65604 Federal Register / Vol. 66, No. 245 / Thursday, December 20, 2001 / Rules and Regulations
swine production health plan shall Done in Washington, DC, this 14th day of Telecommunications Device for the Deaf become effective pending final December 2001. (‘‘TDD’’) only, contact (202) 263–4869. determination in the proceeding if the Bill Hawks, SUPPLEMENTARY INFORMATION: Administrator determines that such Under Secretary for Marketing and Regulatory action is necessary to protect the Programs. I. Background public’s health, interest, or safety. Such [FR Doc. 01–31355 Filed 12–19–01; 8:45 am] Since the mid-1990s, the subprime cancellation shall become effective BILLING CODE 3410–34–U mortgage market has grown upon oral or written notification, substantially, providing access to credit whichever is earlier, to the swine to borrowers with less-than-perfect production system representative. In the FEDERAL RESERVE SYSTEM credit histories and to other borrowers event of oral notification, written who are not served by prime lenders. confirmation shall be given as promptly 12 CFR Part 226 With this increase in subprime lending as circumstances allow. This there has also been an increase in [Regulation Z; Docket No. R–1090] cancellation shall continue in effect reports of ‘‘predatory lending.’’ The pending the completion of the Truth in Lending term ‘‘predatory lending’’ encompasses proceeding, and any judicial review a variety of practices. In general, the thereof, unless otherwise ordered by the AGENCY: Board of Governors of the term is used to refer to abusive lending Administrator. Federal Reserve System. practices involving fraud, deception, or ACTION: Final rule. unfairness. Some abusive practices are PART 85—PSEUDORABIES clearly unlawful, but others involve SUMMARY: The Board is adopting loan terms that are legitimate in many 4. The authority citation for part 85 amendments to the provisions of instances and abusive in others, and continues to read as follows: Regulation Z (Truth in Lending) that thus are difficult to regulate. Loan terms Authority: 21 U.S.C. 111–113, 115, 117, implement the Home Ownership and that may benefit some borrowers, such 120, 121, 123–126, 134b, and 134f; 7 CFR Equity Protection Act (HOEPA). HOEPA as balloon payments, may harm other 2.22, 2.80, and 371.4. was enacted in 1994, in response to borrowers, particularly if they are not evidence of abusive lending practices in fully aware of the consequences. The § 85.7 [Amended] the home-equity lending market. reports of predatory lending have generally included one or more of the 5. Section 85.7 is amended as follows: HOEPA imposes additional disclosure requirements and substantive following: (1) Making unaffordable a. In paragraph (b)(3)(i), by removing limitations (for example, restricting loans based on the borrower’s home the phrase ‘‘The swine’’ and adding in short-term balloon notes) on home- equity without regard to the borrower’s its place the phrase ‘‘Unless the swine equity loans bearing rates or fees above ability to repay the obligation; (2) are moving interstate in a swine a certain percentage or amount. The inducing a borrower to refinance a loan production system in compliance with Board’s amendments to Regulation Z repeatedly, even though the refinancing § 71.19(h) of this chapter, the swine’’. broaden the scope of mortgage loans may not be in the borrower’s interest, b. In paragraph (b)(3)(ii), by removing subject to HOEPA by adjusting the price and charging high points and fees each the phrase ‘‘The swine are accompanied triggers used to determine coverage time the loan is refinanced, which by a certificate’’ and adding in its place under the act. The rate-based trigger is decreases the consumer’s equity in the the phrase ‘‘Unless the swine are lowered by two percentage points for home; and (3) engaging in fraud or moving interstate in a swine production first-lien mortgage loans, with no deception to conceal the true nature of system in compliance with § 71.19(h) of change for subordinate-lien loans. The the loan obligation from an this chapter, the swine are accompanied fee-based trigger is revised to include unsuspecting or unsophisticated by a certificate’’. the cost of optional credit insurance and borrower—for example, ‘‘packing’’ loans similar debt protection products paid at with credit insurance without a c. In paragraph (c)(1), by removing the consumer’s consent. phrase ‘‘The swine are accompanied by closing. The amendments restrict a certificate’’ and adding in its place the certain acts and practices in connection A. The Home Ownership and Equity phrase ‘‘Unless the swine are moving with home-secured loans. For example, Protection Act creditors may not engage in repeated interstate in a swine production system In response to anecdotal evidence refinancings of their HOEPA loans over in compliance with § 71.19(h) of this about abusive practices involving home- a short time period when the chapter, the swine are accompanied by secured loans with high rates or high transactions are not in the borrower’s a certificate’’. fees, in 1994 the Congress enacted the interest. The amendments also Home Ownership and Equity Protection 6. Section 85.8 is amended by strengthen HOEPA’s prohibition against Act (HOEPA), Pub. L. 103–325, 108 Stat. removing the period at the end of extending credit without regard to 2160, as an amendment to the Truth in paragraph (a)(3) and adding in its place consumers’ repayment ability, and Lending Act (TILA), 15 U.S.C. 1601 et ‘‘; or’’; and by adding a new paragraph enhance disclosures received by seq. TILA is intended to promote the (a)(4) to read as follows: consumers before closing for HOEPA- informed use of consumer credit by covered loans. § 85.8 Interstate movement of swine from requiring disclosures about its terms a qualified negative gene-altered vaccinated DATES: The rule is effective December and cost. TILA requires creditors to herd. 20, 2001; compliance is mandatory as of disclose the cost of credit as a dollar October 1, 2002. amount (the ‘‘finance charge’’) and as an (a) * * * FOR FURTHER INFORMATION CONTACT: annual percentage rate (the ‘‘APR’’). (4) The swine are moved interstate in Minh-Duc T. Le, Attorney, Daniel G. Uniformity in creditors’ disclosures is a swine production system in Lonergan, Counsel, or Jane E. Ahrens, intended to assist consumers in compliance with § 71.19(h) of this Senior Counsel, Division of Consumer comparison shopping. TILA requires chapter. and Community Affairs, at (202) 452– additional disclosures for loans secured * * * * * 3667 or 452–2412; for users of by a consumer’s home and permits
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consumers to rescind certain consumer could assert against the Transcripts of the hearings can be transactions that involve their principal creditor. HOEPA also authorizes the accessed on the Board’s Internet web dwelling. TILA is implemented by the Board to prohibit acts or practices in site at http://www.federalreserve.gov/ Board’s Regulation Z, 12 CFR part 226. connection with mortgage lending community.htm. In the notices HOEPA identifies a class of high-cost under defined criteria. announcing the hearings, the Board also mortgage loans through rate and fee solicited written comment on possible B. Continued Concerns About Predatory triggers, and it provides consumers revisions to Regulation Z’s HOEPA Lending Practices entering into these transactions with rules. 65 FR 45547, July 24, 2000. The special protections. HOEPA applies to Since the enactment of HOEPA in Board received approximately 450 closed-end home-equity loans 1994, the volume of home-equity comment letters in response to the (excluding home-purchase loans) lending has increased significantly in notices, two-thirds of which were from bearing rates or fees above a specified the subprime mortgage market. Based on consumers generally encouraging Board percentage or amount. A loan is covered data reported under the Home Mortgage action to curb predatory lending. by HOEPA if (1) the APR exceeds the Disclosure Act (HMDA), 12 U.S.C. 2801 rate for Treasury securities with a et seq., the number of nonpurchase- C. The Board’s Proposed Rule to Amend comparable maturity by more than 10 money loans made by lenders that are Regulation Z percentage points, or (2) the points and identified as engaging in subprime The Board published a proposed rule fees paid by the consumer exceed the lending increased about five-fold—from to amend Regulation Z in December greater of 8 percent of the loan amount 138,000 in 1994 to roughly 658,000 in 2000. 65 FR 81438, December 26, 2000. or $400. The $400 figure set in 1994 is 2000. While such lending benefits The Board proposed to broaden the adjusted annually based on the consumers by making credit available, it scope of mortgage loans subject to Consumer Price Index. The dollar figure also raises concerns that the increase in HOEPA by adjusting the price triggers for 2001 is $465 and for 2002 is $480. the number of subprime loans brings a used to determine coverage under the 66 FR 57849, November 19, 2001. corresponding increase in the number of act; to prohibit certain acts and practices HOEPA is implemented in § 226.32 of predatory loans. in connection with home-secured loans the Board’s Regulation Z. HOEPA also In the past two years, various covered by HOEPA; to require increased amended TILA to require additional initiatives to address predatory lending scrutiny on creditors’ practices to disclosures for reverse mortgages that have been undertaken. The Senate document and verify income; and to are contained in § 226.33 of Regulation Banking Committee held hearings in enhance disclosures received by Z. For purposes of this notice of July 2001 at which consumers and consumers before closing for HOEPA- rulemaking, however, the term representatives of industry and covered loans. ‘‘HOEPA-covered loan’’ or ‘‘HOEPA consumer groups testified; the House The Board received approximately loan’’ refers only to mortgages covered Banking Committee held hearings in 200 letters that specifically addressed by § 226.32 that meet HOEPA’s rate or May 2000 at which the banking the proposed revisions and represented fee-based triggers. regulators and others testified; and bills the views of the mortgage lending Creditors offering HOEPA-covered have been introduced to address industry, credit insurance industry, loans must give consumers an predatory lending. Several states and consumer and community development abbreviated disclosure statement at least municipalities have enacted or are groups, and government agencies. In three business days before the loan is considering legislation or regulations. addition, the Board received closed, in addition to the disclosures The Department of Housing and Urban approximately 1,100 identical e-mail generally required by TILA before or at Development and the Department of comment letters from consumers closing. The HOEPA disclosure informs Treasury held a number of public generally encouraging the Board to curb consumers that they are not obligated to forums on predatory lending and issued predatory lending. complete the transaction and could lose a report in June 2000. The report makes Most of the creditors and other their home if they take the loan and fail recommendations to the Congress commenters involved in mortgage to make payments. It includes a few key regarding legislative action and to the lending opposed making more loans items of cost information, including the Board urging the use of its regulatory subject to HOEPA. They believe that the APR. In loans where consumers have authority to address predatory lending coverage of more loans would reduce three business days after closing to practices. Fannie Mae and Freddie Mac competition and the availability of rescind the loan, the HOEPA disclosure published guidelines last year to avoid credit in the range of rates affected thus affords consumers a minimum of purchasing loans that are potentially because some lenders, as a matter of six business days to consider accepting predatory; they are also making efforts policy, will not make HOEPA loans. key loan terms before receiving the loan to develop consumers’ awareness of With regard to the new rules that would proceeds. their credit options. apply to HOEPA loans, creditors wanted HOEPA restricts certain loan terms for The Board has conferred with its more flexibility and compliance high-cost loans because they are Consumer Advisory Council and Board guidance. Consumer representatives and associated with abusive lending staff have met with other industry community development organizations practices. These terms include short- representatives and consumer advocates generally supported the proposal as a term balloon notes, prepayment on the issue of predatory lending. In step forward in addressing the problem penalties, non-amortizing payment 2000, the Board held hearings in of predatory lending but believed schedules, and higher interest rates Charlotte, Boston, Chicago, and San additional steps are needed to ensure upon default. Creditors are prohibited Francisco, to consider approaches the consumers are protected. from engaging in a pattern or practice of Board might take in exercising its making HOEPA loans based on the regulatory authority under HOEPA. The II. Summary of Final Rule homeowner’s equity without regard to Board’s hearings focused on expanding With some exceptions, the Board is the borrower’s ability to repay the loan. the scope of mortgage loans covered by adopting the revisions substantially as Under HOEPA, assignees are generally HOEPA, prohibiting specific acts or proposed to address predatory lending subject to all claims and defenses with practices, improving consumer and unfair practices in the home-equity respect to a HOEPA loan that a disclosures, and educating consumers. market. The revisions are adopted
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pursuant to the Board’s authority to consumer’s default. A similar rule required under § 226.32 and the time adjust the APR trigger and add applies to home-secured lines of credit the consumer becomes obligated under additional charges to the points and fees under Regulation Z. the loan. If the creditor changes any trigger. See 15 U.S.C. 1602(aa). The final rule seeks to strengthen terms that make the disclosures Revisions are also issued pursuant to HOEPA’s prohibition on making loans inaccurate, new disclosures must be the Board’s authority under HOEPA to based on homeowners’ equity without given and another three-day waiting prohibit certain acts or practices (1) regard to repayment ability. It creates a period is triggered. affecting mortgage loans if the Board presumption that a creditor has violated Comment § 226.31(c)(1)(i)–2 is added, finds the act or practice to be unfair, the statutory prohibition on engaging in as proposed, to clarify redisclosure deceptive, or designed to evade HOEPA, a pattern or practice of making HOEPA requirements when, after a consumer or (2) affecting refinancings if the Board loans without regard to repayment receives a HOEPA disclosure and before finds the act or practice to be associated ability if the creditor generally does not consummation, loan terms change that with abusive lending or otherwise not in verify and document consumers’ make the disclosure inaccurate. The the interest of the borrower. 15 U.S.C. repayment ability. Board’s 2000 hearings revealed that 1639(l)(2). Revisions are also adopted The final rule revises the HOEPA some creditors offer credit insurance pursuant to section 105(a) of TILA to disclosures (given three days before loan and other optional products at loan effectuate the purposes of TILA, to closing) for refinancings, to alert closing. If the consumer finances the prevent circumvention or evasion, or to consumers to the total amount purchase of such products and as a facilitate compliance. 