principal or interest payment amounts. A creditor may also take into account assets borrower in cash at closing or amounts from 2. Payment increases excluded from such as savings accounts or investments that the loan proceeds that directly repay an § 226.32(d)(7)(iv). Payment increases due to can be used by the consumer.fi existing debt. Creditors may consider the following circumstances are not ø2.¿fl4.fi Pattern or practice of extending combined debt-to-income ratios for considered payment increases for purposes of credit—repayment ability. Whether a creditor transactions involving joint applicants. § 226.32(d)(7)(iv): øis engaging in or¿ has engaged in a pattern 2. Verification. Verification of employment i. Actual unanticipated late payment, the or practice of violations of this section satisfies the requirement for payment records borrower’s delinquency, or default; and depends on the totality of the circumstances for employment income.¿ ii. Increased payments made solely at the in the particular case. While a pattern or fl1. Classifying debt and income. To consumer’s option, such as when a consumer practice is not established by isolated, determine whether to classify particular chooses to make a payment of interest and random, or accidental acts, it can be funds or obligations as ‘‘debt’’ or ‘‘income’’ principal on a loan that only requires the established without the use of a statistical under the prepayment penalty exception in consumer to pay interest.fi process. In addition, a creditor might act § 226.32(d)(7)(iii), creditors may look to * * * * * under a lending policy (whether written or widely accepted governmental and non- unwritten) and that action alone could governmental underwriting standards, Section 226.34—Prohibited Acts or Practices establish a pattern or practice of making including, for example, those set forth in the in Connection with Credit øSecured by a loans in violation of this section. Federal Housing Administration’s handbook Consumer’s Dwelling; Open-end Credit¿ ø3. Discounted introductory rates. In on Mortgage Credit Analysis for Mortgage flSubject to § 226.32fi transactions where the creditor sets an initial Insurance on One-to Four-Unit Mortgage 34(a) Prohibited acts or practices for loans interest rate to be adjusted later (whether Loans. subject to § 226.32. fixed or to be determined by an index or 2. Debt described. i. For purposes of formula), in determining repayment ability § 226.32(d)(7)(iii), ‘‘debt’’ includes, but is not * * * * * the creditor must consider the consumer’s 34(a)(4) Repayment ability. limited to, the consumer’s liabilities and ability to make loan payments based on the fl1. Application of repayment ability rule obligations for: non-discounted or fully-indexed rate at the to § 226.35(a) higher-cost mortgage loans. A. Housing expenses; time of consummation.¿ The § 226.34(a)(4) prohibition against a B. Loans such as installment and real estate ø4. Verifying and documenting income and loans; pattern or practice of making loans without obligations. Creditors may verify and C. Open-end credit plans; and regard to consumers’ repayment ability document a consumer’s repayment ability in D. Alimony, child support, and separate applies to creditors making mortgage loans various ways. A creditor may verify and maintenance. described in § 226.32(a). In addition, the document a consumer’s income and current ii. ‘‘Debt’’ does not include amounts paid § 226.34(a)(4) prohibition applies to creditors obligations through any reliable source that by a borrower in cash at closing or amounts making higher-cost mortgage transactions, from the loan proceeds that directly repay an including residential mortgage transactions, provides the creditor with a reasonable basis existing debt. described in § 226.35(a). See 12 CFR for believing that there are sufficient funds to 3. Income described. For purposes of 226.35(b)(1). support the loan. Reliable sources include, § 226.32(d)(7)(iii), ‘‘income’’ includes, but is 2. Determination as of consummation. but are not limited to, a credit report, tax returns, pension statements, and payment not limited to, funds a consumer receives: Section 226.34(a)(4) prohibits a creditor from ¿ i. From employment (whether full-time, engaging in a pattern or practice of extending records for employment income. part-time, seasonal, military, or self- credit subject to § 226.32 to consumers based flParagraph 34(a)(4)(i). employment), including without limitation on the value of consumers’ collateral without 1. Presumptions. Section 226.34(a)(4)(i) salary, wages, base pay, overtime pay, bonus regard to consumers’ repayment ability as of sets forth particular patterns or practices that pay, tips, and commissions; consummation. This prohibition is based on would create a presumption that a creditor ii. As interest or dividends; the facts and circumstances that existed as of has violated § 226.34(a)(4). These iii. As retirement benefits or public consummation. Events after consummation presumptions may be rebutted with sufficient assistance; and may be relevant to determining