Wednesday, August 26, 2009

Wednesday,
August 26, 2009
Part II
Federal Reserve
System
12 CFR Part 226
Truth in Lending; Proposed Rule
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43232 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules
FEDERAL RESERVE SYSTEM http://www.federalreserve.gov/ faith Board or official staff

generalinfo/foia/ProposedRegs.cfm. interpretations are insulated from civil
12 CFR Part 226 • Federal eRulemaking Portal: http:// liability, criminal penalties, or
www.regulations.gov. Follow the administrative sanction.
[Regulation Z; Docket No. R–1366]
instructions for submitting comments.
II. Summary of Major Proposed
Truth in Lending • E-mail:
Changes
regs.comments@federalreserve.gov.
AGENCY: Board of Governors of the Include the docket number in the The goal of the proposed amendments
Federal Reserve System. subject line of the message. to Regulation Z is to improve the
ACTION: Proposed rule; request for • FAX: (202) 452–3819 or (202) 452– effectiveness of disclosures that
public comment. 3102. creditors provide to consumers in
• Mail: Jennifer J. Johnson, Secretary, connection with an application and
SUMMARY: The Board proposes to amend Board of Governors of the Federal throughout the life of a mortgage. The
Regulation Z, which implements the Reserve System, 20th Street and proposed changes are the result of the
Truth in Lending Act (TILA), and the Constitution Avenue, NW., Washington, Board’s review of the provisions that
staff commentary to the regulation, as DC 20551. apply to closed-end mortgage
part of a comprehensive review of All public comments are available transactions. The proposal would apply
TILA’s rules for closed-end credit. This from the Board’s Web site at http:// to all closed-end credit transactions
proposal would revise the rules for www.federalreserve.gov/generalinfo/ secured by real property or a dwelling,
disclosures of closed-end credit secured foia/ProposedRegs.cfm as submitted, and would not be limited to credit
by real property or a consumer’s unless modified for technical reasons. secured by the consumer’s principal
dwelling, except for rules regarding Accordingly, your comments will not be dwelling. The Board is proposing
rescission and reverse mortgages, which edited to remove any identifying or changes to the format, timing, and
the Board anticipates will be reviewed contact information. Public comments content of disclosures for the four main
at a later date. Published elsewhere in may also be viewed electronically or in types of closed-end credit information
today’s Federal Register is the Board’s paper in Room MP–500 of the Board’s governed by Regulation Z: (1)
proposal regarding rules for disclosures Martin Building (20th and C Streets, disclosures at application; (2)
of open-end credit secured by a NW.) between 9 a.m. and 5 p.m. on disclosures within three days after
consumer’s dwelling. weekdays. application; (3) disclosures three days
Disclosures provided at application before consummation; and (4)
FOR FURTHER INFORMATION CONTACT:
would include a Board-published one- disclosures after consummation. In
Jamie Z. Goodson, Jelena McWilliams, addition, the Board is proposing
page ‘‘Key Questions to Ask About Your Nikita M. Pastor, or Maureen C. Yap,
Mortgage’’ document that explains additional protections related to limits
Attorneys; Paul Mondor, Senior on loan originator compensation.
potentially risky loan features, and a Attorney; or Kathleen C. Ryan, Senior
Board-published one-page ‘‘Fixed vs. Disclosures at Application. The
Counsel. Division of Consumer and proposal contains new requirements
Adjustable Rate Mortgages’’ document. Community Affairs, Board of Governors
Transaction-specific disclosures and changes to the format and content
of the Federal Reserve System, at (202) of disclosures given at application, to
required within three business days of 452–3667 or 452–2412; for users of
application would summarize key loan make them more meaningful and easier
Telecommunications Device for the Deaf for consumers to use. The proposed
terms. The calculation of the annual (TDD) only, contact (202) 263–4869.
percentage rate and the finance charge changes include:
would be revised to be more SUPPLEMENTARY INFORMATION: • Providing a new one-page Board
comprehensive, and their disclosures I. Background on TILA and publication, entitled ‘‘Key Questions to
improved. Consumers would receive a Regulation Z Ask About Your Mortgage,’’ which
‘‘final’’ TILA disclosure at least three would explain the potentially risky
Congress enacted the Truth in features of a loan.
business days before consummation.
Certain new post-consummation
Lending Act (TILA) based on findings • Providing a new one-page Board
that economic stability would be publication, entitled ‘‘Fixed vs.
disclosures would be required. In enhanced and competition among
addition, the proposed revisions would Adjustable Rate Mortgages,’’ which
consumer credit providers would be would explain the basic differences
prohibit certain payments to mortgage strengthened by the informed use of
brokers and loan officers that are based between such loans and would replace
credit resulting from consumers’ the lengthy Consumer Handbook on
on the loan’s terms or conditions, and awareness of the cost of credit. One of
prohibit steering consumers to Adjustable-Rate Mortgages (CHARM
the purposes of TILA is to provide booklet) currently required under
transactions that are not in their interest meaningful disclosure of credit terms to
to increase compensation received. Regulation Z.
enable consumers to compare credit • Revising the format and content of
Rules regarding eligibility restrictions terms available in the marketplace more the current adjustable-rate mortgage
and disclosures for credit insurance and readily and avoid the uninformed use of (ARM) loan program disclosure,
debt cancellation or debt suspension credit. including: a requirement that the
coverage would apply to all closed-end TILA’s disclosures differ depending disclosure be in a tabular question and
and open-end credit transactions.
on whether credit is an open-end answer format, a streamlined plain-

DATES: Comments must be received on (revolving) plan or a closed-end language disclosure of interest rate and
or before December 24, 2009. (installment) loan. TILA also contains payment information, and a new
ADDRESSES: You may submit comments, procedural and substantive protections disclosure of potentially risky features,
identified by Docket No. R–1366, by any for consumers. TILA is implemented by such as prepayment penalties.
of the following methods: the Board’s Regulation Z. An Official Disclosures within Three Days after
• Agency Web Site: http:// Staff Commentary interprets the Application. The proposal also contains
www.federalreserve.gov. Follow the requirements of Regulation Z. By revisions to the TILA disclosures
instructions for submitting comments at statute, creditors that follow in good provided within three days after
Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43233
application (the ‘‘early TILA include the costs and effects of that is not home-secured. 74 FR 5244;
disclosure’’) to make the information negatively-amortizing payments. Jan. 29, 2009.
clearer and more conspicuous. The • For creditor-placed property Beginning in 2007, the Board
proposed changes include: insurance, requiring notice of the cost proposed revisions to the rules for
• Revising the calculation of the and coverage at least 45 days before closed-end credit in several phases:
finance charge and annual percentage imposing a charge for such insurance. • HOEPA. In 2007, the Board
rate (APR) so that they capture most fees Loan Originator Compensation. The proposed rules under HOEPA for
and costs paid by consumers in proposal contains new limits on higher-priced mortgage loans (2007
connection with the credit transaction. originator compensation for all closed- HOEPA Proposed Rule). The final rules,
• Providing a graph that would show end mortgages. The proposed changes approved in July 2008 (2008 HOEPA
consumers how their APR compares to include: Final Rule), prohibited certain unfair or
the APRs for borrowers with excellent • Prohibiting certain payments to a deceptive lending and servicing
credit and for borrowers with impaired mortgage broker or a loan officer that are practices in connection with closed-end
credit. based on the loan’s terms and mortgages. The Board also approved
• Summarizing key loan features, conditions. revisions to advertising rules for both
such as the loan term, amount, and type, • Prohibiting a mortgage broker or closed-end and open-end home-secured
and disclosing total settlement charges, loan officer from ‘‘steering’’ consumers loans to ensure that advertisements
as is currently required for the good to transactions that are not in their contain accurate and balanced
faith estimate of settlement costs (GFE) information and do not contain
interest in order to increase the
under the Real Estate Settlement misleading or deceptive representations.
mortgage broker’s or loan officer’s
Procedures Act (RESPA) and Regulation The final rules also required creditors to
compensation.
X. provide consumers with transaction-
• Requiring disclosure of potential III. The Board’s Review of Closed-End specific disclosures early enough to use
changes to the interest rate and monthly Credit Rules while shopping for a mortgage. 73 FR
payment. The Board has amended Regulation Z 44522; July 30, 2008.
• Adopting new format requirements, • Timing of Disclosures for Closed-
numerous times since TILA
including rules regarding: type size and End Mortgages. On May 7, 2009, the
simplification in 1980. In 1987, the
use of boldface for certain terms, Board approved final rules
Board revised Regulation Z to require
placement of information, and implementing the Mortgage Disclosure
special disclosures for closed-end ARMs
highlighting certain information in a Improvement Act of 2008 (the MDIA).2
secured by the borrower’s principal
tabular format. The MDIA adds to the requirements of
dwelling. 52 FR 48665; Dec. 24, 1987. In
Disclosures Three Days before the 2008 HOEPA Final Rule regarding
1995, the Board revised Regulation Z to
Consummation. The proposal would transaction-specific disclosures. Among
implement changes to TILA by the
require creditors to provide a ‘‘final’’ other things, the MDIA and the final
Home Ownership and Equity Protection
TILA disclosure that the consumer must rules require early, transaction-specific
Act (HOEPA). 60 FR 15463; Mar. 24,
receive at least three business days disclosures for mortgage loans secured
1995. HOEPA requires special
before consummation. In addition, two by dwellings even when the dwelling is
disclosures and substantive protections
proposed alternatives regarding not the consumer’s principal dwelling,
for home-equity loans and refinancings
redisclosure of the ‘‘final’’ TILA and requires waiting periods between
with APRs or points and fees above
disclosure include: the time when disclosures are given and
• Alternative 1: If any terms change certain statutory thresholds. Numerous
consummation of the transaction. 74 FR
after the ‘‘final’’ TILA disclosures are other amendments have been made over
23289; May 19, 2009.
provided, then another final TILA the years to address new mortgage This proposal would revise the rules
disclosure would need to be provided so products and other matters, such as for disclosures for closed-end credit
that the consumer receives it at least abusive lending practices in the secured by real property or a consumer’s
three business days before mortgage and home-equity markets. dwelling. The Board anticipates
consummation. The Board’s current review of reviewing the rules for rescission and
• Alternative 2: If the APR exceeds a Regulation Z was initiated in December reverse mortgages in the next phase of
certain tolerance or an adjustable-rate 2004 with an advance notice of the Regulation Z review.
feature is added after the ‘‘final’’ TILA proposed rulemaking.1 69 FR 70925;
Dec. 8, 2004. At that time, the Board A. Coordination With Disclosures
disclosures are provided, then another
announced its intent to conduct its Required Under the Real Estate
final TILA disclosure would need to be
review of Regulation Z in stages, Settlement Procedures Act
provided so that the consumer receives
it at least three business days before focusing first on the rules for open-end The Board anticipates working with
consummation. All other changes could (revolving) credit accounts that are not the Department of Housing and Urban
be disclosed at consummation. home-secured, chiefly general-purpose Development (HUD) to ensure that TILA
Disclosures after Consummation. The credit cards and retailer credit card and Real Estate Settlement Procedures
proposal would change the timing, plans. In December 2008, the Board Act of 1974 (RESPA) disclosures are
content and types of notices provided approved final rules for open-end credit compatible and complementary,
after consummation. The proposed including potentially developing a
changes include: 1 The review was initiated pursuant to

single disclosure form that creditors
• For ARMs, increasing advance requirements of section 303 of the Riegle could use to combine the initial
Community Development and Regulatory
notice of a payment change from 25 to Improvement Act of 1994, section 610(c) of the disclosures required under TILA and
60 days, and revising the format and Regulatory Flexibility Act of 1980, and section 2222
content of the ARM adjustment notice. of the Economic Growth and Regulatory Paperwork 2 The MDIA is contained in Sections 2501
• For payment option loans with Reduction Act of 1996. An advance notice of through 2503 of the Housing and Economic
proposed rulemaking is published to obtain Recovery Act of 2008, Public Law 110–289, enacted
negative amortization, requiring a preliminary information prior to issuing a proposed on July 30, 2008. The MDIA was later amended by
monthly statement to provide rule or, in some cases, deciding whether to issue a the Emergency Economic Stabilization Act of 2008,
information about payment options that proposed rule. Public Law 110–343, enacted on October 3, 2008.
RESPA. The two statutes have different The proposed revised TILA form and after an application is received and
purposes but have considerable overlap. HUD’s revised GFE would represent before the consumer has paid a fee,
Harmonizing the two disclosure significant improvements, but overlap other than a fee for obtaining the
schemes would ensure that consumers between the two forms could be consumer’s credit history.5 The MDIA
receive consistent information under eliminated to reduce information also expanded coverage of the early
both laws. It may also help reduce overload and consistency issues. There disclosure requirement to include loans
information overload by eliminating have been previous efforts to develop a secured by a dwelling even when it is
some duplicative disclosures. Consumer combined TILA and RESPA disclosure not the consumer’s principal dwelling.
testing would be used to ensure form, which were fueled by the amount, In addition, the MDIA required creditors
consumers could understand and use complexity, and overlap of information to mail or deliver early TILA disclosures
the combined disclosures. In the in the disclosures. Under a 1996 at least seven business days before
meantime, the Board is proposing a congressional directive, the Board and consummation and provide corrected
revised model TILA form so that HUD studied ways to simplify and disclosures if the disclosed APR
commenters can see how the Board’s improve the disclosures. In July 1998, changes in excess of a specified
proposed revisions to Regulation Z the Board and HUD submitted a joint tolerance. The consumer must receive
might be applied in practice. report to Congress that provided a broad the corrected disclosures no later than
RESPA, which is implemented by outline intended to be a starting point three business days before
HUD’s Regulation X, seeks to ensure for consideration of legislative reform of consummation. The Board implemented
that consumers are provided with the mortgage disclosure requirements these MDIA requirements in final rules
timely information about the nature and (the 1998 Joint Report).3 The 1998 Joint published May 19, 2009, and effective
costs of the settlement process and are Report included a recommendation for July 30, 2009. 74 FR 23289; May 19,
protected from unnecessarily high real combining and simplifying the RESPA 2009.
estate settlement charges. To this end, and TILA disclosure forms to satisfy the The MDIA also requires payment
RESPA mandates that consumers requirements of both laws. In addition, examples if the interest rate or payments
receive information about the costs The 1998 Joint Report recommended can change. Such disclosures are to be
associated with a mortgage loan that the timing of the TILA and RESPA formatted in accordance with the results
transaction, and prohibits certain disclosures be coordinated. Recent of consumer testing conducted by the
business practices. Under RESPA, regulatory changes addressed the timing Board. Those provisions of the MDIA
creditors must provide a GFE within issues so that initial disclosures will not become effective until January
required under TILA and RESPA would 30, 2011, or any earlier compliance date
three business days after a consumer
be delivered at the same time. established by the Board. This proposal
submits a written application for a
would implement those MDIA
mortgage loan, which is the same time B. The Bankruptcy Act’s Amendment to provisions.