15 U.S.C. 1604(a). borrowed, which may be substantially result the monthly payment differs from The amendments (1) extend the scope higher than the loan amount requested what was previously disclosed under of mortgage loans subject to HOEPA’s due to the financing of credit insurance, § 226.32, the terms of the extension of protections, (2) restrict certain acts or points, and fees. To enhance consumer credit have changed; redisclosure is practices, (3) strengthen HOEPA’s awareness, and deter insurance packing, required and a new three-day waiting prohibition on loans based on the HOEPA disclosure must specify period applies. See discussion below homeowners’ equity without regard to whether the total amount borrowed concerning § 226.32(c)(3) on when repayment ability, and (4) enhance includes the cost of optional insurance. optional items may be included in the HOEPA disclosures received by The staff commentary to Regulation Z regular payment disclosure. consumers before closing, as follows. has also been revised to provide The final rule adjusts the APR trigger guidance on the new rules and to clarify Section 226.32—Requirements for for first-lien mortgage loans, from 10 existing requirements. Revisions to the Certain Closed-end Home Mortgages percentage points to 8 percentage points regulation and the staff commentary are 32(a) Coverage above the rate for Treasury securities discussed in detail below in the section- having a comparable maturity, the by-section analysis. HOEPA disclosures and restrictions maximum amount that the Board may cover home-equity loans that meet one III. Section-by-Section Analysis of Final lower the trigger. The APR trigger for of the act s two high-cost triggers a rate Rule subordinate-lien loans remains at 10 trigger and a points and fees trigger. percentage points. The fee-based trigger Subpart A—General Under the final rule, both triggers are is adjusted to include amounts paid at revised to cover more loans. Section 226.1—Authority, Purpose, closing for optional credit life, accident, APR trigger—Currently, a loan is Coverage, Organization, Enforcement health, or loss-of-income insurance, and covered by HOEPA if the APR exceeds and Liability other debt-protection products written by more than 10 percentage points the in connection with the credit Section 226.1(b) on the purpose of the rate for Treasury securities with a transaction. regulation is revised as proposed to comparable maturity. Section 103(aa) of The final rule also addresses some reflect the addition of prohibited acts TILA authorizes the Board to adjust the ‘‘loan flipping’’ within the first year of and practices in connection with credit APR trigger by 2 percentage points from a HOEPA loan. Except in limited secured by a consumer’s dwelling. the current standard of 10 percentage circumstances, a creditor that has made Section 226.1(d) on the organization of points upon a determination that the a HOEPA loan to a borrower is generally the regulation is revised to reflect the increase or decrease is consistent with prohibited for twelve months from restructuring of Subpart E (rules for the consumer protections against refinancing any HOEPA loan made to certain home mortgage transactions). abusive lending contained in HOEPA that borrower into another HOEPA loan. and is warranted by the need for credit. Subpart C—Closed-end Credit Assignees holding or servicing a HOEPA The Board had proposed to reduce the loan are subject to similar restrictions. Section 226.23—Right of Rescission rate trigger from 10 to 8 percentage To prevent the evasion of HOEPA, points above the rate for Treasury 23(a) Consumer’s Right to Rescind which only covers closed-end loans, the securities with a comparable term for all final rule prohibits a creditor from The proposed amendment to footnote loans, the maximum adjustment that the wrongfully documenting such loans as 48 to § 226.23(a)(3) is unnecessary given Board can make. With this change, open-end credit. For example, a high- the organization of the final rule, and based on recent rates for Treasury cost mortgage may not be structured as thus has not been adopted. securities, home-equity loans with a a home-secured line of credit if there is Subpart E—Special Rules for Certain term of 10 years would be subject to no reasonable expectation that repeat Home Mortgage Transactions HOEPA if they have an APR of transactions will occur under a reusable approximately 13 percent or higher. line of credit. To ensure that lenders do Section 226.31—General Rules The Board solicited comment on an not accelerate the payment of HOEPA 31(c) Timing of Disclosure alternative approach that would loans without cause, the final rule differentiate between first- and prohibits a creditor from exercising 31(c)(1)(i) Change in Terms subordinate-lien loans in the ‘‘due-on-demand’’ or call provisions in Section 226.31(c)(1) requires a three- application of the APR trigger. Under a HOEPA loan, unless the clause is day waiting period between the time the the two-tiered alternative, the APR exercised in connection with a consumer is furnished with disclosures trigger for first-lien mortgages would be
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reduced to 8 percentage points; the APR believe there are insufficient data about abusive lending provided by HOEPA. trigger for subordinate-lien loans would the incidence of predatory lending The Act’s purpose is to protect the most remain at 10 percentage points. The occurring in loans immediately below vulnerable consumers, based on the cost final rule adopts the two-tiered the existing HOEPA triggers to support of the loans, from abusive lending alternative approach. lowering the trigger. practices. As noted above, anecdotal HOEPA provides that the Board may Anecdotal evidence suggests that evidence suggests that subprime adjust the APR trigger after consulting subprime borrowers with rates below borrowers with loans priced below with representatives of consumers and the current HOEPA triggers also have HOEPA’s current APR trigger have been lenders and determining that the been subject to abusive lending subject to predatory practices, such as increase or decrease is consistent with practices. There are no precise data, unaffordable lending, loan flipping and the purpose of consumer protection in however, on the number of subprime insurance packing. These are the very HOEPA and is warranted by the need loans in the market as a whole that types of abuses that HOEPA was for credit. (The Board may not adjust the would be affected by lowering the intended to prevent. With a lowered trigger more frequently than once every HOEPA rate trigger. The precise effect trigger, more consumers with high-cost two years.) Consistent with this that lowering the APR trigger will have loans will receive cost disclosures three mandate, the Board has held public on creditors’ business strategies is days before closing (instead of at hearings, considered the testimony at difficult to predict. It seems likely that closing) and will be protected by other hearings held by government lenders that already make HOEPA loans HOEPA’s prohibitions against onerous agencies and the Congress, analyzed and have compliance systems in place loan terms, such as non-amortizing comment letters, held discussions with would continue making them under a payment schedules, balloon payments community groups and lenders, revised APR trigger. Some creditors that on short-term loans, or interest rates that consulted its Consumer Advisory choose not to make HOEPA loans may increase upon default. A wider range of Council, and reviewed data from refrain from making loans in the range high-cost loans will also be subject to various studies and reports on the of rates that would be covered by the HOEPA’s rule against unaffordable home-equity lending market. lowered threshold. But other creditors lending, and to HOEPA’s restrictions on Most of the information the Board may fill any void left by creditors that prepayment penalties. The rules being received about predatory lending is do not make HOEPA loans, either adopted by the Board to address loan anecdotal, as it was when Congress because they already make HOEPA flipping will also apply to more loans. passed HOEPA in 1994. The reports of loans or because they are willing to do Lastly, more high-cost loans will be actual cases (including additional so in the future. And others may have subject to the HOEPA rule that holds Congressional testimony by consumers) the flexibility to avoid HOEPA’s loan purchasers and other assignees are, however, widespread enough to coverage by lowering rates or fees for liable for any violation of law by the indicate that the problem warrants some loans at the margins, consistent original creditor with respect to the addressing. Homeowners in certain with the risk involved. Data submitted mortgage. communities—frequently the elderly, by a trade association representing minorities, and women—continue to be nondepository institution lenders Two-tiered approach—Of the 200 targeted with offers of high-cost, home- suggest that there is an active market for commenters on the proposal, about 40 secured credit with onerous loan terms. HOEPA loans under the current APR discussed the two-tiered trigger The loans, which are typically offered trigger. There is no evidence that the approach and were about evenly by nondepository institutions, carry impact on credit availability will be divided. Creditors and some consumer high up-front fees and may be based significant if the trigger is lowered. groups favored the two-tiered trigger solely on the equity in the consumers’ Accordingly, the Board believes that approach. Those opposed included homes without regard to their ability to lowering the APR trigger to expand community groups, some creditors, and make the scheduled payments. When HOEPA’s protections to more loans is others that generally believe that there homeowners have trouble repaying the consistent with consumers’ need for should be no distinction drawn between debt, they are often pressured into credit, and therefore, warranted. first-lien and subordinate-lien loans. refinancing their loans into new Moreover, lowering the rate trigger Community groups believe that the unaffordable, high-fee loans that rarely seeks to ensure that the need for credit maximum number of subprime provide economic benefit to the by subprime borrowers will be fulfilled mortgage loans should be subject to consumers. These refinancings may more often by loans that are subject to HOEPA’s protections. Many suggested occur frequently. The loan balances HOEPA’s protections. Borrowers who that the two-tiered approach could be increase primarily due to fees that are have less-than-perfect credit histories helpful if both triggers were financed resulting in reductions in the and those who might not be served by substantially lower than what the Board consumers’ equity in their homes and, prime lenders have benefited from the is authorized to adopt. Some creditors in some cases, foreclosure may occur. substantial growth in the subprime that opposed the tiered-approach The loan transactions also may involve market. But a borrower does not benefit believe that the Board should not issue fraud and other deceptive practices. from expanded access to credit if the a rule that might encourage the making Creditors have expressed concern that credit is offered on unfair terms, the of loans that would place creditors in a lowering the HOEPA rate trigger would repayment costs are unaffordable, or the subordinate lien position. One adversely affect credit availability for loan involves predatory practices. institution noted that a subordinate-lien loans in the range of rates that would be Because consumers who obtain loan may not be more favorable to a covered by the lowered trigger. Many subprime mortgage loans have, or consumer if it results in a combined creditors, ranging from community perceive they have, fewer options than monthly payment on the first and banks to national lenders, have stated other borrowers, they may be more second mortgages that is higher than the that they do not offer HOEPA loans due vulnerable to unscrupulous lenders or monthly payment on a consolidated to their concerns about compliance brokers. first-lien mortgage loan. Some burdens, potential liability, reputational The Board has also determined that commenters believe that borrowers with risk, and difficulty in selling these loans lowering the rate trigger is consistent subordinate-lien loans face similar risks to the secondary market. Some creditors with the consumer protections against of abusive practices as with first-lien
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loans. A few stated that the tiered though the existing first mortgage may Many commenters expressed views approach would add unnecessary have been at a lower rate. This ensures on this issue. The views were sharply complexity to both compliance and that the creditor will be the senior lien- divided. In general, consumer enforcement efforts. holder, but it also results in an increase, representatives, some federal agencies, Data are not available on the number perhaps significant, in the points and state law enforcement officials, and of home-equity loans currently subject fees paid for the new loan (since the some others supported the inclusion of to HOEPA, or the number of loans that latter are calculated on a much larger optional credit insurance premiums in would be covered if the APR trigger loan amount). HOEPA’s points and fees trigger, were lowered. At the time of the The Board’s final rule lowers the APR although they would have preferred an proposal, data from the Mortgage trigger for first lien-mortgages only. outright ban on the purchase or Information Corporation (MIC) Subordinate-lien loans are already financing of single-premium products. compiled by the Office of Thrift covered more frequently by HOEPA Consumer representatives were Supervision suggested that lowering the because the rates on these loans are generally concerned about the cost of APR trigger by 2 percentage points higher than first-lien loans. The data the insurance, its voluntariness, and its could expand HOEPA’s coverage from suggests that coverage under the current contribution to equity stripping. They approximately 1 percent to 5 percent of triggers could be significant for believe that borrowers are often subprime mortgage loans. Further subordinate-lien loans. Moreover, the unaware that insurance has been analysis of additional MIC data suggests evidence of abusive practices has included in their loan balance or that that these percentages of coverage may pertained primarily to first lien borrowers perceive that the insurance is be typical of longer-term, first-lien mortgages. Based on these factors, the required. They also note that these mortgages, and that the coverage Board is adjusting the APR trigger only problems exist notwithstanding the fact percentages are higher for shorter-term for first-lien loans, but retains the ability that TILA currently requires creditors to and subordinate-lien loans. to lower the trigger for subordinate-lien disclose before consummation that the In response to the Board’s request in loans at a future date. insurance is optional in order to exclude the proposal, a few commenters it from the HOEPA fee trigger. (If provided data on the number of loans 32(b) Definition creditors fail to disclose that the they offered in recent years that would Points and fees trigger—Currently, insurance is optional, TILA requires that have been affected by a rate trigger of 8 home-equity loans are subject to HOEPA the cost be treated as a finance charge, percentage points above a comparable if the points and fees payable by the and all finance charges other than Treasury security. The most extensive consumer at or before loan closing interest are in the current HOEPA fee data were submitted by a trade exceed the greater of 8 percent of the trigger.) They state that excessively high association representing nondepository total loan amount or $465. (The dollar premiums contribute to the problem of institution lenders. The association trigger is $480 for 2002; 66 FR 57849, equity stripping. They also note that collected data from the subprime November 19, 2001.) ‘‘Points and fees’’ consumers pay interest on the financed lending divisions of nine member include all finance charges except for premium for the entire loan term even institutions. The number of loans though insurance coverage typically surveyed is about 36 percent of the interest. The trigger also includes some expires much earlier. number of loans of subprime lenders fees that are not finance charges, such recorded under HMDA during the as closing costs paid to the lender or an Most creditors and commenters survey period (mid-year 1995 through affiliated third party. HOEPA authorizes representing the credit insurance mid-year 2000). The dollar volume for the Board to add ‘‘such other charges’’ industry strongly opposed the inclusion the loans surveyed is about 20 percent to the points and fees trigger as the of optional insurance premiums paid at of the dollar volume of loans reported Board deems appropriate. closing in the points and fees trigger. by subprime lenders under HMDA. The comment letters and testimony at Some creditors questioned the Board’s Overall, the trade association data show the hearings raised a number of use of its authority under HOEPA to that for these loans, HOEPA’s existing concerns about single-premium credit mandate inclusion; they pointed to APR trigger would have covered about insurance, such as excessive costs, high- legislative history that discusses the 9 percent of the first-lien loans, and that pressure sales tactics, consumers’ potential inclusion of credit insurance lowering the APR trigger by 2 confusion as to the voluntariness of the premiums if there is evidence that credit percentage points would have resulted product, and ‘‘insurance packing.’’ The insurance premiums are being used to in coverage of nearly 26 percent of the term ‘‘packing’’ in this case refers to the evade HOEPA. These commenters first-lien loans surveyed. For practice of automatically including believe that a finding of evasion is a subordinate-lien loans, about 47 percent optional insurance in the loan amount prerequisite to inclusion; they do not of the surveyed loans would have been without the consumer’s request; as a believe the standard has been met covered by HOEPA’s APR trigger, and result, some consumers may perceive because the proposal merely noted that the data suggest that lowering the APR that the insurance is a required part of the change might prevent such evasions trigger by 2 percentage points would the loan, and others may not be aware in the future. They also cited an have resulted in coverage of about 75 that insurance has been included. exchange in the Congressional Record percent of the subordinate-lien loans. In response to the reported abuses, the between two Senators, when the Most of the evidence of predatory Board proposed to include in the fee Congress was considering HOEPA lending brought to the Board’s attention trigger premiums paid at closing for legislation, about credit insurance being to date has involved abuses in optional credit life, accident, health, or treated consistently with other connection with first-lien mortgage loss-of-income insurance and other provisions of TILA. Because premiums loans. When a consumer seeks a loan to debt-protection products; such for optional credit insurance are not consolidate debts or finance home premiums are typically financed. automatically included in the repairs, some creditors require Premiums paid for required credit calculation of TILA’s finance charge and consumers to borrow additional funds insurance policies are considered APR, these commenters believe such to pay off the existing first mortgage as finance charges and are already premiums should not be included in a condition of providing the loan, even included in the points and fees trigger. HOEPA’s points and fees calculation.