whether a evidence that a creditor did not engage in a iv. As alimony, child support, or separate creditor has violated § 226.34(a)(4), but pattern or practice of disregarding repayment maintenance payments, to the extent events after consummation do not, by ability. These presumptions are also not permitted under Regulation B, 12 CFR themselves, establish a violation. For exhaustive. That is, a creditor may violate 202.5(d)(2), 202.6(b)(5). example, a violation is not established if § 226.34(a)(4) by patterns or practices other 4. Verification. Creditors shall verify borrowers default after consummation than those specified in § 226.34(a)(4)(i). income in the manner described in because of serious illness or job loss.fi Paragraph 34(a)(4)(i)(A). § 226.35(b)(2)(i) and the related comments. ø1.¿fl3.fi Incomefl, assets, and 1. Failure to verify income and assets relied Creditors may verify debt with a credit employmentfi. Any flcurrent or reasonably on. A creditor is presumed to have violated report. expected assets or current or reasonablyfi the prohibition on lending without regard to Paragraph 32(d)(7)(iv). expected income øcan¿ flmayfi be repayment ability if the creditor has engaged 1. Changes in payment amounts. Section considered by the creditor, except flthe in a pattern or practice of failing to verify and 226.32(d)(7)(iv) permits a prepayment collateral itselffi øequity income that would document repayment ability. A pattern or penalty only if the period during which the be realized from collateral¿. For example, a practice of failing to document and verify penalty may be imposed ends at least sixty creditor may use information about flcurrent income and assets relied on to make the days prior to the first date, if any, on which or expectedfi income other than regular credit decision as required by the principal or interest payment amount salary or wages, such as income described in § 226.35(b)(2)(i) would trigger this may increase under the terms of the loan. paragraph 226.32(d)(7)(iii)–(3) øsuch as gifts, presumption. This permits a consumer to refinance or expected retirement payments, or income 2. Failure to verify obligations. A pattern or otherwise pay off all or part of the loan, from self-employment, such as housecleaning practice of failing to verify obligations would without a penalty, sixty days before there is or childcare¿. flEmployment should also be also trigger this presumption. In general, a an increase in the payment of interest or considered. In some circumstances, it may be credit report may be used to verify principal. For example, the principal or appropriate or necessary to take into account obligations. Where two different creditors are interest payment amount may increase expected changes in employment. For extending loans simultaneously, one a first- because— example, depending on all of the facts and lien loan and the other a subordinate-lien i. The loan’s interest rate increases; circumstances, it may be reasonable to loan, each creditor is expected to verify the ii. Scheduled payments of principal or assume that students obtaining professional obligation the consumer is undertaking with interest increase independently of interest degrees or certificates will obtain the other creditor. A pattern or practice of

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failing to do so would create a presumption See also comments 226.17(c)(1)–8 and –10 intermediary agent or broker is received of a violation. for guidance on calculating the annual when it reaches the creditor, rather than Paragraph 34(a)(4)(i)(B). percentage rate for a variable rate when it reaches the agent or broker. See 1. Variable rate loans. For some variable transaction.) The rules in § 226.35(a)(2) apply comment 19(b)–3 to determine whether a rate loans, the initial interest rate is not based to all variable rate transactions, regardless of transaction involves an intermediary agent or on the index and margin or formula used for whether the initial rate is a discounted or broker. later adjustments. In such cases, a pattern or premium rate, or is determined by the index 2. When 15th of the month is not a practice of failing to consider the consumer’s and margin used to make later adjustments. business day. If the most recent 15th of the ability to make loan payments based on the If the initial interest rate is fixed for more month is not a business day, the creditor index and margin or formula used for later than one year, § 226.35(a)(2) requires the must use the yield on the constant Treasury adjustments, or the initial interest rate, if creditor to use the yield on the Treasury maturity as of the business day immediately greater than the sum of the index and margin security matching the duration of the initial preceding the 15th. at consummation, would lead to a interest rate. For example— Paragraph 35(b)(2). presumption that the creditor has violated i. In the case of a variable rate loan with 1. Income and assets relied on. A creditor § 226.34(a)(4)(i)(B). For examples of these an initial interest rate fixed for the first