creditors must provide the early TILA TILA
disclosure. RESPA also requires a The Bankruptcy Abuse Prevention D. Consumer Testing
statement of the actual costs imposed at and Consumer Protection Act of 2005 A principal goal for the Regulation Z
loan settlement (HUD–1 settlement (Bankruptcy Act) primarily amended review is to produce revised and
statement). In November 2008, HUD the federal bankruptcy code, but also improved mortgage disclosures that
published revised RESPA rules, contained several provisions amending consumers will be more likely to
including new GFE and HUD–1 TILA. With respect to open-end and understand and use in their decisions,
settlement statement forms, which closed-end dwelling-secured credit, the while at the same time not creating
lenders, mortgage brokers, and Bankruptcy Act requires that the credit undue burdens for creditors. Currently,
settlement agents must use beginning on application disclosure contain a Regulation Z requires creditors to
January 1, 2010. 73 FR 68204; Nov. 17, statement warning consumers that if the provide at application an ARM loan
2008. In addition to revised disclosures loan exceeds the fair market value of the program disclosure and the CHARM
of settlement costs, the revised GFE now dwelling, then the interest on that booklet. An early TILA disclosure is
includes loan terms, some of which portion of the loan is not tax deductible, required within three business days of
would also appear on the TILA and the consumer should consult a tax application and at least seven business
disclosure, such as whether there is a advisor for further information on tax days before consummation for closed-
prepayment penalty and the borrower’s deductibility. This proposal would end mortgages.
interest rate and monthly payment. The implement this Bankruptcy Act In 2007, the Board retained a research
revised GFE form was developed provision. and consulting firm (ICF Macro) that
through HUD’s consumer testing. specializes in designing and testing
TILA, which is implemented by the C. The MDIA’s Amendments to TILA documents to conduct consumer testing
Board’s Regulation Z, governs the On July 30, 2008, Congress enacted to help the Board’s review of mortgage
disclosure of the APR and certain loan the MDIA.4 The MDIA codified some of rules under Regulation Z. Working
terms. This proposal contains a revised the requirements of the Board’s 2008 closely with the Board, ICF Macro
model TILA form that was developed HOEPA Final Rule, which required conducted several tests in different
through consumer testing. In addition to transaction-specific disclosures to be cities throughout the United States. The
a revised disclosure of the APR and loan provided within three business days testing consisted of four focus groups
terms, the revised TILA disclosure and eleven rounds of one-on-one

would include the total settlement 3 Bd. of Governors of the Fed. Reserve Sys. and
cognitive interviews. The goals of these
U.S. Dep’t of Hous. and Urban Dev., Joint Report to focus groups and interviews were to
charges that appear on the GFE required the Congress Concerning Reform to the Truth in
under RESPA. Total settlement charges Lending Act and the Real Estate Settlement learn how consumers shop for
would be added to the TILA form Procedures Act (1998), available at http://
because consumer testing conducted by www.federalreserve.gov/boarddocs/rptcongress/ 5 To ease discussion, the description of the
tila.pdf. closed-end mortgage disclosure scheme includes
the Board found that consumers wanted 4 As noted, Congress subsequently amended the MDIA’s recent amendments to TILA and the
to have settlement charges disclosed on MDIA with the Emergency Economic Stabilization disclosure timing requirements of the 2008 HOEPA
the TILA form. Act of 2008. Final Rule that will be effective July 30, 2009.
mortgages and what information consumers had of TILA disclosures shopping. These findings suggest that
consumers read when they receive currently provided in the shopping and consumers need information early in the
mortgage disclosures, and to assess their application process. process and that information should not
understanding of such disclosures. Cognitive interviews on existing be limited to information about ARMs.
The consumer testing groups disclosures. In 2008, the Board worked Therefore, the proposal would require
contained participants with a range of with ICF Macro to conduct five rounds creditors to provide key information
ethnicities, ages, educational levels, and of cognitive interviews with mortgage about evaluating loan terms at the time
mortgage behaviors, including first-time customers (seven to eleven participants an application form is provided, as
mortgage shoppers, prime and subprime per round). These cognitive interviews discussed below.
borrowers, and consumers who had consisted of one-on-one discussions 1. Disclosures provided to consumers
obtained one or more closed-end with consumers, during which before application. Currently, creditors
mortgages. For each round of testing, consumers described their recent must provide the CHARM booklet
ICF Macro developed a set of model mortgage shopping experience and before a consumer applies or pays a
disclosure forms to be tested. Interview reviewed existing sample mortgage nonrefundable fee, whichever is earlier.
participants were asked to review model disclosures. In addition to learning The booklet explains how ARMs
forms and provide their reactions, and about shopping behavior, the goals of generally work. Testing showed that
were then asked a series of questions these interviews were: (1) To learn more participants found the CHARM booklet
designed to test their understanding of about what information consumers read too lengthy to be useful, although some
the content. Data were collected on when they receive current mortgage liked specific elements such as the
which elements and features of each disclosures; (2) to research how easily glossary. In addition, creditors must
form were most successful in providing consumers can find various pieces of provide an ARM loan program
information clearly and effectively. The information in these disclosures; and (3) disclosure for each ARM loan program
findings from each round of interviews to test consumers’ understanding of in which the consumer expresses an
were incorporated in revisions to the certain mortgage related words and interest, before the consumer applies or
model forms for the following round of phrases. has paid a nonrefundable fee. The ARM
testing. 1. Initial design of disclosures for loan program disclosure currently must
Specifically, the Board worked with testing. In the fall of 2008, the Board include either a 15-year historical
ICF Macro to develop and test several worked with ICF Macro to develop example of rates and payments for a
types of closed-end disclosures, sample mortgage disclosures to be used $10,000 loan, or the maximum interest
including: in later rounds of testing, taking into rate and payment for a $10,000 loan
• Two Board publications to be account information learned through the originated at the interest rate in effect
provided at application, entitled ‘‘Key focus groups and the cognitive for the disclosure’s identified month
Questions To Ask About Your interviews. and year. Many testing participants
Mortgage’’ and ‘‘Fixed vs. Adjustable 2. Additional cognitive interviews and found the narrative form of the current
Rate Mortgages’’; revisions to disclosures. In late 2008 and ARM loan program disclosure difficult
• An ARM loan program disclosure to early 2009, the Board worked with ICF to read and understand. Some
be provided at application; Macro to conduct six additional rounds participants mistook the historical
• An early TILA disclosure to be of cognitive interviews (nine or ten examples to be their actual loan rate and
provided within three business days of participants per round), where payments. Participants also found the
application, and again so that the consumers were asked to view new content of the disclosure too general to
consumer receives it at least three sample mortgage disclosures developed be useful to them when comparing
business days before consummation; by the Board and ICF Macro. The between lenders or products, and noted
• An ARM adjustment notice to be rounds of interviews were conducted the absence of key loan information,
provided after consummation; and sequentially to allow for revisions to the such as the interest rate.
• A payment option monthly testing materials based on what was Thus, the proposal would require
statement to be provided after learned from the testing during each creditors to provide, for all closed-end
consummation. previous round. mortgages, a one-page document that
Exploratory focus groups. In February Results of testing. Several of the explains the basic differences between
and March 2008 the Board worked with model forms were developed through fixed-rate mortgages and ARMs, and a
ICF Macro to conduct four focus groups the testing. A report summarizing the one-page document that would explain
with consumers who had obtained a results of the testing is available on the potentially risky features of a mortgage
mortgage in the previous two years. Two Board’s public Web site: http:// in a plain-English question and answer
of the groups consisted of subprime www.federalreserve.gov. format. In addition, the proposal would
borrowers and two consisted of prime Many consumer testing participants streamline the content of the ARM loan
borrowers, with creditworthiness reported that they did not shop for a program disclosure to highlight in a
determined by their answers to lender or a mortgage. Several stated that table form information that participants
questions about prior financial they were referred to a lender by a found most useful, such as interest rate
hardship, difficulties encountered in realtor, family member or friend, and and payment adjustments, and to
shopping for credit, and the rate on their that they relied on that lender to get provide information about program-
current mortgage. Each focus group them a loan. Participants who reported specific loan features that could pose
consisted of between seven and nine shopping for a mortgage relied on greater risk, such as prepayment
people that discussed issues identified originators’ oral quotes for interest rates, penalties. Consumer testing suggested
by the Board and raised by a moderator monthly payments, and closing costs. that highlighting such information in a
from ICF Macro. Through these focus Most participants stated that once they table form improved participants’ ability
groups, the Board gathered information had applied for a particular loan and to identify and understand the
on how consumers shop for mortgages, received a TILA disclosure they ceased information provided about key loan
what information consumers currently shopping. Some cited the time involved, features.
use in making decisions about and the amount of documentation 2. Disclosures provided to consumers
mortgages, and what perceptions required, as factors for limiting their after application. Currently, creditors
must provide an early TILA disclosure 3. Disclosures required after cognitive interviews, quantitative
within three business days after consummation. Currently, creditors testing will be conducted. The goal of
application and at least seven business must provide advance notice to a the quantitative testing is to measure
days before consummation, and before consumer before the interest rate and consumers’ comprehension of the
the consumer has paid a fee other than monthly payment adjust on an ARM. newly-developed disclosures with a
a fee for obtaining the consumer’s credit The ARM adjustment notice must larger and more statistically
history. If the APR on the early TILA provide certain information, including representative group of consumers.
disclosure exceeds a certain tolerance current and prior interest rates, the
before consummation, the creditor must index values upon which the current E. Other Outreach and Research
provide corrected disclosures that the and prior interest rates are based, and The Board also solicited input from
consumer must receive at least three the payment that would be required to members of the Board’s Consumer
days before consummation. If any term amortize the loan fully at the new Advisory Council on various issues
other than the APR becomes inaccurate, interest rate. The Board worked with presented by the review of Regulation Z.
the creditor must give the corrected ICF Macro to develop a revised ARM During 2009, for example, the Council
disclosure no later than at adjustment notice that would enhance discussed ways to improve disclosures
consummation. consumers’ ability to identify and for home-secured credit. In addition,
The early TILA disclosure—and any understand changes being made to their Board staff met or conducted conference
corrected disclosure—must provide loan terms. Consumer testing of the calls with various industry and
certain information, such as the loan’s revised ARM adjustment notice consumer group representatives
annual percentage rate (APR), finance indicated that consumers understood throughout the review process leading
charge, amount financed, and total of the content and were able correctly to to this proposal. Board staff also
payments. Participants in consumer identify the amount and due date of the reviewed disclosures currently provided
testing indicated that much of the new payment. Thus, under the proposal, by creditors, the Federal Trade
information in the current TILA creditors would be required to provide Commission’s (FTC) report on consumer
disclosure was of secondary importance the ARM adjustment notice in a revised testing of mortgage disclosures,6 HUD’s
to them when considering a loan. format that would highlight changes report on consumer testing of the GFE,7
Participants consistently looked for the being made to the interest rate and the and other information.
contract rate of interest, monthly monthly payment, and provide other
payment, and in some cases, closing important information, such as the due F. Reviewing Regulation Z in Stages
costs. Most participants assumed that date of the new payment and the loan
the APR was the contract rate of The Board is proceeding with a
balance.
interest, and that the finance charge was Currently, creditors are not required review of Regulation Z in stages. This
the total of all interest they would pay to provide disclosures after proposal largely contains revisions to
if they kept the loan to maturity. Most consummation for negatively-amortizing rules affecting closed-end credit
identified the amount financed as the loans. The Board worked with ICF transactions secured by real property or
loan amount. When asked to compare Macro to develop a monthly statement a dwelling. Published elsewhere in
two loan offers using redesigned model that compares the amount and the today’s Federal Register is the Board’s
forms that contained these disclosures, impact on the loan balance of a fully- proposal regarding disclosures for open-
few participants used the APR and amortizing payment, interest-only end credit secured by a consumer’s
finance charge to compare the loans. In payment, and minimum payment. dwelling. Closed-end mortgages are
addition, some participants had Consumer testing of the proposed distinct from other TILA-covered
difficulty determining whether the loan monthly statement indicated that products, and conducting a review in
tested had a variable or fixed rate and consumers understood the content, stages allows for a manageable process.
understanding the payment schedule’s easily recognized the payment options To minimize compliance burden for
relationship to the changing interest highlighted in the table, and understood creditors offering other closed-end
rate. Many did not understand what that by making only the minimum credit, as well as home-secured credit,
circumstances would trigger a payment they would be borrowing more the proposed rules that would apply
prepayment penalty. money and increasing their loan only to closed-end home-secured credit
Thus, the proposal contains a number balance. Thus, to improve consumer are organized in sections separate from
of revisions to the format and content of understanding of the risks associated the general disclosure requirements for
TILA disclosures to make them clearer with payment option loans, the Board closed-end rules. Although this
and more conspicuous. To enhance the proposes to require, not later than 15 reorganization would increase the size
effectiveness of the finance charge as a days before a periodic payment is due, of the regulation and commentary, the
disclosure of the true cost of credit, the a monthly statement of payment options Board believes a clear delineation of
proposal would require a simpler, more that explains the impact of payment rules for closed-end, home-secured
inclusive approach. The disclosure of choice on the loan balance. loans pending the review of the
the APR would be enhanced to improve Additional testing during and after remaining closed-end rules provides a
consumers’ comprehension of the cost the comment period. During the clear compliance benefit to creditors.
of credit. In addition, to help consumers comment period, the Board will work
determine whether the loan offered is with ICF Macro to conduct additional 6 James M. Lacko and Janis K. Pappalardo, Fed.
affordable for them, creditors would be testing of model disclosures. After Trade Comm’n, Improving Consumer Mortgage
Disclosures: An Empirical Assessment of Current
required to summarize key loan terms receiving comments from the public on and Protoype Disclosure Forms (2007), (‘‘Improving
and highlight interest rate and payment the proposal and the proposed Consumer Mortgage Disclosures’’) available at
information in a table. Consumer testing disclosure forms, the Board will work http://www2.ftc.gov/os/2007/06/
showed that using special formatting with ICF Macro to further revise model P025505MortgageDisclosureReport.pdf.
7 U.S. Dep’t. of Hous. and Urban Dev., Summary
requirements, consistent terminology disclosures based on comments
Report: Consumer Testing of the Good Faith
and a minimum 10-point font, would received, and to conduct additional Estimate Form (GFE) (2008), available at http://
ensure that consumers are better able to rounds of cognitive interviews to test www.huduser.org/publications/pdf/
identify and review key loan terms. the revised disclosures. After the Summary_Report_GFE.pdf.