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The commenters’ suggestion that under HOEPA’s fee-based trigger. As a financing of single-premium credit credit insurance premiums can only be result, they caution that lenders insurance, which typically occurs in included in the HOEPA trigger if the choosing not to make HOEPA loans subprime loans. Some consumers are Board finds that creditors are using the would be foreclosed from offering not aware that they are purchasing the premiums to evade HOEPA is directly single-premium credit insurance insurance, some may believe the contradicted by the express language of products to their loan customers. They insurance is required, and some may not the statute, which states that the Board asserted that the financing of single- understand that the term of insurance need only make a finding that this premium insurance provides protection coverage may be shorter than the term action is ‘‘appropriate.’’ In construing a to cash-poor consumers who are of the loan. These abuses and statute, the plain meaning of the underinsured, and in some cases offers misunderstandings can be addressed statutory text generally governs. When less costly coverage compared with somewhat by applying HOEPA’s the plain meaning of the statutory other forms of insurance. In short, these protections and remedies, to the extent language is clear, there is no reason to commenters generally support the that including insurance in the points resort to legislative history. In this case, current rule that does not include and fees test brings these loans under if the Congress had intended to make insurance premiums for optional credit HOEPA. Moreover, including credit ‘‘evasions’’ the sole standard of insurance in the points and fees trigger. insurance premiums in HOEPA’s fee- ‘‘appropriateness’’ for including Alternatively, they recommend a rule based trigger prevents unscrupulous additional charges in the fee trigger, it that allows the insurance premiums to creditors from evading HOEPA by would have done so expressly. For be excluded based on the consumers’ packing a loan with such products in example, such language was used in ability to cancel the coverage and obtain lieu of charging other fees that already section 129(l)(2)(A), which authorizes a full refund, where consumers are also are included under the current HOEPA the Board to prohibit acts and practices provided with adequate information trigger. that the Board finds to be ‘‘unfair, about their rights to do so after the loan One likely effect of this adjustment to deceptive, or designed to evade’’ the closing. the trigger is that significantly more of provisions of HOEPA. The Board believes that it is the loans that include single-premium In light of the unambiguous statutory appropriate and consistent with the insurance will be covered by HOEPA’s text, the Board believes that the purposes of HOEPA to include protections. Data from a trade legislative history cited by the premiums paid by consumers at or association of nondepository lenders commenters is not dispositive, and that before closing for credit insurance (and indicate that lowering the APR trigger evasion is merely one example of when other debt-protection products) in for first-lien loans by 2 percentage the Board might find that inclusion of HOEPA’s points and fees trigger. The points and including optional credit additional charges is ‘‘appropriate.’’ The coverage is purchased by the consumer insurance premiums in the points and Senate floor colloquy, which refers to in connection with the mortgage fees tests would increase the percentage HOEPA as being consistent with TILA’s transaction, and the creditor or the of first-lien mortgage loans covered by treatment of insurance premiums, credit account is the beneficiary. In HOEPA, from 26 to 38 percent, for the should not be construed as guidance on addition, creditors receive commissions firms surveyed. With a lowered APR how the Board might, in the future, which may be significant for selling trigger, coverage of subordinate-lien adjust HOEPA’s points and fees trigger. credit insurance (and retain the fee mortgage loans would increase from 47 It merely clarified that optional credit assessed for debt-cancellation coverage). to 61 percent for the firms surveyed. insurance premiums were not This oftentimes represents a significant When there are abuses such as automatically included in the statutory addition to the cost of the transaction to coercive or deceptive sales practices, points and fees trigger, as would have the borrower and an increase in benefit borrowers will benefit from HOEPA’s been the case under an earlier version to the creditor. Moreover, when rule requiring disclosures three days of the legislation. financed in connection with a subprime before closing. With the enhanced Industry commenters opposed mortgage loan, as is typically the case, HOEPA disclosure of the amount including optional credit insurance these charges can represent a significant borrowed, these consumers will receive premiums in HOEPA’s points and fees addition to the loan balance, and thus, advance notice about the additional trigger when, for purposes of TILA to the cost of the transaction and the amount they must borrow beyond their disclosures generally, the premiums are size of the lien on the borrower’s home. original loan request if they purchase not included in the cost of the credit. For example, according to insurance the insurance. As part of that new The Board believes that HOEPA’s points industry commenters, the typical cost of disclosure, under the final rule, and fees trigger is not intended to be the single-premium credit life insurance for creditors must specify whether the equivalent of the ‘‘cost of credit,’’ as an individual borrower could amount to amount borrowed includes the cost of measured by TILA’s finance charge and the equivalent of several points. The optional insurance. Moreover, creditors APR. Indeed, HOEPA expressly total cost of credit insurance in a and assignees will be subject to includes certain charges in the points particular mortgage transaction, HOEPA’s strict liability and remedies and fees trigger that are not included in however, also depends on the number of when there are violations of law the finance charge, and authorizes the borrowers covered, and the types of concerning the mortgage. See Board to include others. The HOEPA coverage purchased. HOEPA is § 226.32(c)(5). points and fees trigger is intended to be specifically designed to help borrowers As commenters noted, some creditors used to identify transactions with high in high-cost mortgage transactions to choose not to make loans covered by costs where consumers may be understand the costs of the transaction HOEPA, and if these creditors have been vulnerable and thus need the benefit of and the risk that they may lose their offering single-premium insurance, they HOEPA’s special protections. homes if they do not meet the full may decide to cease doing so in order Creditors also asserted that, based on amount of their obligation under the to remain outside of HOEPA’s coverage. typical premium rates, most mortgage loan. To the extent that some creditors choose loans that include single-premium Importantly, anecdotal evidence has not to offer single-premium policies, credit insurance would be considered revealed that there are sometimes they can make credit insurance high-cost and thus would be covered abuses associated with the sale and available through other vehicles such as
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policies that assess and bill monthly with insurance. Moreover, reliance on agree to purchase optional products. premiums on the outstanding loan the consumer’s exercise of their right to These commenters thought the rule balance. cancel the insurance would not prevent would be useful in preventing Industry commenters assert that abuses but would unfairly require ‘‘packing.’’ Other commenters, single-premium policies are less costly borrowers to take the initiative in representing both consumer and than monthly premium insurance and remedying them. industry interests, opposed such an provide greater continuity of coverage approach. The consumer representatives 32(c) Disclosures because a borrower’s missed payments preferred creditors to have the duty to on the monthly-pay product might Section 129(a) of TILA requires ensure ‘‘voluntariness.’’ Industry result in cancellation of insurance. creditors offering HOEPA loans to representatives expressed a variety of Single-premium and monthly-premium provide abbreviated disclosures to concerns. Some believed that such a policies have relative advantages and consumers at least three days before the rule would be burdensome to creditors disadvantages. For example, a five-year loan is closed, in addition to the and borrowers alike, necessitating policy with a financed single-premium disclosures generally required by TILA additional visits to sign the document at may result in smaller monthly payments at or before closing. The HOEPA least three days before closing. They because the cost is spread over the full disclosures inform consumers that they believed a separate affirmation to be loan term, which may be ten or twenty are not obligated to complete the duplicative and unnecessary. Others years. But the consumer will also pay transaction and could lose their home if believed the rule would have the ‘‘points’’ (and interest over the life of they take the loan and fail to make unintended effect of making consumers the loan) on the additional amount payments. The HOEPA disclosures also feel obligated, and ultimately less likely financed for the coverage. Premiums include a few key cost disclosures, such to reverse an earlier decision prior to or assessed monthly, based on the as the APR and the monthly payment at closing. outstanding loan balance, may result in (including the maximum payment for Having carefully considered a higher monthly expense, but they are variable-rate loans and any balloon commenters’ concerns regarding not financed and would only be payable payment). Under the final rule these burden, and the effectiveness of a during the five years that coverage was disclosures have been enhanced separate written agreement to purchase in force, so the overall cost to the somewhat to further benefit borrowers. optional products to reduce ‘‘packing,’’ consumer could be lower. Regardless of Section 226.32(c) is revised to provide, the Board is not taking further action to the relative merits, under the final rule in accordance with TILA section 129(a), require a separate written agreement at creditors will continue to have the that the disclosures must be in a this time. To address insurance ability to decide what types of insurance conspicuous type size. ‘‘packing,’’ pursuant to its authority products they will make available to under section 129(l)(2)(B) of TILA, the 32(c)(3) Regular Payment; Balloon borrowers. Board has instead enhanced the final Payment The final rule also provides guidance rule to require that the disclosure of the in calculating the HOEPA fees trigger. A Section 226.32(c)(3) requires creditors amount borrowed in mortgage mortgage loan is covered by HOEPA if to disclose to consumers the amount of refinancings expressly state whether the ‘‘points and fees’’ exceed 8 percent the regular monthly (or other periodic) optional credit insurance or debt- of the ‘‘total loan amount.’’ The total payment, including any balloon cancellation coverage is included in the loan amount is based on the ‘‘amount payment. The regulation is revised to amount financed, as discussed below. financed’’ as provided in § 226.18(b). move the disclosure requirement for the The final rule for disclosing the Comment 32(a)(1)(ii)–1 of the staff amount of the balloon payment from the ‘‘amount borrowed’’ includes a $100 commentary to Regulation Z discusses commentary to the regulation, to aid in tolerance for minor errors. As discussed the calculation of the total loan amount. compliance. Model Sample H–16, below, if the amount borrowed is The comment is revised, as proposed, to which illustrates the disclosures inaccurate by any amount, the regular illustrate that premiums or other required under § 226.32(c), is revised to payment disclosure will be inaccurate charges for credit life, accident, health, include a model clause on balloon also. To be meaningful to creditors, any loss-of-income, or debt-cancellation payments. tolerance for the amount borrowed must coverage that are financed by the Under comment 32(c)(3)–1 of the staff ‘‘pass through’’ to the regular payment. creditor must be deducted from the commentary, creditors are allowed to Such an approach is consistent with amount financed in calculating the total include voluntary items in the regular TILA’s rule in closed-end transactions loan amount. payment disclosed under § 226.32 only secured by real property or a dwelling, Disclosure alternatives—The Board if the consumer has previously agreed to where the finance charge as well as solicited comment on whether optional such items. The comment is revised for other disclosures affected by the finance credit insurance premiums should be clarity as proposed. charge are considered accurate within excluded from the trigger when Testimony at the Board’s 2000 public prescribed limits. Pursuant to its consumers have a right to cancel the hearings and other comments received authority under section 129(l)(2)(B) of policy and when disclosures about that suggest that some HOEPA disclosures TILA, the Board is providing a tolerance right are provided after closing. provided in advance of closing include to the regular payment disclosure Consumer representatives were opposed insurance premiums in the monthly required under § 226.32(c)(3), if the to the approach, expressing doubt that payment, even though consumers may payment disclosed is based on an disclosures would be effective. Industry not agree to purchase optional insurance amount borrowed that is deemed commenters supported the exclusion as until closing. Consequently, the Board accurate and disclosed under a reasonable approach to address solicited comment on whether § 226.32(c)(5). concerns about insurance packing. consumers should be required to request Upon further analysis, the Board or affirmatively agree to purchase 32(c)(5) Amount Borrowed believes that post-closing disclosures optional items in writing, to aid in Section 226.32(c)(5) is added to would be less effective than the HOEPA enforcing the rule. require disclosure of the total amount disclosures and remedies in deterring Some commenters supported having a the consumer will borrow, as reflected abusive sales practices in connection rule where consumers would separately by the face amount of the note, pursuant