five must comply with § 226.35(b)(2)(i) with and other variable rate loans, see comment years based on the value of the index at respect to the income and assets relied on in 17(c)(1)–10. consummation plus the margin, and evaluating the creditworthiness of Paragraph 34(a)(4)(i)(D). adjusting thereafter, a creditor would use the consumers. For example, if a consumer earns 1. Failure to consider debt-to-income ratio. yield on the constant maturity of five years, both a salary and an annual bonus, but the A creditor is presumed to have violated the such as published in the statistical release H– creditor only relies on the applicant’s salary prohibition against lending without regard to 15; to evaluate creditworthiness, the creditor repayment ability if the creditor has engaged ii. In the case of a variable rate loan with need only comply with § 226.35(b)(2)(i) with in a pattern or practice of failing to consider an initial interest rate that is a discounted or respect to the salary. the ratio of consumers’ total debt obligations premium rate for the first five years and 2. Income and assets—co-applicant. If two to consumers’ income. For this purpose, a adjusts thereafter based on an index and persons jointly apply for credit and both list creditor may rely on the commentary to margin, a creditor would use the yield on the income or assets on the application, the § 226.32(d)(7)(iii) to determine the constant maturity of five years published in creditor must comply with § 226.35(b)(2) components of debt and income. Unlike the statistical release H–15; with respect to both applicants unless the § 226.32(d)(7)(iii), however, iii. In the case of a variable rate loan, if the creditor only relies on the income or assets § 226.34(a)(4)(i)(D) does not identify a initial interest rate is fixed for the first four of one of the applicants. specific debt to income ratio. Although a years (either at the value of the index at 3. Income and assets—guarantors. A pattern of unusually high ratios may be consummation plus margin or at a creditor does not need to comply with evidence that a creditor has violated discounted or premium rate), and the § 226.35(b)(2) with respect to the income or § 226.34(a)(4), compliance is determined on statistical release H–15 does not report a assets of a person who is not primarily liable the basis of all the facts and circumstances constant maturity of four years but reports a on the obligation, such as a guarantor. relevant to repayment ability. maturity of three years and a maturity of five 4. Expected income. A creditor may rely on Paragraph 34(a)(4)(i)(E). years, the creditor may use the yield from a consumer’s expected income, except equity 1. Failure to consider residual income. A either maturity; and income that would be realized from creditor is presumed to have violated the iv. In the case of a variable rate loan, if the collateral, so long as the creditor verifies the prohibition against lending without regard to interest rate will adjust within the first year, basis for that expectation using documents repayment ability if the creditor has engaged the creditor would use the yield on the listed under § 226.35(b)(2)(i), including third- in a pattern or practice of failing to consider constant maturity of one year regardless of party documents that provide reasonably consumers’ residual income. Paragraph the length of any initial rate. For example, if reliable evidence of the borrower’s expected (a)(4)(i)(E) requires a creditor to consider the initial interest rate is fixed for one month income. For example, if, based on a whether consumers will have sufficient and adjusts monthly thereafter, the creditor consumer’s statement, the creditor relies on income, after paying the new obligation and would use the yield on the constant maturity an expectation that a consumer will receive existing obligations, to cover ordinary living of one year. an annual bonus, the creditor may verify the expenses.fi Paragraph 35(a)(3). basis for that expectation with documents * * * * * 1. In general. Section 226.35(a)(3) sets forth that show the consumer’s past annual the rules for identifying yields on comparable bonuses. Similarly, if the creditor relies on a flSection 226.35—Acts or Practices in Treasury securities for transactions other consumer’s expected salary following the Connection With Higher-priced Mortgage than variable rate transactions. Under these consumer’s receipt of an educational degree, Loans rules, for a transaction with a term of 30 the creditor may verify that expectation with 35(a) Coverage. years, the creditor would compare the APR a written statement from an employer 1. In general. To determine whether a loan to the yield on the constant Treasury indicating that the consumer will be is a higher-priced mortgage loan for purposes maturity of ten years on statistical release H– employed upon graduation and the salary. of the limitations set forth in this section, a 15. For a transaction with a term of 15 years, Paragraph 35(b)(2)(i). creditor must use the rules for determining the creditor would use the yield on the 1. Internal Revenue Service (IRS) Form W– the applicable Treasury security set forth in constant Treasury maturity of seven years. 