G. Implementation Period loan is secured by the principal cause substantial injury to consumers
The Board contemplates providing residence of the borrower; and (5) which is not reasonably avoidable by
creditors sufficient time to implement whether the exemption would consumers themselves and not
any revisions that may be adopted. The undermine the goal of consumer outweighed by countervailing benefits
Board seeks comment on an appropriate protection. The rationales for these to consumers or to competition. In
implementation period. proposed exemptions are explained in addition, in determining whether an act
part VI below. or practice is unfair, the FTC is
IV. The Board’s Rulemaking Authority TILA Section 129(l)(2). TILA also permitted to consider established public
TILA Section 105. TILA mandates that authorizes the Board to prohibit acts or policies, but public policy
the Board prescribe regulations to carry practices in connection with: considerations may not serve as the
• Mortgage loans that the board finds primary basis for an unfairness
out the purposes of the act. TILA also
to be unfair, deceptive, or designed to determination.10
specifically authorizes the Board, among
evade the provisions of HOEPA; and The FTC has interpreted these
other things, to: • Refinancing of mortgage loans that
• Issue regulations that contain such standards to mean that consumer injury
the Board finds to be associated with is the central focus of any inquiry
classifications, differentiations, or other abusive lending practices or that are
provisions, or that provide for such regarding unfairness.11 Consumer injury
otherwise not in the interest of the may be substantial if it imposes a small
adjustments and exceptions for any borrower.
class of transactions, that in the Board’s harm on a large number of consumers,
The authority granted to the Board
judgment are necessary or proper to or if it raises a significant risk of
under TILA Section 129(l)(2), 15 U.S.C.
effectuate the purposes of TILA, concrete harm.12 The FTC looks to
1639(l)(2), is broad. It reaches mortgage
facilitate compliance with the act, or whether an act or practice is injurious
loans with rates and fees that do not
prevent circumvention or evasion. 15 in its net effects.13 The FTC has also
meet HOEPA’s rate or fee trigger in
U.S.C. 1604(a). observed that an unfair act or practice
TILA Section 103(aa), 15 U.S.C.
• Exempt from all or part of TILA any will almost always reflect a market
1602(aa), as well as mortgage loans not
class of transactions if the Board failure or market imperfection that
covered under that section, such as
determines that TILA coverage does not prevents the forces of supply and
home purchase loans. Moreover, while
provide a meaningful benefit to HOEPA’s statutory restrictions apply demand from maximizing benefits and
consumers in the form of useful only to creditors and only to loan terms minimizing costs.14 In evaluating
information or protection. The Board or lending practices, Section 129(l)(2) is unfairness, the FTC looks to whether
must consider factors identified in the not limited to acts or practices by consumers’ free market decisions are
act and publish its rationale at the time creditors, nor is it limited to loan terms unjustifiably hindered.15
it proposes an exemption for comment. or lending practices. See 15 U.S.C. The FTC has also adopted standards
15 U.S.C. 1604(f). 1639(l)(2). It authorizes protections for determining whether an act or
In the course of developing the against unfair or deceptive practices ‘‘in practice is deceptive (though these
proposal, the Board has considered the connection with mortgage loans,’’ and it standards, unlike unfairness standards,
views of interested parties, its authorizes protections against abusive have not been incorporated into the FTC
experience in implementing and practices ‘‘in connection with Act).16 First, there must be a
enforcing Regulation Z, and the results refinancing of mortgage loans.’’ Thus, representation, omission or practice that
obtained from testing various disclosure the Board’s authority is not limited to is likely to mislead the consumer.
options in controlled consumer tests. regulating specific contractual terms of Second, the act or practice is examined
For the reasons discussed in this notice, mortgage loan agreements; it extends to from the perspective of a consumer
the Board believes this proposal is regulating loan-related practices acting reasonably in the circumstances.
appropriate pursuant to the authority generally, within the standards set forth Third, the representation, omission, or
under TILA Section 105(a). in the statute. practice must be material. That is, it
Also, as explained in this notice, the HOEPA does not set forth a standard must be likely to affect the consumer’s
Board believes that the specific for what is unfair or deceptive, but the conduct or decision with regard to a
exemptions proposed are appropriate Conference Report for HOEPA indicates product or service.17
because the existing requirements do that, in determining whether a practice Many States also have adopted
not provide a meaningful benefit to in connection with mortgage loans is statutes prohibiting unfair or deceptive
consumers in the form of useful unfair or deceptive, the Board should acts or practices, and these statutes
information or protection. In reaching look to the standards employed for employ a variety of standards, many of
this conclusion with each proposed interpreting State unfair and deceptive them different from the standards
exemption, the Board considered (1) the trade practices statutes and the Federal
10 15 U.S.C. 45(n).
amount of the loan and whether the Trade Commission Act (FTC Act), 11 Statement of Basis and Purpose and Regulatory
disclosure provides a benefit to Section 5(a), 15 U.S.C. 45(a).8 Analysis, Credit Practices Rule, 42 FR 7740, 7743;
consumers who are parties to the Congress has codified standards Mar. 1, 1984 (Credit Practices Rule).
transaction involving a loan of such developed by the Federal Trade 12 Letter from Commissioners of the FTC to the
amount; (2) the extent to which the Commission (FTC) for determining Hon. Wendell H. Ford, Chairman, and the Hon.
requirement complicates, hinders, or whether acts or practices are unfair John C. Danforth, Ranking Minority Member,
Consumer Subcomm. of the H. Comm. on
makes more expensive the credit under Section 5(a), 15 U.S.C. 45(a).9 Commerce, Science, and Transp., n.12 (Dec. 17,
process; (3) the status of the borrower, Under the FTC Act, an act or practice 1980).
including any related financial is unfair when it causes or is likely to 13 Credit Practices Rule, 42 FR at 7744.
arrangements of the borrower, the 14 Id.

15 Id.
financial sophistication of the borrower 8 H.R. Rep. 103–652, at 162 (1994) (Conf. Rep.).
9 See 16 Letter from James C. Miller III, Chairman, FTC
relative to the type of transaction, and 15 U.S.C. 45(n); Letter from Commissioners
of the FTC to the Hon. Wendell H. Ford, Chairman, to the Hon. John D. Dingell, Chairman, H. Comm.
the importance to the borrower of the and the Hon. John C. Danforth, Ranking Minority on Energy and Commerce (Oct. 14, 1983) (Dingell
credit, related supporting property, and Member, Consumer Subcomm. of the H. Comm. on Letter).
coverage under TILA; (4) whether the Commerce, Science, and Transp. (Dec. 17, 1980). 17 Dingell Letter at 1–2.
currently applied to the FTC Act. A reduce confusion and and margin to be used to calculate
number of States follow an unfairness misunderstanding, which may also ease interest rates and payments, and either
standard formerly used by the FTC. creditors’ costs relating to consumer a 15-year historical example of rates and
Under this standard, an act or practice complaints and inquiries. payments for a $10,000 loan, or the
is unfair where it offends public policy; maximum interest rate and payment for
A. Disclosures at Application
or is immoral, unethical, oppressive, or a $10,000 loan originated at the interest
unscrupulous; and causes substantial Currently, Regulation Z requires pre- rate in effect for the disclosure’s
injury to consumers.18 application disclosures only for identified month and year. Based on
In developing proposed rules under variable-rate transactions. For these consumer testing, the proposal would
TILA Section 129(l)(2)(A), 15 U.S.C. transactions, creditors are required to simplify the ARM loan program
1639(l)(2)(A), the Board has considered provide the CHARM booklet and a loan disclosure to focus on the interest rate
the standards currently applied to the program disclosure that provides twelve and payment and the potential risks
FTC Act’s prohibition against unfair or items of information at the time an associated with ARMs. Information on
deceptive acts or practices, as well as application form is provided or before how to calculate payments, and the
the standards applied to similar State the consumer pays a nonrefundable fee, effect of rising interest rates on monthly
statutes. whichever is earlier. payments would be moved to the early
‘‘Key Questions to Ask about Your TILA disclosure provided after
V. Discussion of Major Proposed Mortgage’’ publication. Since 1987, the application. Placing the information
Revisions number of loan products and product there will allow the creditor to
The goal of the proposed revisions is features has grown, providing customize the information to the
to improve the effectiveness of the consumers with more choices. However, consumer’s potential loan, making the
Regulation Z disclosures that must be the growth in loan features and products information more useful to consumers.
provided to consumers for closed-end has also made the decision-making The proposed ARM loan program
credit transactions secured by real process more complex for consumers. disclosure would be provided in a
property or a dwelling. To shop for and The proposal would require creditors to tabular question and answer format to
understand the cost of home-secured provide to consumers a one-page Board enable consumers to easily locate the
credit, consumers must be able to publication entitled, ‘‘Key Questions to most important information.
identify and comprehend the key terms Ask about Your Mortgage.’’ Creditors
would be required to provide this B. Disclosures Within Three Days After
of mortgages. But the terms and
document for all closed-end loans Application
conditions for mortgage transactions can
be very complex. The proposed secured by real property or a dwelling, TILA and Regulation Z currently
revisions to Regulation Z are intended not just variable-rate loans, before the require creditors to provide an early
to provide the most essential consumer applies for a loan or pays a TILA disclosure within three business
information to consumers when the nonrefundable fee, whichever is earlier. days after application and at least seven
information would be most useful to The publication would inform business days before consummation,
them, with content and formats that are consumers in a plain-English question and before the consumer has paid a fee
clear and conspicuous. The proposed and answer format about potentially other than a fee for obtaining the
revisions are expected to improve risky features, such as interest-only, consumer’s credit history. If the APR on
consumers’ ability to make informed negative amortization, and prepayment the early TILA disclosure exceeds a
credit decisions and enhance penalties. To enable consumers to track certain tolerance before consummation,
competition among creditors. Many of the presence or absence of potentially the creditor must provide corrected
the changes are based on the consumer risky features throughout the mortgage disclosures that the consumer must
testing that was conducted in transaction process, the key questions receive at least three days before
connection with the review of and answers provided in this one-page consummation. If any term other than
Regulation Z. document would also be included in the the APR becomes inaccurate, the
In considering the proposed revisions, ARM loan program disclosure and the creditor must give the corrected
the Board sought to ensure that the early and final TILA disclosures. disclosure no later than at
proposal would not reduce access to ‘‘Fixed vs. Adjustable Rate consummation.
credit, and sought to balance the Mortgages’’ publication. Instead of the The early TILA disclosure, and any
potential benefits for consumers with CHARM booklet, the proposal would corrected disclosure, must include
the compliance burdens imposed on require creditors to provide a one-page certain loan information, including the
creditors. For example, the proposed Board publication entitled, ‘‘Fixed vs. amount financed, the finance charge,
revisions seek to provide greater Adjustable Rate Mortgages’’ for all the APR, the total of payments, and the
certainty to creditors in identifying what closed-end loans secured by real amount and timing of payments. The
costs must be disclosed for mortgages, property or a dwelling, not just variable- finance charge is the sum of all credit-
and how those costs must be disclosed. rate loans. The publication would related charges, but excludes a variety of
More effective disclosures may also contain an explanation of the basic fees and charges. TILA requires that the
differences between fixed-rate finance charge and the APR be disclosed
18 See, e.g., Kenai Chrysler Ctr., Inc. v. Denison, mortgages and ARMs. Although the more conspicuously than other
167 P.3d 1240, 1255 (Alaska 2007) (quoting FTC v. requirement to provide a CHARM information. The APR is calculated
Sperry & Hutchinson Co., 405 U.S. 233, 244–45 n.5 booklet would be eliminated, the Board based on the finance charge and is
(1972)); State v. Moran, 151 N.H. 450, 452, 861 A.2d would continue to publish the CHARM meant to be a single, unified number to
763, 755–56 (N.H. 2004) (concurrently applying the
FTC’s former test and a test under which an act or booklet as a consumer-education help consumers understand the total
practice is unfair or deceptive if ‘‘the objectionable publication. cost of credit.
conduct * * * attain[s] a level of rascality that ARM loan program disclosure. Calculation of the finance charge. The
would raise an eyebrow of someone inured to the Currently, for each variable-rate loan proposal contains a number of revisions
rough and tumble of the world of commerce.’’)
(citation omitted); Robinson v. Toyota Motor Credit
program in which a consumer expresses to the calculation of the finance charge
Corp., 201 Ill. 2d 403, 417–418, 775 N.E.2d 951, an interest, creditors must provide and the disclosure of the finance charge
961–62 (2002) (quoting 405 U.S. at 244–45 n.5). certain information, including the index and the APR to improve consumers’
understanding of the cost of credit. lending laws. However, the proposal payment. Additional special disclosures
Currently, TILA and Regulation Z could also reduce compliance burdens, would be required for loans with
permit creditors to exclude several fees regulatory uncertainty, and litigation negatively-amortizing payment options,
or charges from the finance charge, risks for creditors. introductory interest rates, interest-only
including certain fees or charges Disclosure of the finance charge and payments, and balloon payments.
imposed by third party closing agents; the APR. Currently, creditors are Disclosure of other terms. In addition
certain premiums for credit or property required to disclose the loan’s ‘‘finance to the interest rate and monthly
insurance or fees for debt cancellation charge’’ and ‘‘annual percentage rate,’’ payment, consumer testing indicated
or debt suspension coverage, if the using those terms, more conspicuously that consumers benefit from the
creditor meets certain conditions; than the other required disclosures. disclosure of other key terms in a clear
security interest charges; and real-estate Consumer testing indicated that format. Thus, the proposal would
related fees, such as title examination or consumers do not understand the term require creditors to provide in a tabular
document preparation fees. ‘‘finance charge.’’ Most consumers format information about the loan
Consumer groups, creditors, and believe the term refers to the total of all amount, the loan term, the loan type
government agencies have long been interest they would pay if they keep the (such as fixed-rate), the total settlement
dissatisfied with the ‘‘some fees in, loan to maturity, but do not realize that charges, and the maximum amount of
some fees out’’ approach to the finance it includes the fees and costs associated any prepayment penalty. In addition,
charge. Consumer groups and others with the loan. For these reasons, the creditors would be required to disclose
believe that the current approach proposal replaces the term ‘‘finance in a tabular question and answer format
obscures the true cost of credit. They charge’’ with ‘‘interest and settlement the ‘‘Key Questions about Risk,’’ which
contend that this approach creates charges’’ to make clear it is more than would include information about
incentives for creditors to shift the cost interest, and the disclosure would no potentially risky loan features such as
of credit from the interest rate to longer be more conspicuous than the prepayment penalties, interest-only
ancillary fees excluded from the finance other required disclosures. payments, and negative amortization.