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to the Board’s authority under Section Counseling accelerate the payment of these loans, 129(l)(2)(B) of TILA. This disclosure The Board requested comment on without cause, at any time during the responds to concerns by consumers and whether a generic disclosure advising loan term, in order to force consumers consumer representatives that consumers to seek independent advice to refinance. When a creditor can consumers sometimes seek a modest might encourage borrowers to seek unilaterally terminate the loan without loan amount such as for medical or credit counseling. Consistent with views cause, the consumer may be subject to home improvement costs, only to expressed in connection with the unnecessary refinancings, excessive discover at closing (or after) that the Board’s 2000 hearings, both consumer loan fees, higher interest rates, or note amount is substantially higher due and creditor commenters acknowledged possible foreclosure. Consequently, this to fees and insurance premiums that are the benefits of pre-loan counseling as a rule prevents creditors from using call financed along with the requested loan means to counteract predatory lending. provisions in a manner that would amount. The amount borrowed There was uniform concern, however, cause substantial harm to HOEPA disclosure is enhanced in the final rule; about requiring a referral to counseling borrowers. when the loan amount includes for HOEPA loans because the actual premiums or other charges for optional availability of local counselors may be Loans covered by HOEPA are more credit insurance or debt-cancellation uncertain. Based on the comments likely to involve borrowers who have coverage, the disclosure must so specify, received and further analysis, the Board less-than-perfect credit histories, or who to address insurance ‘‘packing’’ where is not adopting a generic counseling might not be served by prime lenders. consumers may not be aware that disclosure at this time. As noted earlier, because these insurance coverage has been added to consumers either have or perceive they the loan balance. Comment 32(c)(5)–1 to 32(d) Limitations have fewer options than other the staff commentary provides guidance 32(d)(8) Due-on-demand Clause borrowers, they may be more vulnerable regarding terminology for debt- As proposed, § 226.32(d)(8) is added to unscrupulous lenders or brokers. cancellation coverage. to restrict the use of ‘‘due-on-demand’’ Accordingly, HOEPA includes Consumer representatives and some clauses or ‘‘call’’ provisions for HOEPA limitations on certain loan provisions to industry representatives supported the loans, unless the clause is exercised in protect these borrowers from onerous proposal as aiding consumers’ connection with a consumer’s default. loan terms. The Board finds that it is understanding that additional fees The limitation on the use of these also appropriate to protect HOEPA might be financed. Other industry provisions in HOEPA loans is added borrowers from the potentially harsh representatives opposed the proposal. pursuant to the Board’s authority under effects of allowing a creditor to exercise Some of these commenters believed section 129(l)(2)(A) to prohibit acts that a ‘‘due-on-demand’’ clause at any time, consumers would be confused by an are unfair or are designed to evade unless there is legitimate cause. ‘‘amount borrowed’’ in addition to HOEPA. The staff commentary to The hearing testimony and comments TILA’s ‘‘amount financed,’’ which does § 226.32(d)(8) provides guidance received by the Board failed to identify not include amounts borrowed to cover concerning the exercise of ‘‘due-on- any benefits to using ‘‘due-on-demand’’ loan fees. demand’’ clauses when a consumer fails Creditors must provide updated to meet repayment terms or impairs the clauses in HOEPA loans, other than in HOEPA disclosures if, after giving the creditor’s security for the loan. the legitimate cases that are permitted disclosures required by § 226.32(c) to Commenters generally supported the under the Board’s rule. The rule allows the consumer and before proposal. A few commenters suggested creditors to exercise such clauses when consummation, the creditor changes any that the rule was not needed because the creditor is faced with borrower terms that make the disclosure they believe that due-on-demand misrepresentations or fraud, the inaccurate. § 226.31(c)(1). The Board clauses were generally not being used borrower fails to meet repayment terms, requested comment on whether it would by mortgage lenders. Some industry or a borrower’s action (or failure to act) be appropriate to provide for a tolerance commenters asked the Board to limit the affects the creditor’s security for the for insignificant changes to the amount rule’s applicability to the first five years loan. The rule does not affect creditors’ borrowed, and if so, what would be a of a HOEPA loan, to coincide with use of ‘‘due-on-sale’’ clauses. suitable margin. HOEPA’s ban on balloon payments. One The limitations on ‘‘due-on-demand’’ Commenters had mixed views on the commenter sought clarification that the clauses adopted by the Board for desirability for a tolerance. Consumer rule limiting ‘‘due-on demand’’ clauses HOEPA loans are similar to TILA’s groups supported either no tolerance or would not affect ‘‘due-on-sale’’ clauses. a very small tolerance such as $100, The final rule is adopted as proposed. existing limits on the use of such consistent with the existing tolerance To prevent creditors from forcing clauses for home-equity lines of credit for understated finance charges in consumers to pay additional points and (HELOCs). See TILA, Section 127A; 12 closed-end transactions secured by real fees to refinance their loans or face CFR § 226.5b(f)(2). The rule for HELOCs property or a dwelling. § 226.18(d)(1). possible foreclosure, section 129(e) of is contained in the Home Equity Loan Industry commenters wanted a much TILA prohibits the use of balloon Consumer Protection Act of 1988 (Pub. larger tolerance such as 1 percent of the payments for HOEPA loans with terms Law No. 100–709, 102 Stat. 4725). The loan amount or 10 percent of the regular of less than five years. Although ‘‘due- 1988 act recognized that allowing payment. on-demand’’ and ‘‘call’’ provisions creditors to unilaterally terminate a Pursuant to its authority under currently do not appear to be widely home-equity line (or significantly section 129(l)(2)(B) of TILA, the Board used in HOEPA loans, a creditor could change loan terms) is fundamentally is providing a tolerance for the potentially force the consumer to unfair when the consumer’s home is at disclosure of the amount borrowed. refinance by exercising the right to call stake. Allowing creditors’ unlimited Under the final rule, the amount the loan and demanding payment of the discretion to call the loan and require borrowed is accurate if it is not more entire outstanding balance. Restricting immediate repayment is similarly unfair than $100 above or below the amount call provisions in HOEPA loans is with HOEPA loans. required to be disclosed. intended to ensure that lenders do not
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Section 226.34—Prohibited Acts or clarifies that the phrase ‘‘all claims and sought clarification about whether an Practices in Connection with Credit defenses’’ is not limited to violations of assignee merely servicing HOEPA loans Secured by a Consumer’s Dwelling TILA as amended by HOEPA. This is covered by the rule. Section 129(l) of TILA authorizes the interpretation is based on the statutory The Board is adopting a final rule that Board to prohibit acts or practices to text and is supported by the legislative broadens the proposal’s coverage curb abusive lending practices. The act history. See Conference Report, Joint somewhat. Under the final rule, within the first twelve months of originating a provides that the Board shall prohibit Statement of Conference Committee, H. HOEPA loan to a borrower, the creditor practices: (1) In connection with all Rep. No. 103–652, at 22 (Aug. 2, 1994). is prohibited from refinancing that loan mortgage loans if the Board finds the 34(a)(3) Refinancings Within One-year (whether or not the creditor still holds practice to be unfair, deceptive, or Period the loan) or another HOEPA loan held designed to evade HOEPA; and (2) in ‘‘Loan flipping’’ generally refers to the by that borrower. connection with refinancings of practice by brokers and creditors of The proposal was narrowly tailored to mortgage loans if the Board finds that frequently refinancing home-secured curb the more egregious cases of loan the practice is associated with abusive loans to generate additional fee income flipping: repeated refinancing by lending practices or otherwise not in the even though the refinancing is not in the creditors that hold HOEPA loans in interest of the borrower. The Board is borrower’s interest. Loan flipping is portfolio. Once a creditor assigned the exercising this authority to prohibit among the more flagrant of lending loan, the assignee would have been certain acts or practices, as discussed abuses. Victims tend to be borrowers covered, but the originating creditor below. The final rule is intended to curb who are having difficulty repaying a could then have refinanced the HOEPA unfair or abusive lending practices high-cost loan; they are targeted with loan. Thus, the proposed rule did not without unduly interfering with the promises to refinance the loan on more cover loan originators that close loans in flow of credit, creating unnecessary affordable terms. The refinancing their own name and immediately assign creditor burden, or narrowing typically provides little benefit to the them to a funding party or sell them in consumers’ options in legitimate borrower, as the loan amount increases the secondary market. The hearing transactions. The rule prohibiting ‘‘loan mostly to cover fees. Often, there is testimony and comments suggest that flipping’’ has been modified to expand minimal or no reduction in the interest some of these originators are the source its scope. The rule protecting low-rate rate. The monthly payment may of unaffordable loans because they do loans has not been adopted due to increase, making the loan even more not have a vested interest in the concerns about the compliance burden unaffordable. Sometimes the loan is borrower’s ability to repay the loan. on the home-equity lending market amortized so that the monthly payment Once they are no longer holding a loan, generally. Other provisions have been is reduced, but the loan may still be they can target the same borrower with adopted as proposed. unaffordable. As long as there is an offer to refinance the loan. The final The final rule creates a new § 226.34, sufficient equity to support the rule has been expanded to cover which contains prohibitions against financing of additional fees, the creditors (including brokers) that certain acts or practices in connection consumer may be targeted repeatedly, originate HOEPA loans, whether or not with credit secured by a consumer’s resulting in equity stripping. they continue to hold the loan. The loan dwelling. This section includes the The proposed rule prohibited an flipping rule may deter some rules currently contained in § 226.32(e). originating creditor (or assignee) unaffordable lending if the parties 34(a) Prohibited Acts or Practices for holding a HOEPA loan from refinancing making, holding, or servicing the loan Loans Subject to § 226.32 that loan into another HOEPA loan are not permitted to refinance the loan within the first twelve months following within the first year. 34(a)(1) Home Improvement Contracts origination, unless the new loan was ‘‘in Assignees are covered by the rule Section 226.32(e)(2) regarding home- the borrower’s interest.’’ Pursuant to its because in some instances they are the improvement contracts is renumbered authority under Section 129(l)(2)(A) of ‘‘true creditor’’ funding the loan. Even as § 226.34(a)(1) without substantive TILA, the Board is adopting a final rule when they are not acting as the true change. Comment 32(e)(2)(i)–1 of the to address ‘‘loan flipping,’’ as discussed creditors, assignees of HOEPA loans are staff commentary is now comment below. subject to the refinancing restrictions to 34(a)(1)(i)–1. Consumer representatives generally ensure that loans are not transferred for supported the proposal, but they the purpose of evading the prohibition 34(a)(2) Notice to Assignee believed the rule was too narrow and and that borrowers are not pressured Section 226.32 (e)(3) regarding that all creditors and brokers should be into frequent refinancings by the party assignee liability for claims and covered. Federal agencies, community holding or servicing their loans. Thus, defenses that consumers may have in groups, and consumers and their the rule has been revised to clarify that connection with HOEPA loans is representatives believe that the it applies to assignees that are servicing renumbered as § 226.34(a)(2) without prohibition should be lengthened; a HOEPA loan, whether or not they own substantive change. Comments 32(e)(3)– suggestions ranged from 18 months to as the obligation. Assignees will be under 1 and –2 are now comments 34(a)(2)–1 long as four years. the same restrictions as the original and –2 respectively. Creditors’ comments mainly focused creditor while holding or servicing the Comment 34(a)(2)–3 is added to on the ‘‘interest of the borrower’’ test. loan. Comment 34(a)(3)–2 of the staff clarify the statutory provision on the oth creditors and consumer commentary is added to provide liability of purchasers or other assignees representatives sought additional examples of how the rule is applied in of HOEPA loans, as proposed. Section guidance in this area. Consumer specific cases. 131 of TILA provides that, with limited representatives viewed the standard as Under the proposal, the regulatory exceptions, purchasers or other too lenient, while creditors believed that prohibition applicable to creditors assignees of HOEPA loans are subject to the standard’s lack of certainty would would have applied to their affiliates in all claims and defenses with respect to subject them to litigation risk. Creditors all cases. Industry commenters were a mortgage that the consumer could also expressed concerns about the concerned about the compliance assert against the creditor. The comment proposal’s coverage of affiliates and burden—particularly for creditors with