2. A creditor may verify a consumer’s income § 226.35(a). (Note: these rules are different For a transaction with a term of five years, using an IRS Form W–2 (or any subsequent from the rules in § 226.32(a).) the creditor would use the yield on the revisions or similar IRS Forms used for 2. Treasury securities. To determine the constant Treasury maturity of five years. reporting wages and tax withholding). The yield on comparable Treasury securities, 2. Balloon loans. A creditor must look to lender may also use an electronic retrieval creditors may use the yield on actively traded the term of the loan regardless of the service for obtaining the consumer’s W–2 issues adjusted to constant maturities amortization period of the loan. For example, information. published in the Board’s ‘‘Selected Interest if a creditor extends a five-year ‘‘balloon’’ 2. Tax returns. A creditor may verify a Rates’’ (statistical release H–15). Further loan with payments based on a 30-year consumer’s income or assets using the guidance can be found in comments 35(a)(2)– amortization, the creditor should use the consumer’s tax return. A creditor may also 1 and 35(a)(3)–1. yield on the constant Treasury maturity of use IRS Form 4506 ‘‘Request for Copy of Tax Paragraph 35(a)(2). five years. Return,’’ Form 4506–T ‘‘Request for 1. In general. Section 226.35(a)(2) sets forth Paragraph 35(a)(4). Transcript of Tax Return,’’ or Form 8821 the rules for identifying comparable Treasury 1. Application date. An application is ‘‘Tax Information Authorization’’ (or any securities for variable rate transactions. A deemed received when it reaches the creditor subsequent revisions or similar IRS Forms variable rate transaction is one in which the in any of the ways applications are normally appropriate for obtaining tax return annual percentage rate may increase after transmitted. See comment 226.19(a)(1)–3. An information directly from the IRS) to verify consummation. (See comment 226.18(f)–1. application transmitted through an the consumer’s income or assets. The lender

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may also use an electronic retrieval service a legally enforceable contract under Paragraph 36(a)(2)(ii). for obtaining tax return information. applicable law. As evidence of compliance 1. Compensation not determined by 3. Other third-party documents that with this section, a creditor may rely on a reference to interest rate. Where a creditor provide reasonably reliable evidence of written agreement that meets the criteria set can demonstrate that the compensation it consumer’s income or assets. Creditors may forth in § 226.36(a)(1)(i)–(iii) and is signed pays to a mortgage broker is not based on the verify income and assets using other and contemporaneously dated by the interest rate for the transaction, § 226.36(a)(1) documents produced by third parties that consumer and the broker, together with does not apply. This exception would be provide reasonably reliable evidence of the documentation (such as the HUD–1 available, for example, if a creditor can show consumer’s income or assets. For example, Settlement Statement prepared in accordance that it pays brokers the same flat fee for all creditors may verify the consumer’s income with RESPA) that the creditor’s payment to transactions, regardless of the interest rate. using receipts from a check-cashing service, a broker does not exceed the amount Under this exception, unlike the general rule or by obtaining a written statement from the provided for in the written agreement, taking of § 226.36(a)(1), no part of the broker’s consumer’s employer that states the into account any portion of that amount compensation may be based on the interest consumer’s income. received by the broker directly from the rate, even if the consumer is aware of the 4. Duplicative collection of documentation. consumer or out of loan proceeds. relationship and agrees to it. Creditor A creditor that has made a loan to a 3. Clear and conspicuous. The three payments to brokers may vary, however, consumer and is refinancing or extending statements required by § 226.36(a)(1)(i)–(iii) based on factors other than the interest rate new credit to the same consumer need not are clear and conspicuous if they are (such as loan principal amount) without collect from the consumer a document the noticeable, grouped together, and losing this exception. creditor previously examined if that prominently placed on the first page of the 36(b) Misrepresentation of value of document presumably will not have changed written agreement. They are noticeable if consumer’s principal dwelling. since it was initially collected. For example, they are at least as large as the largest type 36(b)(2) When extension of credit if the creditor has collected the consumer’s size used in the rest of the agreement’s text. prohibited. 