charge. They further contend that this In addition, the disclosure of the APR
would be enhanced to improve C. Disclosures Three Days Before
approach undermines the purpose of the
consumers’ comprehension of the cost Consummation
APR, which is to express in a single
figure the total cost of credit. Creditors of credit. Under the proposal, creditors As noted above, the creditor is
maintain that consumers are confused would be required to disclose the APR required to provide the early TILA
by the APR and that the current in 16-point font in close proximity to a disclosure to the consumer within three
approach creates significant regulatory graph that compares the consumer’s business days after receiving the
burdens. They contend that determining APR to the HOEPA average prime offer consumer’s written application and at
which fees are or are not included in the rate for borrowers with excellent credit least seven business days before
finance charge is overly complex and and the HOEPA threshold for higher- consummation, and before the
creates litigation risk. priced loans. This disclosure would put consumer has paid a fee other than a fee
The Board proposes to use its the APR in context and help consumers for obtaining the consumer’s credit
exception and exemption authority to understand whether they are being history. If the APR on the early TILA
revise the finance charge calculation for offered a loan that comports with their disclosure exceeds a certain tolerance
closed-end mortgages, including creditworthiness. before consummation, the creditor must
HOEPA loans. The proposal would Interest rate and payment summary. provide corrected disclosures that the
maintain TILA’s definition of a ‘‘finance Currently, creditors are required to consumer must receive at least three
charge’’ as a fee or charge payable disclose the number, amount, and days before consummation. If any term
directly or indirectly by the consumer timing of payments scheduled to repay other than the APR becomes inaccurate,
and imposed directly or indirectly by the loan. Under the MDIA’s the creditor must give the corrected
the creditor as an incident to the amendments to TILA, creditors will be disclosure no later than at
extension of credit. However, the required to provide examples of consummation. The consumer may
proposal would require the finance adjustments to the regularly required waive the seven- and three-day waiting
charge to include charges by third payment based on the change in interest periods for a bona fide personal
parties if the creditor requires the use of rates specified in the contract. financial emergency.
a third party as a condition of or Consumer testing consistently indicated There are, however, long-standing
incident to the extension of credit (even that consumers shop for and evaluate a concerns about consumers facing
if the consumer chooses the third party), mortgage based on the contract interest different loan terms or increased
or if the creditor retains a portion of the rate and the monthly payment, but settlement costs at closing. Members of
third-party charge (to the extent of the consumers have difficulty the Board’s Consumer Advisory
portion retained). Charges that would be understanding such terms using the Council, participants in public hearings,
incurred in a comparable cash current TILA disclosure. Under the and commenters on prior Board
transaction, such as transfer taxes, proposal, creditors would be required to rulemakings have expressed concern
would continue to be excluded from the disclose in a tabular format the contract about consumers not learning of
finance charge. Under this approach, interest rate together with the changes to credit terms or settlement
consumers would benefit from having a corresponding monthly payment, charges until consummation. In
finance charge and APR disclosure that including escrows for taxes and addition, consumer testing indicated
better represent the cost of credit, property and/or mortgage insurance. that consumers are often surprised at
undiluted by myriad exclusions for Special disclosure requirements would closing by changes in important loan
various fees and charges. This approach be imposed for adjustable-rate or step- terms, such as the addition of an
would cause more loans to be subject to rate loans to show the interest rate and adjustable-rate feature. Despite these
the special protections of the Board’s payment at consummation, the changes, consumers report that they
2008 HOEPA Final Rule, special maximum interest rate and payment at have proceeded with closing because
disclosures and restrictions for HOEPA first adjustment, and the highest they lacked alternatives (especially in
loans, and certain State anti-predatory possible maximum interest rate and the case of a home purchase loan), or
were told that they could easily Payment option statement. Currently, interest and cannot reasonably protect
refinance with better terms in the near creditors are not required to provide themselves against it. Yield spread
future. disclosures after consummation for premiums may provide some benefit to
For these reasons, the proposal would negatively amortizing loans, such as consumers because consumers do not
require the creditor to provide a final payment option loans. To ensure have to pay loan originators’
TILA disclosure that the consumer must consumers receive information about compensation in cash or through
receive at least three business days the risks associated with payment financing. However, the Board believes
before consummation, even if no terms option loans (e.g., payment shock), the that this benefit may be outweighed by
have changed since the early TILA proposal would require creditors to costs to consumers, such as when
disclosure was provided. In addition, provide a periodic statement for consumers pay a higher interest rate or
the Board is proposing two alternative payment option loans that have negative obtain a loan with terms the consumer
approaches to address changes to loan amortization. The disclosure would may not otherwise have chosen, such as
terms and settlement charges during the contain a table with a comparison of the a prepayment penalty or an adjustable
three-business-day waiting period. amount and impact on the loan balance rate.
Under the first approach, if any terms and property equity of a fully- In response to these concerns, the
change during the three-business-day amortizing payment, interest-only 2007 HOEPA Proposed Rule attempted
waiting period, the creditor would be payment, and minimum negatively- to address the potential unfairness
required to provide another final TILA amortizing payment. This disclosure through disclosure. The proposal would
disclosure and wait an additional three would be provided not later than 15 have prohibited a creditor from paying
business days before consummation days before a periodic payment is due. a mortgage broker more than the
could occur. Under the second Creditor-placed property insurance consumer had previously agreed in
approach, creditors would be required notice. Creditors are not currently writing that the mortgage broker would
to provide another final TILA required under Regulation Z to provide receive. A mortgage broker would have
disclosure, but would have to wait an notice before charging for creditor- had to enter into the written agreement
additional three business days before placed property insurance. Industry with the consumer, before accepting the
consummation only if the APR exceeds reports indicate that the volume of consumer’s loan application and before
a designated tolerance or the creditor creditor-placed property insurance has the consumer paid any fee in
adds an adjustable-rate feature. increased significantly. Consumers connection with the transaction (other
Otherwise, the creditor would be struggling financially may fail to pay than a fee for obtaining a credit report).
permitted to provide the new final TILA required property insurance premiums The agreement also would have
disclosure at consummation. unaware that creditors have the right to disclosed (1) that the consumer
obtain such insurance on their behalf ultimately would bear the cost of the
D. Disclosures After Consummation
and add the premiums to their entire compensation even if the creditor
Regulation Z requires certain notices outstanding loan balance. Such paid part of it directly; and (2) that a
to be provided after consummation. premiums are often considerably more creditor’s payment to a broker could
Currently, for variable-rate transactions, expensive than premiums for insurance influence the broker to offer the
creditors are required to provide obtained by the consumer. Thus, under consumer loan terms or products that
advance notice of an interest rate the proposal, creditors would be would not be in the consumer’s interest
adjustment. There are no disclosure required to provide notice to consumers or the most favorable the consumer
requirements for other post- of the cost and coverage of creditor-
consummation events. could obtain.
placed property insurance at least 45 Based on analysis of comments
ARM adjustment notice. Currently, for days before a charge is imposed for such
variable-rate transactions, creditors are received on the 2007 HOEPA Proposed
insurance. In addition, creditors would Rule, the results of consumer testing,
required to provide a notice of interest be required to provide consumers with
rate adjustment at least 25, but no more and other information, the Board
evidence of such insurance within 15 withdrew the proposed provisions
than 120, calendar days before a days of imposing a charge for the
payment at a new level is due. In relating to broker compensation in the
insurance. 2008 HOEPA Final Rule. In particular,
addition, creditors must provide an
adjustment notice at least once each E. Prohibitions on Payments to Loan the Board’s consumer testing raised
year during which an interest rate Originators and Steering concerns that the proposed agreement
adjustment is implemented without an Currently, creditors pay commissions and disclosures would confuse
accompanying payment change. These to loan originators in the form of ‘‘yield consumers and undermine their
disclosures must include certain spread premiums.’’ A yield spread decisionmaking rather than improve it.
information, including the current and premium is the present dollar value of Participants often concluded, not
prior interest rates and the index values the difference between the lowest necessarily correctly, that brokers are
upon which the current and prior interest rate a lender would have more expensive than creditors. Many
interest rates are based. accepted on a particular transaction and also believed that brokers would serve
Under the proposal, creditors would the interest rate a loan originator their best interests notwithstanding the
be required to provide the ARM actually obtained for the lender. Some conflict resulting from the relationship
adjustment notice at least 60 days before or all of this dollar value is usually paid between interest rates and brokers’
compensation.19 The proposed
payment at a new level is due. This to the loan originator by the creditor as
proposal seeks to address concerns that a form of compensation, though it may disclosures presented a significant risk
consumers need more than 25 days to also be applied to other closing costs. of misleading consumers regarding both
seek out a refinancing in the event of a Yield spread premiums can create the relative costs of brokers and lenders
payment adjustment. This notice is financial incentives to steer consumers and the role of brokers in their
particularly critical for subprime to riskier loans for which loan 19 See Macro International, Inc., Consumer
borrowers who may be more vulnerable originators will receive greater Testing of Mortgage Broker Disclosures (July 10,
to payment shock and may have a more compensation. Consumers generally are 2008), available at http://www.federalreserve.gov/
difficult time refinancing a loan. not aware of loan originators’ conflict of newsevents/press/bcreg/20080714regzconstest.pdf.
transactions. In withdrawing the broker about creditors who sometimes offer assumption under §§ 226.18(q) and
compensation provisions of the HOEPA products that contain eligibility 226.20(b). However, the proposed rule
proposal, the Board stated it would restrictions, specifically age or would expand coverage of the
continue to explore options to address employment restrictions, but do not assumption rules to cover any closed-
potential unfairness associated with evaluate whether applicants for the end credit transaction secured by real
loan originator compensation products actually meet the eligibility property or a dwelling. Thus, the Board
arrangements. restrictions at the time of enrollment. proposes to revise comments 2(a)(24)–1,
To address the concerns related to Subsequently, consumers’ claims for –2, and –5 to reflect this change.
loan originator compensation, the Board benefits may be denied because they did
proposes to prohibit payments to loan Section 226.3 Exempt Transactions
not meet the eligibility restrictions at
originators that are based on the loan’s the time of enrollment. Consumers are 3(b) Credit Over $25,000 Not Secured by
terms and conditions. This prohibition presumably unaware that they are Real Property or a Dwelling
would not apply to payments that paying for a product for which they will TILA and Regulation Z cover all
consumers make directly to loan derive no benefit. Under the proposal, credit transactions that are secured by
originators. The Board solicits comment creditors would be required to real property or a principal dwelling in
on an alternative that would allow loan determine whether the consumer meets which the amount financed exceeds
originators to receive payments that are the age and/or employment eligibility $25,000. 15 U.S.C. 1603(3). Section
based on the principal loan amount, criteria at the time of enrollment in the 226.3(b), which implements TILA
which is a common practice today. If a product and provide a disclosure that Section 104(3), provides that credit
consumer directly pays the loan such a determination has been made. transactions over $25,000 not secured
originator, the proposal would prohibit The proposal is not limited to mortgage by real property, or by personal property
the loan originator from also receiving transactions and would apply to all used or expected to be used as the
compensation from any other party in closed-end and open-end transactions. principal dwelling of the consumer, are
connection with that transaction. These exempt from Regulation Z. 15 U.S.C.
rules would be proposed under the VI. Section-by-Section Analysis
1603(3).
Board’s HOEPA authority to prohibit Section 226.1 Authority, Purpose, As noted in the discussion under
unfair or deceptive acts or practices in Coverage, Organization, Enforcement, §§ 226.19 and 226.38, the Board
connection with mortgage loans. and Liability proposes to require creditors to provide
Under the proposal, a ‘‘loan certain disclosures for all closed-end
originator’’ would include both 1(b) Purpose
transactions secured by real property or
mortgage brokers and employees of Section 226.1(b) would be revised to a dwelling, not just principal dwellings.
creditors who perform loan origination reflect the fact that § 226.35 prohibits However, the Board recognizes that, if
functions. The 2007 HOEPA Proposed certain acts or practices for transactions personal property that is a dwelling but
Rule covered only mortgage brokers. secured by the consumer’s principal not the borrower’s principal dwelling
However, a creditor’s loan officers dwelling. In addition, § 226.1(b) would secures a loan of over $25,000, it is not
frequently have the same discretion as be revised to reflect the proposal to covered by TILA in the first instance.
mortgage brokers to modify loans’ terms broaden the scope of § 226.36 (from
For example, Regulation Z does not
to increase their compensation, and transactions secured by the consumer’s
apply to a $26,000 loan that is secured
there is evidence that creditors’ loan principal dwelling to all transactions
by a manufactured home that is not the
officers engage in such practices. secured by real property or a dwelling).
consumer’s second or vacation home.
The Board also seeks comment on an
1(d) Organization Notwithstanding this exemption, the
optional proposal that would prohibit
1(d)(5) Board solicits comment on whether
loan originators from directing or
consumers in these transactions receive
‘‘steering’’ consumers to a particular The Board proposes to revise adequate information regarding their
creditor’s loan products based on the § 226.1(d)(5) to reflect the scope of loan terms and are afforded sufficient
fact that the loan originator will receive §§ 226.32, 226.34, and 226.35. The protections. The Board also seeks
additional compensation even when Board would also revise § 226.1(d)(5) to comment on the relative benefits and
that loan may not be in the consumer’s reflect the proposed change in the scope costs of applying Regulation Z to these
best interest. The Board solicits of § 226.36, and the addition of new transactions.
comment on whether the proposed rule §§ 226.37 and 226.38.
would be effective in achieving the Section 226.4 Finance Charge
stated purpose. In addition, the Board Section 226.2 Definitions and Rules
Background
solicits comment on the feasibility and 2(a) Definitions
practicality of such a rule, its Section 106(a) of TILA provides that
2(a)(24) Residential Mortgage the finance charge in a consumer credit
enforceability, and any unintended
Transaction transaction is ‘‘the sum of all charges,
adverse effects the rule might have.