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broad geographic and corporate that carry high up-front fees even if they refinancing of low-rate loans originated structures. The final rule has been result in incrementally lower APRs. through mortgage assistance programs narrowed and would not apply in The Board believes that precisely designed to give low-or moderate- routine cases where consumers seek a defining circumstances that are ‘‘in the income borrowers the opportunity for refinancing from an affiliate. Under the borrower’s interest’’ is not necessary, homeownership. Some of these final rule, loans made by an affiliate are given the nature of the loan flipping homeowners who have unsecured debts prohibited only if the creditor engages prohibition. The prohibition applies for have been targeted by unscrupulous in a pattern or practice of arranging a relatively short period, and is lenders who consolidate the debts and loans with an affiliate to evade the intended as a strong deterrent for the replace the low-cost, first-lien mortgage flipping prohibition, or engages in other more egregious cases. The ‘‘borrower’s with a substantially higher cost loan. acts or practices designed to evade the interest’’ exception must be narrowly The replacement loans are often rule. The final rule also prohibits construed to preserve the effectiveness unaffordable, many involve ‘‘loan creditors from arranging refinancings of of the overall prohibition. Moreover, the flipping,’’ and as a result, homeowners their own loans with unaffiliated probability that a legitimate creditor have lost their homes. In some cases, the creditors to evade the flipping would refinance its own HOEPA loans low-rate loan is replaced even though prohibition. within twelve months is typically low. the first-lien holder may be willing to As noted above, some commenters The Board recognizes that this subordinate its security interest. believe that the prohibition should be approach places the primary burden on Under the proposal creditors would lengthened. Although a longer period the creditor, in light of the totality of the have been prohibited, in the first five might further limit the opportunity for circumstances, to weigh whether the years of a zero interest rate or other low- loan flipping, one year provides an loan is in the borrower’s interest. The rate loan, from replacing that loan with appropriate balance between the need to standard is intended to give legitimate any higher-rate loan unless the address the clearest cases of abusive creditors some flexibility for refinancing was in the interest of the refinancings and the need not to restrict extenuating circumstances, while borrower. Based on the comments the free flow of credit in legitimate creditors that rely on the exception received and after consultation with the transactions. Thus, the final rule retains routinely to ‘‘flip’’ HOEPA loans bear Consumer Advisory Council and further the one-year limitation, as proposed. the risk that a court will find that they analysis, the Board is withdrawing the Borrower’s interest—Under the violated HOEPA. proposed provision addressing low-rate proposal, creditors are permitted to Comment 34(a)(3)–1 of the staff loans. refinance a HOEPA loan within the one- commentary has been expanded to Unlike the prohibition against loan year period when ‘‘in the borrower’s provide additional guidance on lenders’ flipping, which applies only to HOEPA interest.’’ The determination of whether ability to make loans that are in the creditors, the prohibition against or not a benefit exists would be based borrower’s interest notwithstanding the refinancing low-rate loans, as proposed, on the totality of the circumstances. loan-flipping prohibition. A mere would have applied to all mortgage Consumer representatives viewed the statement by the borrower that ‘‘this refinancing transactions. While standard as too lenient. They asserted loan is in my interest’’ would not meet borrowers with low-rate mortgage loans that the lack of specificity or examples the standard. In connection with a could benefit from the rule, the benefits under the proposal would lead creditors refinancing that provides additional appear to be far outweighed by the to liberally construe the ‘‘borrower’s funds to the borrower, in determining potential compliance burden for all interest’’ standard to permit any whether a refinancing is in the home-equity lenders. Therefore, the borrower predicament or any arguable borrower’s interest, consideration proposed rule is being withdrawn at this ‘‘improvement’’ in term, payment, or should be given to whether the loan fees time for reconsideration. The Board will rate, as sufficient justification for and charges are commensurate with the consider other approaches that refinancing within the first year. amount of new funds advanced, and appropriately protect borrowers with Creditors, conversely, believed that the whether the real estate-related charges low-rate loans in order to deter harmful standard’s lack of certainty would lead are bona fide and reasonable in amount refinancings and provide adequate to litigation, inconsistent application, (see generally § 226.4(c)(7)). A remedies where they occur without and borrower and judicial second- refinancing would be in the borrower’s imposing unnecessary documentation guessing of creditors. This, creditors interest if needed for a ‘‘bona fide requirements on the market as a whole. argued, could ultimately result in a personal financial emergency’’; this is hesitancy by creditors to extend the current standard for certain 34(a)(4) Repayment Ability refinance credit at all in the first year of consumer waivers under TILA. TILA Under section 129(h) of TILA, a origination of a HOEPA loan. authorizes the Board to permit creditor may not engage in a pattern or Commenters offered many suggestions consumers to waive the three-day practice of making HOEPA loans based for more specific guidance, asking the rescission period for certain home on the equity in the borrower’s home Board to provide that lowering the equity loans or the three-day waiting without regard to the consumer’s interest rate or the monthly payment, or period before closing a HOEPA loan, if repayment ability, taking into account eliminating a balloon payment or necessary for homeowners to meet a the consumer’s current and expected variable rate feature, was per se, ‘‘in the bona fide personal financial emergency. income, current obligations, and borrower’s interest.’’ Although a list of See § 226.23(e) and § 226.31(c)(1)(iii). employment status. As proposed, the acceptable loan purposes would provide Comment 31(c)(1)(iii)–1 of the staff final rule, formerly in § 226.32(e)(1), has more certainty, it is difficult to identify commentary provides that the imminent been moved to § 226.34(a)(4) and circumstances that would be sale of the consumer’s home at revised to parallel the statutory unequivocally in the borrower’s interest foreclosure during the three-day HOEPA language. The revision is a clarification in all or even most cases. A good reason waiting period is an example of a bona of existing law and is not a new rule. in one context may be abusive in other fide personal financial emergency. Currently, compliance with the circumstances. For example, a Limitations on refinancing low-rate prohibition against unaffordable lending homeowner’s equity could still be loans—The December proposal is difficult to enforce because creditors stripped through repeated refinancings addressed abuses involving the are not required to document that they
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considered the consumer’s ability to comment clarifies that creditors can rely creditors typically do not evaluate a repay. In addition, there have been on any reliable source that provides a borrower’s ability to repay a loan based reports of creditors relying on reasonable basis for believing there are on a temporary discounted rate, they inaccurate information provided by sufficient funds to support repayment of also do not evaluate repayment ability unscrupulous loan brokers. To aid in the loan. based on the maximum interest rate that solving these problems, the Board Pattern or practice—Section 129(h) of may be charged as a result of rate proposed under § 226.34(a)(4)(ii) to TILA does not define ‘‘pattern or adjustments on the loan. Based on the require that creditors generally verify practice,’’ nor does the legislative comments and further analysis, the final and document consumers’ current or history provide guidance as to how the comment treats all discounted and expected income, current obligations, phrase should be applied. The Board variable-rate loans the same. Comment and employment to the extent proposed interpretive guidance on the 34(a)(4)–3, as adopted, requires applicable. If a creditor engages in a ‘‘pattern or practice’’ requirement. The creditors to consider the consumer’s pattern or practice of making loans proposed comment provided that ability to repay the loan assuming the without verifying and documenting determining whether a pattern or non-discounted rate for fixed-rate loans, consumers’ repayment ability, there practice exists depends on the totality of or the fully-indexed rate for variable rate would be a presumption that the the circumstances. The proposal loans, is in effect at consummation. creditor has violated the rule. The Board referenced statutes relevant to a pattern 34(b) Prohibited Acts or Practices for adopts the rule as § 226.34(a)(4) with or practice determination, specifically, Dwelling-Secured Loans; Open-end minor modifications. the Truth in Lending Act, the Equal Determining repayment ability— Credit Opportunity Act, the Fair Credit Comment 34(a)(4)–1 of the staff Housing Act, and Title VII of the Civil HOEPA covers only closed-end commentary, formerly comment Rights Act of 1964 (equal employment mortgage loans. In the December notice, 32(e)(1)–1, has been modified in light of opportunity). the Board proposed a prohibition the new verification and documentation Those that commented on this aspect against structuring a home-secured loan requirements discussed below. The of the proposal generally requested as a line of credit to evade HOEPA’s comment has also been modified to more guidance on what would requirements, if the credit does not meet more closely track the statute. constitute a ‘‘pattern or practice.’’ the definition of open-end credit in The reference to § 226.32(d)(7) has Several requested that the Board set a § 226.2(a)(20). been deleted as unnecessary; the specific standard. Industry commenters Although consumer representatives sources of information listed in generally preferred a narrow standard, supported the Board’s proposal, they § 226.32(d)(7) with one exception are while representatives of consumer and generally believe that HOEPA should listed in comment 34(a)(4)–2 on community groups sought a broader cover open-end credit carrying rates or verifying and documenting repayment standard that would be less onerous for fees above HOEPA’s price triggers. ability. consumers. Comment 34(a)(1)–2 as Industry commenters believe there is Verification and documentation—The adopted provides additional guidance little evidence that creditors are using verification and documentation rule on the ‘‘pattern or practice’’ open-end credit to evade HOEPA. requires creditors to use independent requirement, but retains the totality of Moreover, they oppose the rule as sources to ascertain borrowers’ ability to the circumstances test. The comment unnecessary because it is already a repay loans that are secured by their provides that while a ‘‘pattern or violation of TILA to provide disclosures homes, and to memorialize and retain practice’’ of violations is not established for an open-end credit plan if the legal this information. Proposed comment by isolated, random, or accidental acts, obligation does not meet the criteria for 34(a)(4)(ii)–1 provided examples of it can be established without the use of open-end credit. ways to verify and document the a statistical process. The comment also Pursuant to the Board’s authority income and obligations of consumers notes that a creditor might act under a under section 129(l)(2)(A), as proposed, who are employed, including those who lending policy (whether written or § 226.34(b) explicitly prohibits are self-employed. The final comment, unwritten) and that action alone could structuring a mortgage loan as an open- renumbered 34(a)(4)–4, adopts the establish that there is a pattern or end credit line to evade HOEPA’s proposed comment with modifications practice of violating the prohibition requirements, if the loan does not meet to accommodate creditworthy borrowers against unaffordable lending. the TILA definition of open-end credit. not employed or without traditional Discounted introductory rates— This prohibition responds to cases financial documents. Concern was raised about creditors reported by consumer advocates at the Most of the commenters supported determining a consumer’s repayment Board’s hearings and to enforcement the rule and comment. Some ability based on low introductory rates actions brought by the Federal Trade commenters from industry pointed out offered under some programs. Proposed Commission, where creditors have that verification and documentation is comment 34(a)(4)(i)–3 provided that in documented loans as open-end basic to the underwriting process and considering consumers repayment ‘‘revolving’’ credit, even if there was no already required for safety and ability in transactions where the real expectation of repeat transactions soundness purposes. Government creditor sets a temporary introductory under a reusable line of credit. Although entities at both the federal and state interest rate and the rate is later the practice would currently violate levels noted that verification and adjusted (whether fixed or later TILA, the new rule will subject creditors documentation is necessary for determined by an index or formula) the and assignees to HOEPA’s stricter enforcement of the prohibition against creditor must consider increases in the liability rule and remedies if the credit unaffordable mortgage lending. A few consumer’s payments assuming the carries rates and fees that exceed commenters were concerned that the maximum possible increases in rates in HOEPA’s price triggers for closed-end rule was not sufficiently flexible in the shortest possible time frame. The loans. allowing creditors to make loans to comment was not intended to impose a Where a loan is documented as open- creditworthy borrowers whose standard for evaluating a borrower’s end credit but the features and terms or repayment ability may not be based on repayment ability that is more stringent other circumstances demonstrate that it regular employment wages. The final than current industry practice. While does not meet the definition of open-