2006 tax return to make a loan in May 2007, This standard also requires that the 1. Reasonable diligence. A creditor will be the creditor may rely on the 2006 tax return statements be reasonably understandable. deemed to have acted with reasonable if the creditor makes another loan to the same The following example would be considered diligence under § 226.36(b)(2) if the creditor consumer in August 2007. Using the same reasonably understandable: ‘‘The total fee I/ extends credit based on an appraisal other example, if the creditor has collected the we will receive for your loan is $ lll. You than the one subject to the restriction in consumer’s bank statement for May 2007 in will pay this entire amount. The lender will § 226.36(b)(2). making the first loan, the creditor may rely increase your interest rate if the lender pays 36(c) Mortgage broker defined. on that bank statement for that month in any part of this amount. A lender payment 1. Meaning of mortgage broker. Section making the subsequent loan in August. to a mortgage broker can influence which 226.36(c) provides that a mortgage broker is Paragraph 35(b)(2)(ii). loan products and terms the broker offers any person who for compensation or other 1. No violation if income or assets relied you, which may not be in your best interest monetary gain arranges, negotiates, or on were not materially greater than verifiable or may be less favorable than you otherwise otherwise obtains an extension of consumer amounts. A creditor must verify amounts of could obtain.’’ credit, but is not an employee of a creditor. income or assets relied upon in extending Paragraph 36(a)(1)(i). In addition, this definition expressly credit for a higher-priced mortgage loan. 1. Total amount of broker’s compensation. includes any person that satisfies this However, the creditor does not violate The agreement must set forth the total definition but makes use of ‘‘table funding.’’ § 226.35(b)(2) if it demonstrates that the compensation the mortgage broker will Table funding occurs when a transaction is income or assets relied upon were not receive and retain as a dollar amount. The consummated with the debt obligation materially greater than the amounts that the broker’s total compensation stated in the initially payable by its terms to one person, creditor would have been able to verify agreement is limited to amounts that the but another person provides the funds for the pursuant to § 226.35(b)(2)(i) at consummation. For example, if a creditor broker both receives and retains. It does not transaction at consummation and receives an approves an extension of credit relying on a include amounts received by the broker and immediate assignment of the note, loan consumer’s annual income of $40,000 but paid to third parties for other services contract, or other evidence of the debt fails to obtain documentation of that amount obtained in connection with the transaction, obligation. Although § 226.2(a)(17)(1)(B) before extending the credit, the creditor will such as a fee for an appraisal or inspection, provides that a person to whom a debt not have violated this section if the creditor provided such amounts actually are paid to obligation is initially payable on its face later obtains evidence that would satisfy and retained by third parties. generally is a creditor, § 226.36(c) provides § 226.35(b)(2)(i), such as tax return Paragraph 36(a)(2). that, solely for the purposes of § 226.36, such information, showing that the consumer had 1. Effect of section. Section 226.36(a)(2) a person is considered a mortgage broker. In an annual income of at least $40,000 at the provides two exceptions to the general rule addition, although consumers themselves time the loan was consummated.fi in § 226.36(a)(1). Creditor payments to often arrange, negotiate, or otherwise obtain mortgage brokers that qualify for either extensions of consumer credit on their own flSection 226.36—Prohibited Acts or exception are not subject to the prohibition behalf, they do not do so for compensation Practices in Connection with Credit Secured on creditor payments to mortgage brokers. or other monetary gain and, therefore, are not by a Consumer’s Principal Dwelling Accordingly, in such cases, the agreement mortgage brokers under this section. 36(a) Creditor payments to mortgage prescribed by § 226.36(a)(1) is not required. 36(d) Servicing practices. brokers. Paragraph 36(a)(2)(i). Paragraph 36(d)(1)(i). Paragraph 36(a)(1). 