Regulation Z, § 226.2(a)(24), defines a payable directly or indirectly by the
F. Additional Protections ‘‘residential mortgage transaction’’ as ‘‘a person to whom the credit is extended,
Credit insurance or debt cancellation transaction in which a mortgage, deed of and imposed directly or indirectly by
or debt suspension coverage eligibility trust, purchase money security interest the creditor as an incident to the
for all loan transactions. Currently, arising under an installment sales extension of credit.’’ 15 U.S.C. 1605(a).
creditors may exclude from the finance contract, or equivalent consensual The finance charge does not include
charge a premium or charge for credit security interest is created or retained in charges of a type payable in a
insurance or debt cancellation or debt the consumer’s principal dwelling to comparable cash transaction. Id. The
suspension coverage if the creditor finance the acquisition or initial finance charge does not include fees or
discloses the voluntary nature and cost construction of that dwelling.’’ charges imposed by third party closing
of the product, and the consumer signs Currently, comment 2(a)(24)–1 states agents, such as settlement agents,
or initials an affirmative request for the that the term is important in five attorneys, and title companies, if the
product. Concerns have been raised provisions in Regulation Z, including creditor does not require the imposition
of those charges or the services automatically excluded from the finance § 226.4(e). The regulation also excludes
provided, and the creditor does not charge and other fees excluded from the from the finance charge the real estate
retain the charges. Id. Examples of finance charge provided certain related fees enumerated in Section
finance charges include, among other conditions are met. The regulation 106(e) of TILA. § 226.4(c)(7).
things, interest, points, service or tracks this approach with a three-tiered Over time, the Board, by regulation,
carrying charges, credit report fees, and approach to the classification of fees or has contributed to the ‘‘some fees in,
credit insurance premiums. Id. charges: (1) Some fees or charges are some fees out’’ approach to the finance
The finance charge is significant for finance charges; (2) some fees and charge by determining that certain other
two reasons. First, it is meant to charges are not finance charges; and (3) charges not specifically excluded by the
represent, in dollar terms, the ‘‘cost of some fees and charges are not finance statute are not finance charges. These
credit’’ in whatever form imposed by charges, but only if certain conditions regulatory exclusions often sought to
the creditor or paid by the borrower. are met. As a result, neither the finance bring logical consistency to the
Second, the finance charge is used in charge nor the corresponding APR treatment of fees that are similar to fees
calculating the annual percentage rate disclosed to the consumer reflect the the statute excludes or conditionally
(APR) for the loan, 15 U.S.C. 1606, consumer’s total cost of credit. excludes from the finance charge.
which represents the ‘‘cost of credit, Section 226.4(a) defines the finance Charges excluded from the finance
expressed as a yearly rate.’’ charge as ‘‘the cost of consumer credit charge by regulation include: Charges
§ 226.22(a)(1). Together, these two as a dollar amount.’’ Consistent with for debt cancellation or debt suspension
interrelated terms are among the most TILA Section 106(a), the finance charge coverage if the coverage is not required
important terms disclosed to consumers includes ‘‘any charge payable directly or by the creditor, certain disclosures are
under TILA. indirectly by the consumer and imposed provided to the consumer, and the
While the test for determining what is directly or indirectly by the creditor as consumer affirmatively requests the
included in a finance charge is very an incident to or a condition of the coverage in a writing signed or initialed
broad, TILA Section 106 excludes from extension of credit’’ and does not by the consumer; and fees for verifying
the definition of the finance charge include ‘‘any charge of a type payable in the information in a credit report. See
various fees or charges. The statute a comparable cash transaction.’’ § 226.4(d)(3) and comment 4(c)(7)–1.
excludes from the finance charge: § 226.4(a). The finance charge also The additional fees the Board has
Premiums for credit insurance if includes fees and amounts charged by excluded from the finance charge
coverage is not required to obtain credit, someone other than the creditor if the generally are closely analogous or
certain disclosures are provided to the creditor requires the use of a third party related to fees that the statute excludes
consumer, and the consumer as a condition of or incident to the or conditionally excludes from the
affirmatively requests the insurance in extension of credit, even if the finance charge. For example, premiums
writing; and premiums for property and consumer can choose the third party, or for voluntary debt cancellation coverage
liability insurance written in connection if the creditor retains a portion of the are closely analogous to premiums for
with a consumer credit transaction if the third party charge (to the extent of the voluntary credit insurance, which TILA
insurance may be obtained from a portion retained). § 226.4(a)(1). excludes from the finance charge.
person of the consumer’s choice and The Board has adopted provisions in Likewise, charges for verifying a credit
certain disclosures are provided to the the regulation to give effect to each of report are related to the credit report
consumer. 15 U.S.C. 1605(b) and (c). the statutory exclusions and conditional itself.
Statutory exclusions also apply to exclusions from the finance charge.
certain security interest charges, Closing agent charges are not included Concerns With the Current Approach to
including: (1) Fees or charges required in the finance charge unless the creditor Finance Charges
by law and paid to public officials for requires the particular services for The ‘‘some fees in, some fees out’’
determining the existence of, or for which the consumer is charged, requires approach to the finance charge has been
perfecting, releasing, or satisfying, any imposition of the charge, or retains a problematic both for consumers and for
security related to the credit transaction; portion of the charge (to the extent of creditors since TILA’s inception. Many
(2) premiums for insurance purchased the portion retained). § 226.4(a)(2). of these problems were described in the
instead of perfecting any security Premiums for credit insurance may be 1998 Joint Report.20
interest otherwise required by the excluded from the finance charge if One fundamental problem is that
creditor; and (3) taxes levied on security insurance coverage is not required by there are two views of what is meant by
instruments or the documents the creditor, certain disclosures are the ‘‘cost of credit.’’ From the creditor’s
evidencing indebtedness if payment of provided to the consumer, and the perspective, the cost of credit means the
those taxes is required to record the consumer affirmatively requests the interest and fee income that the creditor
instrument securing the evidence of insurance coverage in a writing signed receives or requires in exchange for
indebtedness. 15 U.S.C. 1605(d). or initialed by the consumer. providing credit to the consumer. From
Finally, the statute excludes from the § 226.4(d)(1). Premiums for property the consumer’s perspective, however,
finance charge various fees in and liability insurance may also be the cost of credit means what the
connection with loans secured by real excluded from the finance charge if the consumer pays for the credit, regardless
property, such as title examination fees, insurance may be obtained from a of the persons to whom such amounts
title insurance premiums, fees for person of the consumer’s choice and are paid.21 The statute uses both of these
preparation of loan-related documents, certain disclosures are provided to the approaches in designating which fees
escrows for future payment of taxes and consumer. § 226.4(d)(2). Certain security are and are not included in the finance
insurance, notary fees, appraisal fees, interest charges enumerated in the charge.
pest and flood-hazard inspection fees, statute, such as taxes and fees The influence of the creditor’s
and credit report fees. 15 U.S.C. 1605(e). prescribed by law and paid to public perspective on the cost of credit is
Through the exclusions described officials for determining the existence evident in how the ‘‘some fees in, some
above, the Congress has adopted a of, or for perfecting, releasing, or
‘‘some fees in, some fees out’’ approach satisfying, a security interest, are 20 The 1998 Joint Report at 8–16.
to the finance charge with some fees excluded from the finance charge. 21 See The 1998 Joint Report at 10.
fees out’’ approach to the finance charge and the resulting pricing complexity, appraisal fees, document preparation
has evolved and been applied to loans can have a detrimental impact on fees, fees for title services, and fees paid
secured by real property. Many services consumers. For example, research to public officials to record security
provided in connection with real estate undertaken by HUD suggests that interests.29 Under the ‘‘required-cost of
loans are performed by third parties, borrowers experience great difficulty credit’’ test, fees for optional services,
such as appraisers, closing agents, when deciding whether the tradeoff such as premiums for voluntary credit
inspectors, public officials, attorneys, between paying higher up-front costs or insurance, would be excluded from the
and title companies. Some of these paying a higher interest rate is in their finance charge.30
services are required by the creditor, best interest, and that borrowers who do
The Board’s Proposal
while others are not. In either case, the not pay up-front loan origination fees
fees for these services generally are generally pay less than borrowers who A simpler, more inclusive test for
remitted in whole or in part to the third do pay such fees.24 To the extent that determining the finance charge. The
party. In some cases, the creditor may the APR calculation includes most or all Board believes consumers would benefit
have little control over the fees imposed fees, the APR can reduce the incentive from having a disclosure that includes
by these third parties. From the for lenders to include junk fees in credit fees or charges that better represent the
creditor’s perspective, the creditor agreements.25 full cost of credit undiluted by myriad
generally does not receive and retain Based on extensive outreach exclusions, the basis for which
these charges in connection with conducted by Board staff, there appears consumers cannot be expected to
providing credit to the consumer. From to be a broad consensus that the ‘‘some understand. In addition, having a single
the consumer’s perspective, however, fees in, some fees out’’ approach to the benchmark figure—the APR—that is
these third-party charges are part of finance charge and corresponding APR simple to use should allow consumers
what the consumer pays to obtain calculation and disclosure is seriously to evaluate competing mortgage
credit.22 flawed. Many industry representatives products by reviewing one variable. The
Another problem with the ‘‘some fees consider the finance charge definition Board also believes that such a
in, some fees out’’ approach is that it overly complex. For creditors, this disclosure would reduce compliance
undermines the effectiveness of the APR complexity creates significant regulatory burdens, regulatory uncertainty, and
as an accurate measure of the cost of burden and litigation risk. While some litigation risks for creditors who must
credit expressed as a yearly rate. The industry representatives generally favor provide accurate TILA disclosures.
APR is designed to be a benchmark for a more inclusive measure, they have not Thus, the Board would retain the APR
consumer shopping. In consumer testing advocated a specific test for determining as a benchmark for closed-end
conducted for the Board, however, the the finance charge. transactions secured by real property or
APR appeared not to be fulfilling that Consumer advocates believe that the a dwelling but is proposing certain
objective in connection with mortgage exclusions from the finance charge revisions designed to make the APR
loans. undermine the purpose of the finance more useful to consumers. First, as
A single figure such as the APR is charge and the APR, which is to discussed below, the Board is proposing
simple to use, particularly if consumers measure the cost of credit. Some to provide consumers with more helpful
can use it to evaluate and compare consumer advocates have recommended explanation of the APR and what it
competing products, rather than having a ‘‘but for’’ test that would include in represents. Second, the Board is
to evaluate multiple figures.23 This is the finance charge all fees except those proposing to require disclosure of the
especially true for a figure such as the that the consumer would pay if he or APR together with a new disclosure of
APR, which has a forty-year history in she were not ‘‘obtaining, accessing, or the interest rate, as discussed below.
consumer disclosures, and thus is repaying the extension of credit,’’ such Third, the Board is proposing to replace
familiar to consumers. Nevertheless, if as fees paid in comparable cash the ‘‘some fees in, some fees out’’
that single figure is not understood by transactions.26 approach for determining the finance
consumers or does not fully represent In the 1998 Joint Report, the Board charge with a simpler, more inclusive
what it purports to represent, the and HUD recommended that the approach for determining the finance
usefulness of that figure is undermined. Congress adopt a more comprehensive charge that is based on TILA Section
Consumer testing shows that most definition of the finance charge.27 The 106(a), 15 U.S.C. 1605(a). This approach
consumers do not understand the APR, Board and HUD recommended adopting is designed to ensure that the finance
and many believe that the APR is the a ‘‘required-cost of credit’’ test that charge and the corresponding APR
interest rate. would include in the finance charge disclosed to consumers fulfills the basic
Under the current ‘‘some fees in, some ‘‘the costs the consumer is required to purpose of TILA by providing a more
fees out’’ approach to the finance pay to get the credit.’’ 28 Under this complete and useful measure of the cost
charge, mortgage lenders also have an approach, the finance charge would of credit.
incentive to unbundle the cost of credit include (and the APR would reflect) Pursuant to its authority under TILA
and shift some of the costs from the costs required to be paid by the Sections 105(a) and (f) of TILA, 15
interest rate into ancillary fees that are consumer to obtain the credit, including U.S.C. 1604(a) and (f), the Board is
excluded from the finance charge and many fees currently excluded from the proposing to amend § 226.4 to make
not considered when calculating the finance charge, such as application fees, most of the current exclusions from the
APR, resulting in a lower APR than finance charge inapplicable to closed-
otherwise would have been disclosed. 24 U.S. Department of Housing and Urban end credit transactions secured by real
This further undermines the usefulness Development, A Study of Closing Costs for FHA property or a dwelling. For such loans,
of the APR and has resulted in the Mortgages at x–xi and 2–4 (May 2008). the Board is proposing to replace the
25 See The 1998 Joint Report at 9.
proliferation of ‘‘junk fees,’’ such as fees ‘‘some fees in, some fees out’’ approach
26 Renuart, Elizabeth and Diane E. Thomson, The
for preparing loan-related documents. Truth, the Whole Truth, and Nothing but the Truth:
with a simpler, more inclusive test
Such unbundling of the cost of credit, Fulfilling the Promise of Truth in Lending, 25 Yale based on the definition of finance
J. on Reg. 181, 230 (2008).
22 See The 1998 Joint Report at 11. 27 The 1998 Joint Report at 15–16. 29 The 1998 Joint Report at 13.
23 See The 1998 Joint Report at 9. 28 The 1998 Joint Report at 13, 16. 30 The 1998 Joint Report at 13.
charge in TILA Section 106(a), 15 U.S.C. to § 226.4 would apply only to closed- Processing Services, Inc. (LPS), which
1605(a), for determining what fees or end credit transactions secured by real include mostly prime and near-prime
charges are included in the finance property or a dwelling, consistent with home loans serviced by several large
charge. The Board believes that the the general scope of this proposed rule. mortgage servicers.
current patchwork of fee exclusions The Board seeks comment on whether On the basis of this analysis, the
from the definition of the finance charge the same amendments should be made Board estimates that proposed § 226.4
is not consistent with TILA’s purpose of applicable to other closed-end credit would increase the share of first-lien
disclosing the cost of credit to the and may consider such amendments refinance and home improvement loans
consumer. The Board believes that a under a future review of Regulation Z. covered by HOEPA, under § 226.32, by
more inclusive approach to determining Contemporaneous with this proposal, about 0.6 percent. While this increase is
the finance charge would be more the Board is publishing separately small, the Board also notes that, because
consistent with TILA’s purpose, proposed rules regarding home equity very few HOEPA loans are originated
enhance consumer understanding and lines of credit (HELOCs). Accordingly, overall, the absolute number of loans
use of the finance charge and APR the Board is not proposing to apply the covered would increase markedly—
disclosures, and reduce compliance changes to the finance charge more than 350 percent. Because the
costs. The Board also believes that the determination to HELOCs in this HMDA data do not include APRs for
proposed revisions to the finance charge rulemaking. As discussed in the HELOC loans below the rate spread reporting
may enhance competition for third- proposal, the Board believes that thresholds, see 12 CFR 203.4(a)(12),
party services since creditors would changing the definition of finance 2006 LPS data were used to estimate the
likely be more mindful of fees or charge for HELOC accounts would not impact on coverage of § 226.35. Based
charges that must be included in the have a material effect on the HELOC on this analysis, the Board estimates
finance charge and APR. disclosures and accordingly is that about 3 percent of the first-lien
The proposed test for determining the unnecessary. loans in the loan amount range of the
finance charge tracks the language of Impact on coverage of other rules. typical home purchase or refinance loan
current § 226.4 but excluding One potential consequence of adopting ($175,000 to $225,000) that were below
§ 226.4(a)(2). Specifically, under this a more inclusive test for determining the the § 226.35 APR threshold would have
test, a fee or charge is included in the finance charge is that more loans may been above the threshold if proposed
finance charge for closed-end credit qualify as ‘‘HOEPA loans,’’ as described § 226.4 had been in effect at the time.
transactions secured by real property or in TILA Section 103(aa), and therefore
a dwelling if it is (1) ‘‘payable directly be subject to the additional disclosures The Board also examined HMDA data
or indirectly by the consumer’’ to whom and prohibitions applicable to such for the impact of the proposed, more
credit is extended, and (2) ‘‘imposed loans under TILA Section 129. inclusive finance charge definition on
directly or indirectly by the creditor as Similarly, more loans may be subject to APRs in certain states. Specifically, the
an incident to or a condition of the the Board’s recently adopted protections Board considered the APR tests for
extension of credit.’’ The finance charge for higher-priced mortgage loans under coverage of first-lien mortgages under
would continue to exclude fees or § 226.35, which become effective on the anti-predatory lending laws in the
charges paid in comparable cash October 1, 2009. 73 FR 44522; Jul. 30, District of Columbia (DC), Illinois, and
transactions. See § 226.4(a). The finance 2008. Finally, more loans may qualify as Maryland. These laws are the only three
charge also includes charges by third covered loans under certain State anti- State anti-predatory lending laws with
parties if the creditor: (1) Requires use predatory lending laws that use the APR APR coverage thresholds that are lower
of a third party as a condition of or as a coverage test. The Board has than the federal HOEPA APR threshold,
incident to the extension of credit, even conducted some analysis to quantify for first-lien loans, of 800 basis points
if the consumer can choose the third these impacts. over the U.S. Treasury yield on
party; or (2) retains a portion of the To estimate representative charges, securities with comparable maturities.
third-party charge, to the extent of the the Board obtained information from a DC and Illinois use a threshold of 600
portion retained. See § 226.4(a)(1). Other 2008 survey conducted by Bankrate.com basis points, and Maryland uses a
exclusions from the finance charge for on closing costs for each state, based on threshold of 700 basis points, over the
closed-end credit transactions secured a $200,000 hypothetical mortgage comparable Treasury yield.32 Freddie
by real property or a dwelling would be loan.31 Using these estimates, and Mac and Fannie Mae have policies
limited to late fees and similar default scaling those that are calculated as a under which they will not purchase
or delinquency charges, seller’s points, percentage of loan amount as necessary, loans that exceed the Illinois
and premiums for property and liability the Board estimated the effect on the thresholds,33 but they have no such
insurance. APRs of first-lien loans in two policies with regard to DC or Maryland.