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end credit, the loan is subject to the received by consumers before closing subordinate-lien HOEPA loan that is not rules for closed-end credit, including for HOEPA-covered loans are also a refinancing to the same borrower. HOEPA if the rate or fee trigger is met. enhanced. • Low-cost loan refinancing—The In response to comments, comment (2) Summary of public comment and proposed prohibition against 34(b)–1 provides guidance on how to statement of changes—Significant refinancing certain low-cost loans is apply HOEPA s triggers to transactions issues raised by the public comments in withdrawn. The relatively low number structured as open-end credit in response to the Board s proposal and of borrowers with low-cost mortgage violation of § 226.34(b). Initial Regulatory Flexibility Analysis loans that would benefit from the rule are described more fully in the appeared to be far outweighed by the Appendix H to Part 226—Closed-End supplementary material provided above. compliance burden for all home-equity Model Forms and Clauses Section 103(f) of TILA provides that a lenders. Model Form H–16—Mortgage Sample person becomes a creditor under TILA • Tolerance for amount borrowed— illustrates the disclosures required by if, during any twelve-month period, the The final rule, as proposed, requires § 226.32(c), which must be provided to person originates more than one creditors making HOEPA-covered consumers at least three days before HOEPA-covered loan, or one or more refinancings to include the face amount becoming obligated on a mortgage HOEPA-covered loans through a of the note (‘‘amount borrowed’’) in the transaction subject to § 226.32. Model mortgage broker. In providing HOEPA disclosures provided at least Form H–16 is amended to illustrate the protections to consumers whose three days before closing. If any term is additional disclosures required for principal dwellings secure high-cost changed between the time the early refinancings under § 226.32(c)(5). A new mortgage loans, HOEPA did not create HOEPA disclosure is provided to the comment App. H–20 clarifies that different rules for large and small consumer and consummation, and the although the additional disclosures are creditors. Moreover, HOEPA sets forth change makes the disclosure inaccurate, required for refinancings that are subject specific limitations on the Board’s new disclosures must be provided and to § 226.32, creditors may, at their authority to exempt mortgage products another three-day waiting period begins. option, include these disclosures for any or categories of products from certain of The final rule contains a small tolerance loan subject to that section. The Sample HOEPA’s requirements. See Section for changes in the amount actually also includes an illustration for loans 129(l)(1) of TILA. Nevertheless, the borrowed of $100 above or below the with balloon payments. Former Board has analyzed comments and has amount disclosed, and to the disclosed comments H–20 through H–23 have sought to minimize compliance burden regular payment as it is affected by the been renumbered H–21 through H–24, for all creditors by making disclosed amount borrowed. This respectively. modifications to the proposal in the reduces redisclosure duties for creditors following ways. making insignificant errors and IV. Regulatory Flexibility Analysis • Tiered APR trigger—The final rule mitigates the economic impact of the The Regulatory Flexibility Act (5 retains the current APR trigger for rule’s overall compliance burdens and U.S.C. 601 et seq.) requires federal subordinate-lien loans at 10 percentage costs. agencies either to provide a Final points above the rate for Treasury (3) Description of the small entities to Regulatory Flexibility Analysis with a securities having a comparable maturity. which the final rule would apply—The final rule or to certify that the final rule The proposed across-the-board number of lenders, large or small, likely will not have a significant economic reduction of the APR trigger to 8 to be affected by the proposal is impact on a substantial number of small percentage points for all loans unknown. In the June 2001 Call Report, entities. Based on available data, the encompassed subordinate-lien loans 4,547 small banks (assets less than $100 Board is unable to determine at this that fall between the 8 and 10 million) had first-lien mortgage credit time whether the final rule would have percentage point triggers. The final outstanding, and 3,477 small banks had a significant impact on a substantial revision to the APR trigger reduces the junior-lien mortgage loans outstanding. number of small entities. For this impact of the rule on creditors that At the same time there were 228 small reason, the Board has prepared the choose not to extend HOEPA-covered thrifts that report to the Office of Thrift following Final Regulatory Flexibility credit generally, and on those that make Supervision which had closed-end first Analysis. small, short-term home-equity loans in mortgage credit and/or junior-lien loans (1) Statement of the need for and particular, where fixed origination costs outstanding. The number of banks or objectives of the final rule—The final may significantly impact the APR. thrifts active in subprime lending or rule is adopted to address predatory • Safe-harbor for refinancings in the HOEPA loans cannot be determined lending and unfair practices in home- ‘‘borrower’s interest’’—The final rule from information in the Call Report. equity lending. As stated more fully provides additional guidance on There is no comprehensive listing of above, the existing regulations are creditors ability to refinance a HOEPA consumer finance companies, but amended to broaden the scope of loan into another HOEPA loan that is in informal industry contacts indicate that mortgage loans subject to HOEPA by the borrower’s interest notwithstanding there may be about 2,000 such adjusting the price triggers used to the one-year general prohibition on such institutions nationwide. Most of these determine coverage under the act (both refinancings. Creditors expressed companies are small entities, but the interest rate trigger and points and concern that the proposed apparently many, perhaps most, of the fees trigger). Certain acts and practices determination for meeting the small institutions do not engage in in connection with home-secured loans standard—the totality of the mortgage lending, preferring to are restricted. For example, creditors circumstances—was too subjective, and concentrate on unsecured lending and may not engage in repeated refinancings that as a result creditors would refrain sales finance. An unknown number of of HOEPA loans over a short time from making refinancings during the small institutions do engage in mortgage period when the transactions are not in one-year period to avoid litigation risk. lending, but there is no comprehensive the borrower’s interest. HOEPA’s In addition to providing additional listing of these institutions or estimate prohibition against extending credit guidance on refinancings that would be of their number. without regard to consumers’ repayment in the borrower s interest, the final rule There also is no comprehensive ability is strengthened, and disclosures permits creditors to make an additional listing of mortgage banks or mortgage
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brokers, but informal discussions with consumers’ repayment ability for credit burden, or narrowing consumers’ industry sources indicate that there are HOEPA loans, the Board believes that options in legitimate credit transactions. more than 1,200 mortgage banking firms creditors’ existing consideration of The final rule contains specific with annual mortgage originations of safety and soundness issues and risk modifications to the proposed rule that less than $100 million that are members assessment will result in little reduce regulatory burden. of a national trade association. Some of additional burden to comply with the V. Paperwork Reduction Act these companies are primarily mortgage new requirements. servicing companies and generate few or Institutions that originate subprime In accordance with the Paperwork no new mortgages, but there is also an mortgages, including small entities, will Reduction Act of 1995 (44 U.S.C. 3506; unknown number of other mortgage have to become aware of new 5 CFR 1320 Appendix A.1), the Board banks that do not belong to the definitions that expand HOEPA reviewed the rule under the authority association. coverage, and as needed, will have to delegated to the Board by the Office of The effect of expanding HOEPA comply with the additional disclosures Management and Budget. The Federal coverage on small entities is unknown. and other consumer protection Reserve may not conduct or sponsor, The precise effect that adjusting the provisions that apply to HOEPA loans. and an organization is not required to triggers will have on creditors’ business To comply with the final rule, then, respond to, this information collection strategies is difficult to predict. As creditors will need, among other things, unless it displays a currently valid OMB discussed in the supplementary to prepare disclosure forms, make control number. The OMB control information provided above, there is an various operational changes, and train number is 7100–0199. active market for HOEPA loans under staff. Professional skills needed to The collection of information that is the current triggers. Some creditors that comply with the final rule may include revised by this rulemaking is found in choose not to make HOEPA loans may clerical, computer systems, personnel 12 CFR part 226 and in Appendices F, withdraw from making loans in the training, as well as legal advice, which G, H, J, K, and L. This information is range of rates that would be covered by will require internal review and other mandatory (15 U.S.C. 1601 et seq.) to the lowered threshold. Others creditors actions by programmers and systems evidence compliance with the may fill any void left by creditors that specialists, employee trainers, attorneys, requirements of Regulation Z and the choose not to make HOEPA loans. And and senior managers. Significantly, Truth in Lending Act (TILA). The others may have the flexibility to avoid however, these skills are currently respondents/recordkeepers are all types HOEPA s coverage by lowering rates or required to comply with HOEPA’s of creditors, among which are small fees for some loans at the margins, existing rules and are not new to businesses. Under the Paperwork consistent with the risk involved. creditors both large and small. Creditors Reduction Act, the Federal Reserve (4) Reporting, recordkeeping, and can reasonably be expected to be able to accounts for the paperwork burden compliance requirements—The final rely on current personnel for these associated with Regulation Z only for amendments: (1) Extend the protections specialized skills and thus not state member banks, their subsidiaries, of HOEPA to more loans; (2) strengthen experience undue compliance burden. and subsidiaries of bank holding HOEPA’s prohibition on loans based on (5) Significant alternatives to the final companies (not otherwise regulated). homeowners’ equity without regard to rule—As explained above, the final rule Other agencies account for the repayment ability; (3) improve is adopted substantially as proposed to paperwork burden on their respective disclosures received by consumers address predatory lending and unfair constituencies under this regulation. before closing; and (4) prohibit certain practices in the home-equity market, Institutions are required to retain acts or practices, to address some ‘‘loan and contains several revisions to reflect records for twenty-four months. flipping’’ within the first twelve months suggestions or alternatives The final rule broadens HOEPA’s of a HOEPA loan by prohibiting a recommended by commenters. coverage (by lowering the APR trigger refinancing into another HOEPA loan to Specifically, the adoption of a ‘‘tiered’’ for first-lien loans by 2 percentage the same borrower unless the APR trigger, the inclusion of a tolerance points and adding certain costs to the refinancing is in the borrower’s interest. for insignificant errors in disclosing the fee-based trigger) and revises a HOEPA applies to creditors that make amount borrowed, the additional disclosure currently required by more than one HOEPA loan in a twelve- guidance for meeting the ‘‘borrower’s § 226.32 of Regulation Z. The revised month period. For firms engaged in interest’’ standard under the refinancing disclosure covers refinancings subject to subprime lending, HOEPA’s existing restriction, and the withdrawal of the HOEPA and states the total amount of scope of coverage, its prohibition on ‘‘low-cost loan’’ refinancing prohibition, the borrower’s obligation and whether loans made without regard to all reflect an effort to incorporate optional credit insurance or debt- consumers’ repayment ability, and its practical measures to reduce cancellation coverage is included in the mandatory pre-closing disclosures compliance burdens for creditors. The amount borrowed (§ 226.32(c)(5)). already require the professional skills supplementary information provided Model Form H–16 illustrates this needed to comply with HOEPA. For above discusses other alternatives revised disclosure. The burden of some creditors (or holders or servicers suggested by commenters. The rule’s revising the disclosure should be of HOEPA loans) that seek to refinance amendments are issued pursuant to the minimal because most institutions use a HOEPA loan with the same borrower Board’s authority under TILA to adjust software that automatically generates into another HOEPA loan during a one- the scope of mortgage loans covered by model forms such as Model Form H–16. year period after origination, some HOEPA, to prohibit certain acts or The changes to the triggers also should recordkeeping adjustments may be practices affecting mortgage loans or impose minimal burden because the necessary. However, the Board believes refinancings, to effectuate the purposes changes generally will require only a the burden will not be significant, since of TILA, to prevent circumvention or one-time reprogramming of systems. each of these parties has records that evasion, or to facilitate compliance. The With respect to state member banks, associate the borrower and the loan date amendments are intended to target it is estimated that there are 976 for purposes of the one-year prohibition. unfair or abusive lending practices respondent/recordkeepers and an Also, while the final rule imposes a new without unduly interfering with the average frequency of 136,294 responses requirement to document and verify flow of credit, creating unnecessary per respondent each year for Regulation