1. State statute or regulation. A state 1. Crediting of payments. Under 1. Timing of agreement. The agreement statute or regulation may impose a specific § 226.36(d)(1)(i), a mortgage servicer must under § 226.36(a)(1) must be entered into by duty on mortgage brokers, under which a credit a payment to a consumer’s loan the consumer and mortgage broker before the broker may not offer loan products or terms account as of the date of receipt. This does consumer pays a fee to any person or submits that are less favorable than the consumer not require that a mortgage servicer post the a written application for the credit otherwise could obtain through the same payment to the consumer’s loan account on transaction to the broker, whichever occurs broker, assuming the same loan terms and a particular date; the servicer is only required first. The agreement must be entered into conditions. For example, such a law may to credit the payment as of the date of before the consumer’s payment of any fee, impose a duty on brokers to act solely in the receipt. Accordingly, a servicer that receives regardless of whether the fee is received or consumer’s best interests. Where brokers are a payment on or before its due date and does retained by the broker. The agreement also subject by law to such a duty, and the not enter the payment on its books or in its must be entered into before the consumer applicable statute or regulation requires system until after the payment’s due date submits a written application for the credit brokers to provide consumers with a written does not violate this requirement as long as transaction to the broker. agreement that describes the broker’s role the entry does not result in the imposition of 2. Written agreement. The agreement under and relationship to the consumer, a late charge, additional interest, or similar § 226.36(a)(1) must be in writing and must be § 226.36(a)(1) does not apply. penalty to the consumer, or in the reporting

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of negative information to a consumer inform the consumer where the schedule is payments in writing, such as requiring that reporting agency. located, rather than solely referring to the payments be accompanied by the account 2. Date of receipt. The ‘‘date of receipt’’ is servicer’s home page. number; setting a cut-off hour for payment to the date that the payment instrument or other 3. Dollar amount of fees and charges. The be received, or setting different hours for means of payment reaches the mortgage dollar amount of a fee or charge may be payment by mail and payments made in servicer. For example, payment by check is expressed as a flat fee or, if a flat fee is not person; specifying that only checks or money received when the mortgage servicer receives feasible, an hourly rate or percentage. orders should be sent by mail; specifying that it, not when the funds are collected. If the Paragraph 36(d)(1)(iv). payment is to be made in U.S. dollars; or consumer elects to have payment made by a 1. Reasonable time. The payoff statement third-party payor such as a financial must be provided to the consumer, or person specifying one particular address for institution, through a preauthorized payment acting on behalf of the consumer, within a receiving payments, such as a post office box. or telephone bill-payment arrangement, reasonable time after the request. For The servicer may be prohibited, however, payment is received when the mortgage example, it would be reasonable under from specifying payment by preauthorized servicer receives the third-party payor’s normal market conditions to provide the electronic fund transfer. (See section 913 of check or other transfer medium, such as an statement within three business days of a the Electronic Fund Transfer Act.) electronic fund transfer. consumer’s request. This timeframe might be 2. Implied guidelines for payments. In the Paragraph 36(d)(1)(ii). extended, for example, when the market is absence of specified requirements for making 1. Pyramiding of late fees. The prohibition experiencing an unusually high volume of payments, payments may be made at any on pyramiding of late fees in this subsection refinancing requests. location where the servicer conducts should be construed consistently with the 2. Person acting on behalf of the consumer. business; any time during the servicer’s ‘‘credit practices rule’’ of Regulation AA, 12 For purposes of § 226.36(d)(1)(iv), a person normal business hours; and by cash, money CFR 227.15. acting on behalf of the consumer may include order, draft, or other similar instrument in Paragraph 36(d)(1)(iii). the consumer’s representative, such as an properly negotiable form, or by electronic 1. Fees and charges imposed by the attorney representing the individual in pre- fund transfer if the servicer and consumer servicer. The schedule of fees and charges foreclosure or bankruptcy proceedings, a have so agreed.fl must include any third-party fees or charges non-profit consumer counseling or similar assessed on the consumer by the servicer. organization, or a lender with which the By order of the Board of Governors of the 2. Provision of schedule to consumer. The consumer is refinancing and which requires Federal Reserve System, December 20, 2007. servicer may provide the schedule to the the payoff statement to complete the Jennifer J. Johnson, consumer in writing or it may direct the refinancing. Secretary of the Board. consumer to a specific website address where Paragraph 36(d)(2). the schedule is located. Any such website 1. Payment requirements. The servicer may [FR Doc. E7–25058 Filed 1–8–08; 8:45 am] address reference must be specific enough to specify reasonable requirements for making BILLING CODE 6210–01–P

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