As new services are added, and new databases: HMDA records, which The Board estimates that proposed
fees are charged, in connection with include most closed-end home loans, § 226.4 would convert the following
closed-end credit transactions secured and data obtained from Lender percentages of first-lien loans that are
by real property or a dwelling, creditors under the applicable APR threshold into
would have to apply the basic test in 31 To supplement the Bankrate.com survey with loans that exceed that threshold and
making judgments about whether or not estimated recording fees and taxes, which the thus would become covered by the
survey did not include, the Board used the
new fees must be included in the Martindale-Hubbell service’s digest of State laws.
applicable State anti-predatory lending
finance charge. The Board requests As discussed below, the Board is not proposing to law: DC, 2.5%; Illinois, 4.0%; Maryland,
comment on whether further guidance revise comment 4(a)–5, which provides principles 0.0%.
is needed to assist creditors in making for determining the treatment of taxes based on the
party on whom the law imposes the tax. For the
these determinations, and, if so, what sake of simplicity, the Board did not attempt to
32 DC Code Ann. 26–1151.01(7)(A)(i); Ill. Comp.
specific guidance would be helpful. distinguish such laws on this basis and, instead, Stat. ch. 815, 137/10; Md. Code Ann. Com. Law 12–
Loans covered. Section 226.4 is part of included all recording taxes in the finance charge 1029(a)(2).
under the proposal. The analysis thus may have 33 http://www.freddiemac.com/learn/pdfs/uw/
Subpart A, General, as opposed to included some recording taxes in the finance charge Pred_requirements.pdf; https://
Subpart C, Closed-End Credit. under the proposal that could have been excluded www.efanniemae.com/sf/guides/ssg/annltrs/pdf/
Nevertheless, the proposed amendments under comment 4(a)–5. 2003/03-12.pdf.
The Board notes that the impact of the class of transactions from coverage as ‘‘HOEPA loans.’’ The Board does not
proposed finance charge definition on under any part of TILA if the Board believe that this limitation restricts its
APRs varies among loans based on two determines that coverage under that part ability to apply the revised provisions
significant factors. First, because many does not provide a meaningful benefit to regarding finance charges to all
of the affected charges are fixed dollar consumers in the form of useful mortgage loans, including HOEPA
amounts, the impact is significantly information or protection. 15 U.S.C. loans. This limitation on the Board’s
greater for smaller loans. Second, the 1604(f)(1). The Board is proposing to general exception and exemption
impact likely would vary geographically exempt closed-end transactions secured authority is a necessary corollary to the
because some charges, notably title by real property or a dwelling from the decision of the Congress, as reflected in
insurance premiums and recording fees complex exclusions in TILA Section TILA Section 129(l)(1), to grant the
and taxes, vary considerably by state. 106(b) through (e), 15 U.S.C. 1605(b) Board more limited authority to exempt
The Board believes the proposal, on through (e). TILA Section 105(f) directs HOEPA loans from the prohibitions
balance, would be in consumers’ the Board to make the determination of applicable only to HOEPA loans in
interests but seeks comment on these whether coverage of such transactions Section 129(c) through (i) of TILA. See
consequences of the proposal and the under those exclusions provides a 15 U.S.C. 1639(l)(1). Here, the Board is
impact it may have on loans that could meaningful benefit to consumers in light not proposing any exemptions from the
become subject to these various laws. of specific factors. 15 U.S.C. 1604(f)(2). HOEPA prohibitions. This limitation
Legal authority. The Board is These factors are (1) the amount of the does raise a question as to whether the
proposing to adopt the simpler, more loan and whether the disclosure Board could use its exception and
inclusive test for determining the provides a benefit to consumers who are exemption authority under Sections
finance charge and corresponding APR parties to the transaction involving a 105(a) and (f) to except or exempt
pursuant to its general rulemaking, loan of such amount; (2) the extent to HOEPA loans, but not other types of
exception, and exemption authorities which the requirement complicates, mortgage loans, from other, generally
under TILA Section 105. Section 105(a) hinders, or makes more expensive the applicable TILA provisions. That
directs the Board to prescribe credit process; (3) the status of the question, however, is not implicated by
regulations to carry out the purposes of borrower, including any related this proposal.
this title, which include facilitating financial arrangements of the borrower, Here, the Board is proposing to apply
consumers’ ability to compare credit the financial sophistication of the its general exception and exemption
terms and helping consumers avoid the borrower relative to the type of authority to enhance the finance charge
uninformed use of credit. 15 U.S.C. transaction, and the importance to the disclosure for all loans secured by real
1601(a), 1604(a). Section 105(a) borrower of the credit, related property or a dwelling, including both
generally authorizes the Board to make supporting property, and coverage HOEPA and non-HOEPA loans, in order
adjustments and exceptions to TILA to under TILA; (4) whether the loan is to fulfill the statute’s purpose of having
effectuate the statute’s purposes, to secured by the principal residence of the finance charge and APR disclosures
prevent circumvention or evasion of the the borrower; and (5) whether the reflect the total cost of credit. It would
statute, or to facilitate compliance with exemption would undermine the goal of not be consistent with the statute or
the statute. 15 U.S.C. 1601(a), 1604(a). consumer protection. with Congressional intent to interpret
The Board has considered the The Board has considered each of the Board’s authority under Sections
purposes for which it may exercise its these factors carefully and, based on 105(a) and (f) in such a way that the
authority under TILA Section 105(a) that review, believes that the proposed proposed revisions could apply only to
carefully and, based on that review, exemptions are appropriate. Mortgage mortgage loans that are not subject to
believes that the proposed adjustments loans generally are the largest credit HOEPA. Reading the statute in a way
and exceptions are appropriate. The obligation that most consumers assume. that would deprive HOEPA borrowers of
proposal has the potential to effectuate Most of these loans are secured by the improved finance charge and APR
the statute’s purpose by better informing consumer’s principal residence. For disclosures is not a reasonable
consumers of the total cost of credit and many consumers, their mortgage loan is construction of the statute and
to prevent circumvention or evasion of the most important credit obligation that contravenes the Congress’s goal of
the statute through the unbundling or they have. Consumer testing suggests ensuring ‘‘that enhanced protections are
shifting of the cost of credit from that consumers find the finance charge provided to consumers who are most
finance charges to fees or charges that and APR disclosures confusing and vulnerable to abuse.’’ 34
are currently excluded from the finance unhelpful when shopping for a The Board solicits comment on all
charge. The Board believes that mortgage. Along with other changes, aspects of this proposal, including the
Congress did not anticipate how such replacing the patchwork ‘‘some fees in, cost, burden, and benefits to consumers
unbundling would undermine the some fees out’’ approach to determining and to industry regarding the proposed
purposes of TILA, when it enacted the the finance charge with a more inclusive revisions to the determination of the
exceptions. For example, fees for approach that reflects the consumer’s finance charge. The Board also requests
preparation of loan-related documents total cost of credit has the potential to comment on any alternatives to the
are excluded from the finance charge by further the goals of consumer protection proposal that would further the
TILA Section 106(e), 15 U.S.C. 1605(e); and promote the informed use of credit purposes of TILA and provide
in practice, document preparation fees for mortgage loans. Adoption of a more consumers with more useful
have become a common vehicle used by inclusive finance charge also would disclosures.
creditors to enhance their revenue simplify compliance, reduce regulatory
without having any impact on the burden, and reduce litigation risk for 4(a) Definition
finance charge or APR. A simpler, more creditors. Comment 4(a)–5 contains guidance
inclusive approach to determining the The Board’s exception and exemption for determining whether taxes should be
finance charge also would facilitate authority under Sections 105(a) and (f) treated as finance charges. Generally, a
compliance with the statute. does not apply in the case of a mortgage tax imposed on the creditor is a finance
TILA Section 105(f) generally referred to in Section 103(aa), which are
authorizes the Board to exempt any high-cost mortgages generally referred to 34 H.R. Conf. Rept. 103–652 at 159 (Aug. 2, 1994).
charge if the creditor passes it through indirectly by the creditor. For instance, Excluding fees from the finance
to the consumer. If applicable law because real estate settlements are charge because they are voluntary or
imposes a tax solely on the consumer, complex financial and legal optional also is not consistent with the
on the creditor and consumer jointly, on transactions, creditors generally require statutory purpose of disclosing the ‘‘cost
the credit transaction itself without a licensed closing agent (often an of credit,’’ which includes charges
specifying a liable party, or on the attorney) to conduct closings to ensure imposed ‘‘as an incident to the
creditor with direction or authorization that the transaction is handled with extension of credit.’’ 35 15 U.S.C.
to pass it through to the consumer, the professional skill and care. These 1605(a). One basis for the current
tax is not a finance charge. closing agents typically impose fees on exclusions for voluntary or optional
Consequently, an examination of the the consumer in the course of ensuring charges is an implicit assumption that
law imposing each tax that is paid by that the loan is consummated they are not ‘‘imposed directly or
the consumer is required to determine appropriately. In some cases, the indirectly by the creditor’’ on the
whether such taxes are finance charges. creditor clearly requires the particular consumer. However, charges may be
This examination of laws creates burden third-party service for which a fee is imposed by a creditor even if the
for creditors and may result in charged, such as where the creditor services for which the fee is imposed are
inconsistent treatment of similar taxes. instructs the closing agent to send not specifically required by the creditor.
The resulting disclosures likely are not documents by overnight courier. In Moreover, a test that depends upon
as useful to consumers as they might be other cases, however, whether the whether a service is ‘‘voluntary’’
if all taxes were treated consistently. creditor requires the particular service is inherently requires a factual
The Board seeks comment on whether not clear. determination. In the current provisions
the rules for determining the finance A rule that requires case-by-case addressing credit insurance, the Board
charge treatment of taxes imposed by factual determinations as to whether a has identified certain objective criteria
State and local governments should be particular third-party fee must be for determining when the consumer’s
simplified and, if so, how. The Board included in the finance charge results in purchase of such insurance is deemed to
also seeks comment on whether any complexity and inconsistent treatment be voluntary. However, as discussed
such simplification should be for of such fees. Such inconsistent below, this approach has many
purposes of closed-end transactions treatment in turn undermines the utility problems and has not proven
secured by real property or a dwelling of the finance charge and APR as satisfactory. The Board believes that
only or should have more general comparison shopping tools and drawing a bright-line to include in the
applicability. introduces uncertainty and litigation finance charge both voluntary and
Proposed new comment 4(a)–6 would required charges that are imposed by the
risk for creditors. For these reasons, the
clarify that there is no comparable cash creditor would eliminate the difficulties
Board believes that fees charged by
transaction in a transaction where there posed by this type of fact-based analysis
closing agents, both their own and those
is no seller, such as a refinancing, and and provide a more consistent measure
of other third parties they hire to
thus the comparable cash transaction of the cost of credit.
perform particular services, should be
exclusion from the finance charge does Another basis for the current
treated uniformly as finance charges.
not apply to such transactions. exclusions for voluntary or optional
The Board seeks comment on whether
4(a)(2) Special Rule; Closing Agent any such third-party charges do not fall charges in connection with the credit
Charges within the basic test for determining the transaction is an assumption that
finance charge and could be excluded creditors cannot know the amounts of
The Board is proposing to amend
from the finance charge without such charges at the time the disclosure
§ 226.4(a)(2), which set out special rules
requiring factual determination in each must be provided to the consumer. The
for closing agent charges, in light of the
case. Board presumes that creditors know the
proposed new § 226.4(g), discussed
Requiring third-party charges to be amounts of their own voluntary charges,
below. As a result, this provision would
included in the finance charge creates if any. The Board believes that creditors
no longer apply to closed-end credit
some risk that a creditor may understate generally know or can readily determine
a dwelling because the fees excluded by the finance charge if the creditor does voluntary third-party charges when
§ 226.4(a)(2) meet the general definition not know that a particular charge was providing TILA disclosures three
of the finance charge in TILA Section imposed by a third party. This risk is business days before consummation, as
106(a). The Board also proposes certain mitigated to some extent by TILA proposed § 226.19(a)(2)(ii) would
conforming amendments to the staff Section 106(f), which provides that a require. As a practical matter, the
commentary under this provision. disclosed finance charge is treated as primary voluntary third-party charge in
Under the general definition of accurate if it does not vary from the connection with a mortgage transaction
‘‘finance charge’’ in TILA Section actual finance charge by more than $100 of which the Board is aware (and that
106(a), a charge is a finance charge if it or is greater than the amount required is not otherwise excluded from the
is (1) ‘‘payable directly or indirectly by to be disclosed. 15 U.S.C. 1605(f). This finance charge) is the premium for
the person to whom the credit is tolerance has been incorporated into voluntary credit insurance, and
extended,’’ and (2) ‘‘imposed directly or Regulation Z. See § 226.18(d)(1). The creditors generally solicit consumers for
indirectly by the creditor as an incident Board requests comment on whether it such insurance. In fact, under existing
§ 226.4(d)(1)(ii), creditors historically
to the extension of credit.’’ 15 U.S.C. should increase the finance charge

1605(a). Application of the basic tolerance, for example to $200, in light 35 The Board has consistently interpreted the
statutory definition as the test for of its proposal to require more third- definition of finance charge as not dependent on
determining which charges are finance party charges to be included in the whether a charge is voluntary or required. As a
charges would result in many third- finance charge. The Board also requests practical matter, most voluntary fees are excluded
party charges being treated as finance comment on whether the existing or any because they coincidentally are payable in a
comparable cash transaction, not specifically
charges because such third-party increased tolerance should be linked to because they are voluntary. See, e.g., 61 FR 49237,
charges often are payable directly or an inflation index, such as the 49239; Sept. 19, 1996 (charges for voluntary debt
indirectly by the consumer and imposed Consumer Price Index. cancellation agreements).