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Z. Therefore, the total annual burden PART 226—TRUTH IN LENDING d. Revising paragraph (d) introductory under the regulation for all state (REGULATION Z) text and adding paragraph (d)(8); and member banks is estimated to be e. Removing paragraph (e). 1,841,118 hours. In the Federal 1. The authority citation for part 226 Reserve’s April 2001 Paperwork continues to read as follows: § 226.32 Requirements for certain closed- end home mortgages. Reduction Act submission to OMB Authority: 12 U.S.C. 3806; 15 U.S.C. 1604 addressing the electronic disclosures and 1637(c)(5). (a) Coverage. (1) Except as provided in interim rule, the Federal Reserve stated paragraph (a)(2) of this section, the its belief that state member banks do not Subpart A—General requirements of this section apply to a typically offer the type of loans that consumer credit transaction that is would require HOEPA disclosures and 2. Section 226.1 is amended by: secured by the consumer’s principal that these disclosures had a negligible a. Revising paragraph (b); and dwelling, and in which either: effect on the paperwork burden for state b. Revising paragraph (d)(5). (i) The annual percentage rate at member banks. Lowering the APR § 226.1 Authority, purpose, coverage, consummation will exceed by more trigger by 2 percentage points could, organization, enforcement and liability. than 8 percentage points for first-lien loans, or by more than 10 percentage however, result in higher burden for the * * * * * points for subordinate-lien loans, the few state member banks that choose to (b) Purpose. The purpose of this yield on Treasury securities having make these loans. Because little regulation is to promote the informed comparable periods of maturity to the information is available about the actual use of consumer credit by requiring loan maturity as of the fifteenth day of number of loans that will be affected by disclosures about its terms and cost. The the month immediately preceding the the coverage change the Federal Reserve regulation also gives consumers the month in which the application for the is not changing its current burden right to cancel certain credit extension of credit is received by the estimates cited above. The Federal transactions that involve a lien on a creditor; or Reserve will, however, solicit more consumer’s principal dwelling, burden comments and re-estimate the regulates certain credit card practices, * * * * * burden associated with the HOEPA and provides a means for fair and timely (b) Definitions. For purposes of this requirements in Regulation Z in the next resolution of credit billing disputes. The subpart, the following definitions apply: triennial PRA review (during the fourth regulation does not govern charges for (1) For purposes of paragraph (a)(1)(ii) quarter 2002). The Federal Reserve also consumer credit. The regulation of this section, points and fees means: estimates the one-time cost burden for requires a maximum interest rate to be (i) All items required to be disclosed programming systems with the revised stated in variable-rate contracts secured under § 226.4(a) and 226.4(b), except disclosures and updating systems with by the consumer’s dwelling. It also interest or the time-price differential; the new triggers to be $135,000 per imposes limitations on home equity (ii) All compensation paid to bank, on average. plans that are subject to the mortgage brokers; Because the records are maintained at (iii) All items listed in § 226.4(c)(7) state member banks and the notices are requirements of § 226.5b and mortgages that are subject to the requirements of (other than amounts held for future not provided to the Federal Reserve, no payment of taxes) unless the charge is issue of confidentiality under the § 226.32. The regulation prohibits certain acts or practices in connection reasonable, the creditor receives no Freedom of Information Act arises; direct or indirect compensation in however, any information obtained by with credit secured by a consumer’s principal dwelling. connection with the charge, and the the Federal Reserve may be protected charge is not paid to an affiliate of the from disclosure under exemptions * * * * * creditor; and (b)(4), (6), and (8) of the Freedom of (d) Organization. *** (iv) Premiums or other charges for Information Act (5 U.S.C. 522 (b)(4), (6) (5) Subpart E contains special rules credit life, accident, health, or loss-of- and (8)). The disclosures and for mortgage transactions. Section income insurance, or debt-cancellation information about error allegations are 226.32 requires certain disclosures and coverage (whether or not the debt- confidential between creditors and the provides limitations for loans that have cancellation coverage is insurance customer. rates and fees above specified amounts. under applicable law) that provides for The Federal Reserve has a continuing Section 226.33 requires disclosures, cancellation of all or part of the interest in the public’s opinions of our including the total annual loan cost rate, consumer’s liability in the event of the collections of information. At any time, for reverse mortgage transactions. loss of life, health, or income or in the comments regarding the burden Section 226.34 prohibits specific acts case of accident, written in connection estimate, or any other aspect of this and practices in connection with with the credit transaction. collection of information, including mortgage transactions. * * * * * suggestions for reducing the burden, * * * * * may be sent to: Secretary, Board of (c) Disclosures. In addition to other Governors of the Federal Reserve Subpart E—Special Rules for Certain disclosures required by this part, in a System, 20th and C Streets, NW., Home Mortgage Transactions mortgage subject to this section, the Washington, DC 20551; and to the creditor shall disclose the following in Office of Management and Budget, 3. Section 226.32 is amended by: conspicuous type size: Paperwork Reduction. a. Republishing paragraph (a)(1) * * * * * introductory text and revising paragraph (3) Regular payment; balloon List of Subjects in 12 CFR Part 226 (a)(1)(i); payment. The amount of the regular Advertising, Federal Reserve System, b. Republishing paragraph (b) monthly (or other periodic) payment Mortgages, Reporting and recordkeeping introductory text and revising paragraph and the amount of any balloon payment. requirements, Truth in lending. (b)(1); The regular payment disclosed under For the reasons set forth in the c. Revising paragraph (c) introductory this paragraph shall be treated as preamble, the Board amends Regulation text, revising paragraph (c)(3), and accurate if it is based on an amount Z, 12 CFR part 226, as set forth below: adding paragraph (c)(5); borrowed that is deemed accurate and is
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disclosed under paragraph (c)(5) of this § 226.34 Prohibited acts or practices in any loan subject to § 226.32 to the same section. connection with credit secured by a borrower into another loan subject to consumer’s dwelling. * * * * * § 226.32, unless the refinancing is in the (a) Prohibited acts or practices for (5) Amount borrowed. For a mortgage borrower’s interest. A creditor (or loans subject to § 226.32. A creditor assignee) is prohibited from engaging in refinancing, the total amount the extending mortgage credit subject to consumer will borrow, as reflected by acts or practices to evade this provision, § 226.32 shall not— including a pattern or practice of the face amount of the note; and where (1) Home improvement contracts. Pay the amount borrowed includes arranging for the refinancing of its own a contractor under a home improvement loans by affiliated or unaffiliated premiums or other charges for optional contract from the proceeds of a mortgage credit insurance or debt-cancellation creditors, or modifying a loan agreement covered by § 226.32, other than: (whether or not the existing loan is coverage, that fact shall be stated, (i) By an instrument payable to the grouped together with the disclosure of satisfied and replaced by the new loan) consumer or jointly to the consumer and and charging a fee. the amount borrowed. The disclosure of the contractor; or the amount borrowed shall be treated as (ii) At the election of the consumer, (4) Repayment ability. Engage in a accurate if it is not more than $100 through a third-party escrow agent in pattern or practice of extending credit above or below the amount required to accordance with terms established in a subject to § 226.32 to a consumer based be disclosed. written agreement signed by the on the consumer’s collateral without regard to the consumer’s repayment (d) Limitations. A mortgage consumer, the creditor, and the contractor prior to the disbursement. ability, including the consumer’s transaction subject to this section shall current and expected income, current not include the following terms: (2) Notice to assignee. Sell or otherwise assign a mortgage subject to obligations, and employment. There is a * * * * * § 226.32 without furnishing the presumption that a creditor has violated (8) Due-on-demand clause. A demand following statement to the purchaser or this paragraph (a)(4) if the creditor feature that permits the creditor to assignee: ‘‘Notice: This is a mortgage engages in a pattern or practice of terminate the loan in advance of the subject to special rules under the federal making loans subject to § 226.32 original maturity date and to demand Truth in Lending Act. Purchasers or without verifying and documenting repayment of the entire outstanding assignees of this mortgage could be consumers’ repayment ability. balance, except in the following liable for all claims and defenses with (b) Prohibited acts or practices for circumstances: respect to the mortgage that the dwelling-secured loans; open-end credit. (i) There is fraud or material borrower could assert against the In connection with credit secured by the misrepresentation by the consumer in creditor.’’ consumer’s dwelling that does not meet connection with the loan; (3) Refinancings within one-year the definition in § 226.2(a)(20), a (ii) The consumer fails to meet the period. Within one year of having creditor shall not structure a home- repayment terms of the agreement for extended credit subject to § 226.32, secured loan as an open-end plan to any outstanding balance; or refinance any loan subject to § 226.32 to evade the requirements of § 226.32. (iii) There is any action or inaction by the same borrower into another loan 5. Appendix H to Part 226 is amended the consumer that adversely affects the subject to § 226.32, unless the by revising Model Form H–16 to read as creditor’s security for the loan, or any refinancing is in the borrower’s interest. follows: right of the creditor in such security. An assignee holding or servicing an extension of mortgage credit subject to Appendix H to Part 226X—Closed-End * * * * * § 226.32, shall not, for the remainder of Model Forms and Clauses 4. A new § 226.34 is added to subpart the one-year period following the date * * * * * E to read as follows: of origination of the credit, refinance BILLING CODE 6210–01–P
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BILLING CODE 6210–01–C
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6. In Supplement I to Part 226, the applies. (See comment 32(c)(3)–1 on the amount owed. In disclosing the following amendments are made: when optional items may be included in regular payment, creditors may rely on a. Under Section 226.31—General the regular payment disclosure.) the rules set forth in § 226.18(g); Rules, under Paragraph 31(c)(1)(i), * * * * * however, the amounts for voluntary paragraph 2. is added; items, such as credit life insurance, may b. Under Section 226.32— Section 226.32—Requirements for be included in the regular payment Requirements for Certain Closed-End Certain Closed-End Home Mortgages disclosure only if the consumer has Home Mortgages, under Paragraph 32(a) Coverage. previously agreed to the amounts. 32(a)(1)(ii), paragraph 1. introductory * * * * * * * * * * text is revised and 1.iv. is added; Paragraph 32(a)(1)(ii). Paragraph 32(c)(5) Amount borrowed. c. Under Section 226.32— 1. Total loan amount. For purposes of Requirements for Certain Closed-End 1. Optional insurance; debt- the ‘‘points and fees’’ test, the total loan Home Mortgages, a new heading cancellation coverage. This disclosure is amount is calculated by taking the Paragraph 32(b)(1)(iv) is added and a required when the amount borrowed in amount financed, as determined new paragraph 1. is added; a refinancing includes premiums or d. Under Section 226.32— according to § 226.18(b), and deducting other charges for credit life, accident, Requirements for Certain Closed-End any cost listed in § 226.32(b)(1)(iii) and health, or loss-of-income insurance, or Home Mortgages, under Paragraph 32(c)(3),§ 226.32(b)(1)(iv) that is both included debt-cancellation coverage (whether or the heading is revised, paragraph 1. is as points and fees under § 226.32(b)(1) not the debt-cancellation coverage is revised and paragraph 2. is removed; and financed by the creditor. Some insurance under applicable law) that and a new heading Paragraph 32(c)(5) is examples follow, each using a $10,000 provides for cancellation of all or part added and a new paragraph 1. is added. amount borrowed, a $300 appraisal fee, of the consumer’s liability in the event e. Under Section 226.32— and $400 in points. A $500 premium for of the loss of life, health, or income or Requirements for Certain Closed-End optional credit life insurance is used in in the case of accident. See comment Home Mortgages, a new heading one example. 4(d)(3)–2 and comment app. G and H– Paragraph 32(d)(8) is added; a new * * * * * 2 regarding terminology for debt- heading Paragraph 32(d)(8)(ii) is added iv. If the consumer finances a $300 fee cancellation coverage. and a new paragraph 1. is added; and a for a creditor-conducted appraisal and a 32(d) Limitations. new heading Paragraph 32(d)(8)(iii) is $500 single premium for optional credit * * * * * added and new paragraphs 1. and 2. are life insurance, and pays $400 in points 32(d)(8) Due-on-demand clause. added. at closing, the amount financed under Paragraph 32(d)(8)(ii). § 226.18(b) is $10,400 ($10,000, plus the f. Under Section 226.32— 1. Failure to meet repayment terms. A $300 appraisal fee that is paid to and Requirements for Certain Closed-End creditor may terminate a loan and financed by the creditor, plus the $500 Home Mortgages, 32(e) Prohibited Acts accelerate the balance when the insurance premium that is financed by and Practices is removed; consumer fails to meet the repayment g. Under subpart E, a new Section the creditor, less $400 in prepaid terms provided for in the agreement; a 226.34—Prohibited Acts or Practices in finance charges). The $300 appraisal fee creditor may do so, however, only if the Connection with Credit Secured by a paid to the creditor is added to other consumer actually fails to make Consumer’s Dwelling; Open-end Credit points and fees under § 226.32(b)(1)(iii), payments. For example, a creditor may is added; and and the $500 insurance premium is not terminate and accelerate if the h. Under Appendix H—Closed-End added under 226.32(b)(1)(iv). The $300 consumer, in error, sends a payment to Model Forms and Clauses, paragraphs and $500 costs are deducted from the the wrong location, such as a branch 20. through 23. are redesignated as amount financed ($10,400) to derive a rather than the main office of the paragraphs 21. through 24., and new total loan amount of $9,600. paragraph 20. is added. creditor. If a consumer files for or is * * * * * placed in bankruptcy, the creditor may The additions and revisions read as 32(b) Definitions. follows: terminate and accelerate under this * * * * * provision if the consumer fails to meet Supplement I to Part 226 Official Staff Paragraph 32(b)(1)(iv). the repayment terms of the agreement. Interpretations 1. Premium amount. In determining Section 226.32(d)(8)(ii) does not * * * * * ‘‘points and fees’’ for purposes of this override any state or other law that section, premiums paid at or before requires a creditor to notify a borrower Subpart E—Special Rules for Certain closing for credit insurance are included of a right to cure, or otherwise places a Home Mortgage Transactions whether they are paid in cash or duty on the creditor before it can financed, and whether the amount terminate a loan and accelerate the Section 226.31—General Rules represents the entire premium for the balance. * * * * * coverage or an initial payment. Paragraph 32(d)(8)(iii). 31(c) Timing of disclosure. * * * * * 1. Impairment of security. A creditor * * * * * 32(c) Disclosures. may terminate a loan and accelerate the Paragraph 31(c)(1)(i) Change in terms. * * * * * balance if the consumer’s action or * * * * * Paragraph 32(c)(3) Regular payment; inaction adversely affects the creditor’s 2. Sale of optional products at balloon payment. security for the loan, or any right of the consummation. If the consumer 1. General. The regular payment is the creditor in that security. Action or finances the purchase of optional amount due from the borrower at inaction by third parties does not, in products such as credit insurance and as regular intervals, such as monthly, itself, permit the creditor to terminate a result the monthly payment differs bimonthly, quarterly, or annually. There and accelerate. from what was previously disclosed must be at least two payments, and the 2. Examples. i. A creditor may under § 226.32, redisclosure is required payments must be in an amount and at terminate and accelerate, for example, and a new three-day waiting period such intervals that they fully amortize if:
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A. The consumer transfers title to the 3. Assignee liability. Pursuant to another loan subject to § 226.32 until property or sells the property without section 131(d) of the act, the act’s April 1, 2004. the permission of the creditor. general holder-in-due course protections ii. The loan made by Creditor A on B. The consumer fails to maintain do not apply to purchasers and January 15, 2003 (and assigned to required insurance on the dwelling. assignees of loans covered by § 226.32. Creditor B) may be refinanced by C. The consumer fails to pay taxes on For such loans, a purchaser’s or other Creditor C at any time. If Creditor C the property. assignee’s liability for all claims and refinances this loan on March 1, 2003 D. The consumer permits the filing of defenses that the consumer could assert into a new loan subject to § 226.32, a lien senior to that held by the creditor. against the creditor is not limited to Creditor A is prohibited from E. The sole consumer obligated on the violations of the act. refinancing the loan made by Creditor C credit dies. Paragraph 34(a)(3) Refinancings (or any other loan subject to § 226.32 to F. The property is taken through within one-year period. the same borrower) into another loan eminent domain. 1. In the borrower’s interest. The subject to § 226.32 until January 15, G. A prior lienholder forecloses. 2004. Creditor C is similarly prohibited ii. By contrast, the filing of a judgment determination of whether or not a from refinancing any loan subject to against the consumer would permit refinancing covered by § 226.34(a)(3) is § 226.32 to that borrower into another termination and acceleration only if the in the borrower’s interest is based on the until March 1, 2004. (The limitations of amount of the judgment and collateral totality of the circumstances, at the time § 226.34(a)(3) no longer apply to subject to the judgment is such that the the credit is extended. A written Creditor B after Creditor C refinanced creditor’s security is adversely affected. statement by the borrower that ‘‘this the January 2003 loan and Creditor B If the consumer commits waste or loan is in my interest’’ alone does not ceased to hold or service the loan.) otherwise destructively uses or fails to meet this standard. maintain the property such that the i. A refinancing would be in the Paragraph 34(a)(4) Repayment ability. action adversely affects the security, the borrower’s interest if needed to meet the 1. Income. Any expected income can loan may be terminated and the balance borrower’s ‘‘bona fide personal financial be considered by the creditor, except accelerated. Illegal use of the property emergency’’ (see generally § 226.23(e) equity income that would be realized by the consumer would permit and § 226.31(c)(1)(iii)). from collateral. For example, a creditor termination and acceleration if it ii. In connection with a refinancing may use information about income other subjects the property to seizure. If one that provides additional funds to the than regular salary or wages such as of two consumers obligated on a loan borrower, in determining whether a loan gifts, expected retirement payments, or dies, the creditor may terminate the loan is in the borrower’s interest income from self-employment, such as and accelerate the balance if the security consideration should be given to housecleaning or childcare. is adversely affected. If the consumer whether the loan fees and charges are 2. Pattern or practice of extending moves out of the dwelling that secures commensurate with the amount of new credit—repayment ability. Whether a the loan and that action adversely funds advanced, and whether the real creditor is engaging or has engaged in a affects the security, the creditor may estate-related charges are bona fide and pattern or practice of violations of this terminate a loan and accelerate the reasonable in amount (see generally section depends on the totality of the balance. § 226.4(c)(7)). circumstances in the particular case. 2. Application of the one-year While a pattern or practice is not * * * * * refinancing prohibition to creditors and established by isolated, random, or Section 226.34—Prohibited Acts or assignees. The prohibition in accidental acts, it can be established Practices in Connection with Credit § 226.34(a)(3) applies where an without the use of a statistical process. Secured by a Consumer s Dwelling; extension of credit subject to § 226.32 is In addition, a creditor might act under Open-end Credit refinanced into another loan subject to a lending policy (whether written or 34(a) Prohibited acts or practices for § 226.32. The prohibition is illustrated unwritten) and that action alone could loans subject to § 226.32. by the following examples. Assume that establish a pattern or practice of making Paragraph 34(a)(1) Home- Creditor A makes a loan subject to loans in violation of this section. improvement contracts. § 226.32 on January 15, 2003, secured by 3. Discounted introductory rates. In Paragraph 34(a)(1)(i). a first lien; this loan is assigned to transactions where the creditor sets an 1. Joint payees. If a creditor pays a Creditor B on February 15, 2003: initial interest rate to be adjusted later contractor with an instrument jointly i. Creditor A is prohibited from (whether fixed or to be determined by payable to the contractor and the refinancing the January 2003 loan (or an index or formula), in determining consumer, the instrument must name as any other loan subject to § 226.32 to the repayment ability the creditor must payee each consumer who is primarily same borrower) into a loan subject to consider the consumer’s ability to make obligated on the note. § 226.32, until January 15, 2004. loan payments based on the non- Paragraph 34(a)(2) Notice to Assignee. Creditor B is restricted until January 15, discounted or fully-indexed rate at the 1. Subsequent sellers or assignors. 2004, or such date prior to January 15, time of consummation. Any person, whether or not the original 2004 that Creditor B ceases to hold or 4. Verifying and documenting income creditor, that sells or assigns a mortgage service the loan. During the prohibition and obligations. Creditors may verify subject to § 226.32 must furnish the period, Creditors A and B may make a and document a consumer’s repayment notice of potential liability to the subordinate lien loan that does not ability in various ways. A creditor may purchaser or assignee. refinance a loan subject to § 226.32. verify and document a consumer’s 2. Format. While the notice of Assume that on April 1, 2003, Creditor income and current obligations through potential liability need not be in any A makes but does not assign a second- any reliable source that provides the particular format, the notice must be lien loan subject to § 226.32. In that creditor with a reasonable basis for prominent. Placing it on the face of the case, Creditor A would be prohibited believing that there are sufficient funds note, such as with a stamp, is one means from refinancing either the first-lien or to support the loan. Reliable sources of satisfying the prominence second-lien loans (or any other loans to include, but are not limited to, a credit requirement. that borrower subject to § 226.32) into report, tax returns, pension statements,
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and payment records for employment NATIONAL CREDIT UNION 2, Developing and Reviewing income. ADMINISTRATION Government Regulations. The NCUA Paragraph 34(b) Prohibited acts or Board is issuing the final rule 12 CFR Parts 700, 701, 712, 715, 723, practices for dwelling-secured loans; unchanged from the proposed rule. 725, and 790 The proposed rule replaced obsolete open-end credit. references in two parts of NCUA’s 1. Amount of credit extended. Where Definitions; Organization and regulations related with new references a loan is documented as open-end credit Operation of Federal Credit Unions; to prompt corrective action, section 216 but the features and terms or other Credit Union Service Corporations; of the Federal Credit Union Act. 12 CFR circumstances demonstrate that it does Supervisory Committee Audits and 700.1, 701.14. In the definitions part of not meet the definition of open-end Verifications; Member Business the regulations, the proposed rule added credit, the loan is subject to the rules for Loans; Central Liquidity Facility; a scope section and definitions for closed-end credit, including § 226.32 if Description of NCUA ‘‘paid-in and unimpaired capital and surplus’’ and ‘‘unimpaired capital and the rate or fee trigger is met. In applying AGENCY: National Credit Union the triggers under § 226.32, the ‘‘amount Administration (NCUA). surplus.’’ 12 CFR part 700. The proposed rule conformed definitions of financed,’’ including the ‘‘principal loan ACTION: Final rule. amount’’ must be determined. In making paid-in and unimpaired capital and the determination, the amount of credit SUMMARY: NCUA is issuing a final rule surplus in the CUSO and CLF rules to the proposed definitions in the that would have been extended if the to amend various rules to make technical corrections and add and revise definitions part. 12 CFR 712.2(d); 12 loan had been documented as a closed- CFR 725.2(o). The proposed rule also end loan is a factual determination to be certain definitions. The Board is adding a scope section and definitions of ‘‘paid- corrected a citation in the supervisory made in each case. Factors to be committee audit rule and clarified the considered include the amount of in and unimpaired capital and surplus’’ and ‘‘unimpaired capital and surplus’’ member business loan rule by changing money the consumer originally to its rule containing definitions. The a reference from ‘‘federally insured requested, the amount of the first Board also is removing obsolete credit unions’’ to ‘‘federally insured advance or the highest outstanding references from this rule and updating state-chartered credit unions.’’ 12 CFR balance, or the amount of the credit line. the rule concerning changes in officials 715.2(l), 723.4. The proposed rule also The full amount of the credit line is of newly chartered or troubled credit updated NCUA’s regulations by considered only to the extent that it is unions. The Board is correcting a changing a reference in Part 790 from reasonable to expect that the consumer citation in the supervisory committee the ‘‘Office of Community Development might use the full amount of credit. rule and making clarifications to the Credit Unions’’ to the office’s new * * * * * credit union service organization name, the ‘‘Office of Credit Union (CUSO) rule and the member business Development.’’ The NCUA Board is Appendix H—Closed-End Model Forms loan rule. In addition, the Board is adopting all the proposed changes in the and Clauses updating and clarifying the definition final rule. * * * * * for ‘‘paid-in and unimpaired capital and Summary of Comments 20. Sample H–16. This sample illustrates surplus’’ in the Central Liquidity The NCUA Board requested comment the disclosures required under § 226.32(c). Facility (CLF) rule. Finally, the Board is on all aspects of the proposed rule and The sample illustrates the amount borrowed changing a reference in Part 790 from received three comment letters: One and the disclosures about optional insurance the ‘‘Office of Community Development from a national trade association, one that are required for mortgage refinancings Credit Unions’’ to the ‘‘Office of Credit from a state trade association, and one under § 226.32(c)(5). Creditors may, at their Union Development.’’ from a federal credit union (FCU). The option, include these disclosures for all loans DATES: This rule is effective January 22, two trade associations supported the subject to § 226.32. The sample also includes 2002. proposal without qualification. The FCU disclosures required under § 226.32(c)(3) FOR FURTHER INFORMATION CONTACT: offered a substantive comment regarding when the legal obligation includes a balloon Regina Metz, Staff Attorney, Division of the definition of ‘‘paid-in and payment. Operations, Office of General Counsel, unimpaired capital and surplus,’’ * * * * * at the National Credit Union discussed below. NCUA received no By order of the Board of Governors of the Administration, 1775 Duke Street, comment on the other provisions in the Federal Reserve System, December 14, 2001. Alexandria, Virginia 22314–3428, or proposed rule. This preamble does not telephone: (703) 518–6561; or Herbert S. Jennifer J. Johnson, repeat discussions from the proposal for Yolles, Deputy Director, Office of those provisions and the NCUA Board Secretary of the Board. Examination and Insurance, at the same has adopted them as proposed. [FR Doc. 01–31264 Filed 12–19–01; 8:45 am] address or telephone: (703) 518–6360. ‘‘Paid-in and Unimpaired Capital and BILLING CODE 6210–01–P SUPPLEMENTARY INFORMATION: Surplus’’ and ‘‘Unimpaired Capital and Background Surplus’’ On June 21, 2001, NCUA issued a To improve the clarity of NCUA’s proposed rule on definitions and regulations, the Board proposed to technical corrections. 66 FR 33211, June include definitions for ‘‘paid-in and 21, 2001. The proposed rule resulted unimpaired capital and surplus’’ and from NCUA’s policy of continually ‘‘unimpaired capital and surplus’’ in the reviewing its regulations to ‘‘update, general definitions part of the clarify and simplify existing regulations regulations. The proposed rule defined and eliminate redundant and ‘‘unimpaired capital and surplus’’ as unnecessary provisions.’’ Interpretive meaning the same as ‘‘paid-in and Rulings and Policy Statement (IRPS) 87– unimpaired capital and surplus’’ and
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