have had to disclose the premium for would be retained for closed-end credit 4(d) Insurance and Debt Cancellation
voluntary credit insurance to exclude it transactions secured by real property or and Debt Suspension Coverage
from the finance charge. The Board a dwelling. Seller’s points are not The Board is proposing technical
nevertheless solicits comment on payable by the consumer. Comment amendments to comment 4(d)–12 to
whether there are voluntary third-party 226.4(c)(5)–1 notes that seller’s points reflect the fact that the exclusions from
charges the amounts of which cannot be may be passed on to the buyer in the the finance charge under § 226.4(e)
determined three business days before form of a higher sales price for the would not apply to closed-end
consummation. property or dwelling. Even then, seller’s transactions secured by real property or
The Board recognizes that creditors points are excluded from the finance a dwelling.
may not know what voluntary or charge. A different rule would require a
optional charges the consumer will fact-specific determination in every 4(d)(1) and (3) Voluntary Credit
incur when providing early TILA Insurance Premiums; Voluntary Debt
transaction involving seller’s points
disclosures. When providing early TILA Cancellation and Debt Suspension Fees
regarding whether and to what extent
disclosures, creditors may rely on The Board is proposing to amend
the seller shifted those costs to the
reasonable assumptions regarding §§ 226.4(d)(1), exclusion for voluntary
borrower. The Board does not believe
voluntary or optional charges and label credit insurance premiums, and
that such a rule is feasible. The Board
those amounts as estimates. The Board 226.4(d)(3), exclusion for voluntary debt
invites comment on whether further seeks comment on the retention of the
seller’s points exclusion. cancellation and debt suspension fees,
guidance is required regarding to limit their application consistently
reasonable assumptions that may be 4(c)(7) Real-Estate Related Fees with proposed § 226.4(g). Thus, these
made regarding voluntary or optional exclusions would not apply to closed-
charges in early TILA disclosures. The Board is proposing to amend end transactions secured by real
§ 226.4(c)(7), which currently excludes property or a dwelling.
4(b) Examples of Finance Charges from the finance charge a number of fees Age or employment eligibility criteria.
The Board is proposing technical charged in transactions secured by real Under TILA Section 106(a)(5), 15 U.S.C.
amendments to comment 4(b)–1 to property or in residential mortgage 1605(a)(5), a premium or other charge
reflect the fact that the exclusions from transactions if those fees are bona fide for any guarantee or insurance
the finance charge under § 226.4(c) and reasonable. Under the proposal, the protecting the creditor against the
through (e), other than §§ 226.4(c)(2), following fees currently excluded would obligor’s default or other credit loss is
226.4(c)(5) and 226.4(d)(2), would not be included in the finance charge for a finance charge. Under §§ 226.4(b)(7)
apply to closed-end credit transactions closed-end credit transactions secured and 226.4(b)(10), a premium or charge
secured by real property or a dwelling. by real property or a dwelling: fees for for credit life, accident, health, or loss-
4(c) Charges Excluded From the Finance title examination, abstract of title, title of-income insurance, or debt
Charge insurance, property survey, and similar cancellation or debt suspension
The Board proposes to amend purposes; fees for preparing loan-related coverage is a finance charge if the
§ 226.4(c), which lists miscellaneous documents, such as deeds, mortgages, insurance or coverage is written in
exclusions from the finance charge, to and reconveyance or settlement connection with a credit transaction.
provide that § 226.4(c) is limited by documents; notary and credit-report TILA Section 106(b), 15 U.S.C. 1605(b),
proposed new § 226.4(g). Thus, except fees; property appraisal fees or fees for allows the creditor to exclude from the
for late fees and similar default or inspections to assess the value or finance charge any charge or premium
delinquency charges and seller’s points, condition of the property if the service for credit life, accident, or health
the exclusions in § 226.4(c) would not is performed prior to closing, including insurance written in connection with
apply to closed-end credit transactions fees related to pest-infestation or flood- any consumer credit transaction if (1)
secured by real property or a dwelling. hazard determinations; and amounts the coverage is not a factor in the
The Board also proposes certain required to be paid into escrow or approval by the creditor of the extension
conforming amendments to the staff trustee accounts if the amounts would of credit, and this fact is clearly
commentary under those provisions. not otherwise be included in the finance disclosed in writing to the consumer;
charge. The commentary provisions and (2) in order to obtain the insurance,
4(c)(2) the consumer specifically requests the
under § 226.4(c)(7) would also be
The exclusion of fees for actual amended accordingly. insurance after getting the disclosures.
unanticipated late payment, exceeding a Under §§ 226.4(d)(1) and 226.4(d)(3),
As amended, § 226.4(c)(7) and the the creditor may exclude from the
credit limit, or for delinquency, default,
commentary provisions under finance charge any premium for credit
or a similar occurrence in § 226.4(c)(2)
§ 226.4(c)(7) would apply only to open- life, accident, health or loss-of-income
would be retained for closed-end credit
transactions secured by real property or end credit plans secured by real insurance; any charge or premium paid
a dwelling. The Board believes these property and open-end residential for debt cancellation coverage for
charges should be excluded because mortgage transactions. Thus, for amounts exceeding the value of the
they necessarily occur only after the HELOCs, the fees specified in collateral securing the obligation; or any
finance charge is disclosed to § 226.4(c)(7) would continue to be charge or premium for debt cancellation
consumers. At the time the TILA excluded from the finance charge. The or debt suspension coverage in the event
disclosures must be provided to Board requests comment on whether it of loss of life, health, or income or in
consumers, a creditor cannot know should retain § 226.4(c)(7), as proposed case of accident, whether or not the
whether it will impose such charges or to be amended, or delete § 226.4(c)(7) coverage is insurance, if (1) the
their amounts. altogether, in light of the proposed insurance or coverage is not required by
changes to the Regulation Z HELOC the creditor and the creditor discloses
4(c)(5) rules, published today in a separate this fact in writing; (2) the creditor
The exclusion of seller’s points from Federal Register notice. See the discloses the premium or charge for the
the finance charge in § 226.4(c)(5) discussion under § 226.4 in that notice. initial term of the insurance or coverage,
(3) the creditor discloses the term of or debt cancellation or debt suspension unduly burdensome because in most
insurance or coverage, if the term is less coverage. Because the product is sold in cases the creditor would already have
than the term of the credit transaction, connection with a credit transaction that information about the consumer’s age
and (4) the consumer signs or initials an is underwritten by the creditor, the and employment status as part of the
affirmative written request for the consumer may reasonably believe that credit underwriting process. The Board
insurance or coverage after receiving the the creditor has determined that the seeks comment on whether other
required disclosures. In addition, under consumer is eligible for the product. examples of reasonably reliable
§ 226.4(d)(3)(iii), the creditor must This may be especially true for age evidence of the consumer’s age or
disclose for debt suspension coverage restrictions because that information is employment status should be included.
the fact that the obligation to pay loan typically requested by the creditor on Proposed comment 4(d)–14 would
principal and interest is only the credit application form. As a result, clarify that, if the consumer does not
suspended, and that interest will many consumers may not discover until meet the product’s age or employment
continue to accrue during the period of they file a claim that they were paying eligibility criteria, then the premium or
suspension.36 Under proposed for a product for which they were not charge is not voluntary and must be
§ 226.4(g), these provisions would not eligible when they initially purchased included in the finance charge. If the
apply to closed-end credit transactions it. Consumers that do not submit claims creditor offers a bundled product (such
secured by real property or a dwelling. may never discover that they are paying as credit life insurance combined with
Some creditors offer credit insurance for products that hold no value for credit involuntary unemployment
or debt cancellation or debt suspension them. insurance) and the consumer does not
products with eligibility restrictions, but To address this problem, the Board meet the age and/or employment
may not evaluate whether applicants for proposes to add §§ 226.4(d)(1)(iv) and eligibility criteria for all of the bundled
the products actually meet the eligibility 226.4(d)(3)(v) to permit creditors to products, the proposed commentary
criteria at the time the applicants exclude a premium or charge from the would clarify that the creditor must
request the product.37 For instance, a finance charge only if the creditor either: (1) treat the entire premium or
consumer who is 70 at the time of determines at the time of enrollment charge for the bundled product as a
enrollment could never receive the that the consumer meets any applicable finance charge, or (2) offer the consumer
benefits of a product with a 65-year-old age or employment eligibility criteria for the option of selecting only the products
age limit.38 Similarly, a consumer who the credit insurance or the debt for which the consumer is eligible and
is self-employed at the time of suspension or debt cancellation exclude the premium or charge from the
enrollment would not receive benefits if coverage. These provisions would apply finance charge if the consumer chooses
the product requires the consumer to be to open-end as well as closed-end (non- an optional product for which the
employed as a W–2 wage employee.39 real property) credit transactions. consumer meets the age and/or
Although age and employment Proposed comment 4(d)–14 would state employment eligibility criteria at the
eligibility criteria may be set forth in the that a premium or charge for credit life, time of enrollment.
product marketing materials and/or accident, health, or loss-of-income The Board proposes this rule and
enrollment forms, the Board believes insurance, or debt cancellation or debt commentary to address concerns about
few consumers notice this information suspension coverage is voluntary and the voluntary nature of this product.
when they obtain credit and choose to can be excluded from the finance charge TILA Section 106(b), 15 U.S.C. 1605(b),
purchase the voluntary credit insurance only if the consumer meets the states that ‘‘[c]harges or premiums for
product’s age or employment eligibility credit life, accident, or health insurance
36 The provisions regarding debt suspension criteria at the time of enrollment. The written in connection with any
coverage were in the December 2008 Open-End proposed comment would further consumer credit transaction shall be
Final Rule. See 74 FR 5244, 5400; Jan. 29, 2009. clarify that to exclude such a premium included in the finance charge unless
These provisions will take effect on July 1, 2010. (1) the coverage of the debtor by the
37 See, e.g., Parker et al. v. Protective Life Ins. Co.
or charge from the finance charge, the
of Ohio et al., Nos. 2004–T–0127 and 2004–T–0128, creditor would have to determine at the insurance is not a factor in the approval
2006 Ohio App. LEXIS 3983, at *28 (Ohio Ct. App. time of enrollment that the consumer is by the creditor of the extension of
Aug. 4, 2006) (reversing summary judgment for eligible for the product under the credit, and this fact is clearly disclosed
defendants automobile dealership and insurer product’s age or employment eligibility in writing to the person applying for or
because the automobile dealership employee did
not evaluate whether the plaintiffs were eligible for restrictions. obtaining the extension of credit; and (2)
credit disability insurance and the plaintiffs were Proposed comment 4(d)–14 would in order to obtain the insurance in
later denied benefits based on eligibility provide that the creditor could use connection with the extension of credit,
restrictions); Stewart v. Gulf Guaranty Life Ins. Co., reasonably reliable evidence of the the person to whom the credit is
No. 2000–CA–01511–SCT, 2002 Miss. LEXIS 254, at consumer’s age or employment status to extended must give specific affirmative
*4 (Miss. Aug. 15, 2002) (affirming the jury award
where the insurer did not require the bank satisfy the condition. Reasonably written indication of his desire to do so
employee to have the consumer fill out a credit life reliable evidence of a consumer’s age after written disclosure to him of the
and disability insurance application regarding pre- would include using the date of birth on cost thereof.’’ Historically, § 226.4(d)
existing conditions and the insurer later denied the consumer’s credit application, on has implemented this provision as a
coverage based on a pre-existing condition).
38 See, e.g., Fed. Trade Comm’n v. Stewart the driver’s license or other government- ‘‘voluntariness’’ standard. For example,
Finance Holdings, Inc. et al., Civ. Action No. issued identification, or on the credit in 1981, comment 4(d)–5 was adopted
103CV–2648, Final Judgment and Order at 13 (N.D. report. Reasonably reliable evidence of as part of the TILA simplification
Ga. Nov. 9, 2005) (alleging that the finance a consumer’s employment status would process. The comment stated that the
company sold accidental death and dismemberment
insurance to borrowers who were not eligible for
include the consumer’s information on credit insurance ‘‘must be voluntary in
the product due to age restrictions). a credit application, Internal Revenue order for the premium to be excluded
39 See, e.g., In the Matter of Providian Nat’l Bank, Service Form W–2, tax returns, payroll from the finance charge.’’ 46 FR 50288,
OCC Docket No. 2000–53, Consent Order (June 28, receipts, or other evidence such as a 50301; Oct. 9, 1981 (emphasis added).
2000) (alleging that the bank marketed an letter or e-mail from the consumer or the In 1996, the Board amended Regulation
involuntary unemployment credit protection
program but failed to adequately disclose that such
consumer’s employer. A determination Z to apply the rules for credit insurance
protection was unavailable to consumers who were of age or employment eligibility at the to debt cancellation coverage. In
self-employed). time of enrollment should not be adopting this provision, the Board
stated: ‘‘The new rule allows creditors employment eligibility criteria after the for a product that provides no benefit to
to exclude fees for voluntary debt product is sold (e.g., before renewing an them if the eligibility criteria are not
cancellation coverage from the finance annual premium), or whether creditors met at the time of enrollment.
charge when specified disclosures are should be required to provide notice Accordingly, the Board tested the
made.’’ 61 FR 49237, 49240; Sept. 19, when the consumer exceeds the age following language: ‘‘Even if you pay for
1996 (emphasis added). In the December limit of the product after enrollment. this insurance, you may not qualify to
2008 Open-End Final Rule, the Board Revised disclosures. As discussed receive any benefits in the future.’’
applied the rules for credit insurance above, TILA Section 106(b), 15 U.S.C. Participants were greatly surprised to
and debt cancellation coverage to debt 1605(b), and §§ 226.4(d)(1) and learn that they might purchase the
suspension coverage. In adopting this 226.4(d)(3) allow a creditor to exclude insurance only to later discover that
provision, the Board referred to the May from the finance charge a credit they were not eligible for benefits. A few
2007 Open-End Proposed Rule, which insurance premium or debt cancellation participants indicated that they did not
stated that the Board ‘‘proposed to or debt suspension fee if the creditor understand how they could pay for the
revise § 226.4(d)(3) to expressly permit provides disclosures that inform the coverage and then receive no benefits.
creditors to exclude charges for consumer of the voluntary nature and To address this issue and to conform to
voluntary debt suspension coverage cost of the product. Currently, the requirements of proposed
from the finance charge when, after Regulation Z does not specifically §§ 226.4(d)(1)(iv) and 226.4(d)(3)(v), the
receiving certain disclosures, the mandate the format of these disclosures, following statement was added to the
consumer affirmatively requests such as but provides sample language in the disclosure: ‘‘Based on our review of
product.’’ 74 FR 5244, 5266; Jan. 29, model forms. For example, Appendix your age and/or employment status at
2009 (emphasis in original). Finally, the H–2 (Loan Model Form) contains the this time, you would be eligible to
model forms currently contain the following language: ‘‘Credit life receive benefits.’’ However, if there are
following statement emphasizing the insurance and credit disability other eligibility restrictions, such as pre-
voluntary nature of the product: ‘‘Credit insurance are not required to obtain existing health conditions, the creditor
life insurance and credit disability credit, and will not be provided unless would be required to disclose the
insurance are not required to obtain you sign and agree to pay the additional following statements: ‘‘Based on our
credit, and will not be provided unless cost.’’ The model form also shows the review of your age and/or employment
you sign and agree to pay the additional type of product (e.g., credit life or credit status at this time, you may be eligible
cost.’’ See Appendix H–1 (Credit Sale disability); the cost of the premium; and to receive benefits. However, you may
Model Form) and Appendix H–2 (Loan a signature line. The signature area is not qualify to receive any benefits
Model Form). The Board believes that if accompanied by the following language: because of other eligibility restrictions.’’
the consumer was ineligible for the ‘‘I want credit life insurance.’’ Finally, a sentence was added to the
Concerns have been raised about disclosure to refer consumers to the
benefits of credit insurance or debt
whether the current disclosures Board’s Web site to learn more about the
cancellation or debt suspension
sufficiently inform consumers of the product, and the cost disclosure was
coverage at the time of enrollment, then
voluntary nature and costs of the streamlined to display more clearly the
the purchase cannot be voluntary
product. To address these concerns, a exact cost of the product. Most
because a reasonable consumer would
disclosure was tested that included a consumer testing participants indicated
not knowingly purchase a policy for
charge for credit life insurance and they would visit the Board’s Web site to
which he or she can derive no benefit.
listed the product under the title learn more about a credit insurance or
For these reasons, the Board believes
‘‘Optional Features.’’ Only about half of debt cancellation or debt suspension
that the requirements of proposed the participants understood that product.
§§ 226.4(d)(1)(iv) and 226.4(d)(3)(v) accepting credit insurance was Based on this consumer testing, the
would help ensure that the purchase of voluntary and that they could decline Board proposes to add model clauses
credit insurance or debt cancellation or the product. Subsequently, a disclosure and samples that provide clearer
debt suspension coverage would, in fact, was tested that stated, ‘‘STOP. You do information to consumers about the
be voluntary. not have to buy this insurance to get this voluntary nature and costs of credit
The Board notes that although the loan.’’ After reading this disclosure, all insurance or debt cancellation or debt
proposed rule would require creditors to participants understood the voluntary suspension coverage. These model
determine the consumer’s age and/or nature of the product. clauses and samples would apply in
employment eligibility for the product In addition, concerns have been open-end or closed-end (not secured by
at the time of enrollment, the proposed raised about the product’s cost. The real property) transactions, if the
rule would not affect the creditor’s product may be more costly than, for product is voluntary and the consumer
ability to deny coverage if the consumer example, traditional life insurance, but qualifies for benefits based on age or
misrepresented his or her age or may not provide additional benefits. To employment. For closed-end
employment status at the time of address this concern, the Board tested transactions secured by real property or
enrollment. Finally, the proposed rule the following language: ‘‘If you have a dwelling, the model clause or sample
does not require a creditor to determine insurance already, this policy may not would be required whether or not the
if a consumer ceases to meet the age or provide you with any additional product is voluntary. Model Clauses and
employment eligibility criteria after benefits. Other types of insurance can Samples are proposed at Appendix
enrollment. For example, the creditor give you similar benefits and are often G–16(C) and G–16(D) and H–17(C) and
has complied with the proposal if the less expensive.’’ Participant H–17(D). These Model Clauses and
consumer becomes ineligible for the comprehension of the costs and benefits Samples would be in addition to the
policy or coverage after enrollment. of the product was significantly Debt Suspension Model Clauses and
State or other law may address these increased by these plain-language Samples found at Appendix G–16(A)
issues. However, the Board solicits disclosures. and G–16(B) and H–17(A) and H–17(B).
comment on whether creditors should Concerns have also been raised about Timing of disclosures. Currently,
be required to determine whether the eligibility restrictions. Consumers might comment 4(d)–2 states that ‘‘[i]f
consumer meets the product’s age or not be aware that they may incur a cost disclosures are given early, for example
under § 226.17(f) or § 226.19(a), the choices with regard to how much through the creditor.’’ In addition, the
creditor need not redisclose if the actual insurance to purchase to cover various proposed comment would clarify that
premium is different at the time of risks and, as a result, have some control insurance is available ‘‘from or through
consummation. If insurance disclosures over the premiums they pay. a creditor’’ if it is available from the
are not given at the time of early The Board requests comment on the creditor’s ‘‘affiliate,’’ as that term is
disclosure and insurance is in fact appropriateness of retaining the current defined under the Bank Holding
written in connection with the exclusion from the finance charge of Company Act, 12 U.S.C. 1841(k). The
transaction, the disclosures under premiums for insurance against loss or Bank Holding Company Act defines an
§ 226.4(d) must be made in order to damage to property or against liability ‘‘affiliate’’ as ‘‘any company that
exclude the premiums from the finance arising out of the ownership or use of controls, is controlled by, or is under
charge.’’ The Board proposes to delete property. The Board notes that, under common control with another
the reference to § 226.19(a) to conform current § 226.4(d)(2), the category of company.’’ Thus, if the consumer elects
to the new timing and redisclosure property and liability insurance has to purchase property insurance from a
requirements under proposed been interpreted to include coverage company that controls, is controlled by,
§ 226.19(a). against flood risks; the Board seeks or is under common control with the
comment on whether the reasons for creditor, then the creditor would be
4(d)(2) Property Insurance Premiums retaining the exclusion discussed above required to disclose the cost of the
The proposal would retain the are applicable to flood insurance insurance, and the term, if it is less than
exclusion from the finance charge of specifically and, if not, whether it the term of the obligation. The Board
premiums for insurance against loss or should be subject to separate treatment believes that this proposed rule would
damage to property or against liability under Regulation Z. In addition, the clarify for creditors the meaning of
arising out of the ownership or use of Board requests comment on whether ‘‘through the creditor’’ and provide
property under TILA Section 106(c) and including such premiums in the finance consumers with a clearer disclosure of
§ 226.4(d)(2). Consumers typically charge could have adverse or the cost of property insurance.
purchase property and liability unintended consequences for
insurance to protect against a variety of consumers and for creditors. 4(d)(4) Telephone Purchases
risks, including loss of or damage to the TILA Section 106(c) states that Under §§ 226.4(d)(1) and 226.4(d)(3),
property, such as damage caused by fire, charges or premiums for property creditors may exclude from the finance
loss of or damage to personal property insurance must be included in the charge premiums for credit insurance or
kept on the property, such as furniture, finance charge unless ‘‘a clear and fees for debt cancellation or debt
and owner liability for injuries incurred specific statement in writing is suspension coverage, if the creditor
by visitors to the property. Although furnished by the creditor to the person provides certain disclosures in writing
creditors generally require such to whom the credit is extended, setting and the consumer signs or initials an
insurance as a condition of extending forth the cost of the insurance if affirmative written request for the
closed-end credit secured by real obtained from or through the creditor, insurance or coverage. Over the years,
property or a dwelling in order to and stating that the person to whom the the Board has received industry requests
protect the value of the collateral that is credit is extended may choose the to permit creditors to provide the
securing the loan, consumers who do person through which the insurance is disclosures and obtain the affirmative
not have mortgages regularly purchase to be obtained.’’ 15 U.S.C. 1605(c) consumer request orally in order to
this type of insurance to protect (emphasis added). Section 226.4(d)(2) facilitate telephone purchases of these
themselves from the risks described permits property insurance premiums to products. In addition, the OCC has
above. This type of insurance is best be excluded from the finance charge issued telephone sales guidelines for
viewed as a hybrid product that protects under the following conditions, among national banks that sell debt
not only the value of the creditor’s others: ‘‘If the coverage is obtained from cancellation and debt suspension
collateral, but also protects the or through the creditor, the premium for coverage. 12 CFR 37.6(c)(3), 37.7(b).
consumer from loss or impairment of the initial term of insurance coverage In the December 2008 Open-End Final
the consumer’s equity in the property, shall be disclosed. If the term of Rule, the Board created an exception to
loss or impairment of the consumer’s insurance is less than the term of the the requirement to provide prior written
personal property, and personal liability transaction, the term of insurance shall disclosures and obtain written
if anyone is injured on the property. also be disclosed.’’ (Emphasis added). signatures or initials for telephone
Consequently, it is impossible to Comment 4(d)–8 states, in relevant part, purchases of credit insurance and debt
segregate that portion of the insurance that ‘‘[t]he premium or charge must be cancellation or debt suspension
(and that portion of the premium) which disclosed only if the consumer elects to coverage in connection with open-end
protects the creditor from that portion purchase the insurance from the (not home-secured) plans. 74 FR 5244,
which protects only the consumer. creditor; in such a case, the creditor 5267; Jan. 29, 2009. This rule will take
In addition, the Board has not must also disclose the term of the effect on July 1, 2010. Under new
identified significant abuses in property insurance coverage if it is less § 226.4(d)(4), for telephone purchases a
connection with the sale or marketing of than the term of the obligation.’’ creditor may make the disclosures orally
insurance against loss or damage to (Emphasis added.) Currently, the and the consumer may affirmatively
property or against liability arising out comment does not use the statutory request the insurance or coverage orally,
of the ownership or use of property. The language ‘‘from or through the creditor’’ provided that the creditor (1) maintains
market for these products appears to be and does not define the phrase. To evidence that the consumer, after being
competitive. Consumers can purchase conform to the statutory and regulatory provided the disclosures orally,
this type of insurance from many language, the Board proposes to amend affirmatively elected to purchase the
insurance companies, including comment 4(d)–8 to clarify that the insurance or coverage, and (2) mails the
companies not associated with mortgage premium or charge and term (if less required disclosures within three
lenders. In addition, policies generally than the term of the obligation) must be business days after the telephone
are tailored to the particular risks faced disclosed if the consumer elects to purchase. New comment 226.4(d)(4)–1
by the consumer. Thus, consumers have purchase the insurance ‘‘from or provides that a creditor does not satisfy
the requirement to obtain a consumer’s with the disclosure and consumer changes, the following fees that
affirmative request if the ‘‘request’’ was request requirements even if the credit currently are excluded from the finance
a response to a leading question or insurance and debt cancellation or debt charge would be included in the finance
negative consent. The comment also suspension coverage is sold after the charge for closed-end mortgage
provides an example of an acceptable opening of the plan. A creditor in an transactions (unless otherwise
enrollment question (‘‘Do you want to open-end (not home-secured) excluded): Closing agent charges,
enroll in this optional debt cancellation transaction may be more likely to application fees charged to all
plan?’’). market the product by telephone after applicants for credit (whether or not
The Board promulgated this rule the opening of the plan, and new credit is extended), voluntary credit
pursuant to its exception and exemption § 226.4(d)(4) facilitates the telephone insurance premiums, voluntary debt-
authorities under TILA Section 105. purchase. By contrast, a creditor in a cancellation charges or premiums, taxes
Section 105(a) authorizes the Board to closed-end transaction is more likely to or fees required by law and paid to
make exceptions to TILA to effectuate have the opportunity to meet the public officials relating to security
the statute’s purposes, which include consumer face-to-face at or before interests, premiums for insurance
facilitating consumers’ ability to consummation to market the product, obtained in lieu of perfecting a security
compare credit terms and helping provide the disclosure, and obtain the interest, taxes imposed as a condition of
consumers avoid the uninformed use of consumer request. For these reasons, recording the instruments securing the
credit. 15 U.S.C. 1601(a), 1604(a). In this proposal does not contain a evidence of indebtedness, and various
addition, the Board considered the telephone purchase rule for credit real-estate related fees.
exemption factors set forth in TILA insurance or debt cancellation or debt Proposed commentary to § 226.4(g) is
Section 105(f)(2), 15 U.S.C. 1604(f)(2), suspension coverage sold in connection included to clarify the rule for mortgage
and determined that an exemption for with a closed-end credit transaction. transactions. Proposed comment 4(g)–1
telephone purchases for open-end (not The Board seeks comment on this issue. clarifies that the commentary for the
home-secured) plans was appropriate For a discussion of the application of exclusions identified above no longer
because the rule contained adequate the telephone purchase rule to HELOCs, applies to closed-end credit transactions
safeguards to ensure that oral purchases see the Board’s proposal for such secured by real property or a dwelling.
are voluntary. 74 FR 5268. The Board transactions published simultaneously Proposed comment 4(g)–2 clarifies that
emphasized that consumers in open-end with this proposal. third-party charges that meet the
(not home-secured) plans receive definition under § 226.4(a) and are not
monthly statements that clearly disclose 4(e) Certain Security Interest Charges otherwise excluded generally are
fees, including credit insurance and The Board proposes to amend finance charges, whether or not the
debt cancellation or debt suspension § 226.4(e), which provides exclusions creditor requires the services for which
coverage charges. Id. Consumers who from the finance charge for certain they are imposed. Proposed comment
are billed for insurance or coverage they government recording and related 4(g)–3 clarifies that charges payable in
did not request can dispute the charge charges and insurance premiums a comparable cash transaction, such as
as a billing error. Id. The Board stated incurred in lieu of such charges, as property taxes and fees or taxes imposed
that as part of the closed-end review, it limited by proposed § 226.4(g). Thus, to record the deed evidencing transfer of
would consider whether to expand the the exclusions listed in § 226.4(e) would title to the property from the seller to
telephone purchase rule to this type of not apply to closed-end credit the buyer, are not finance charges
credit. 74 FR 5267. transactions secured by real property or because they would have to be paid
The Board believes that a telephone a dwelling. The Board also proposes even if no credit were extended to
purchase rule for closed-end credit is certain conforming amendments to the finance the purchase.
not appropriate. Monthly statements are staff commentary under this provision.
not required for closed-end credit, and Request for Comment
4(g) Special Rule; Closed-End Mortgage
it would be difficult for consumers who The Board solicits comment on the
Transactions
do not receive monthly statements to benefits and costs of the proposed
detect charges for unwanted coverage. The Board is proposing to add a new changes for determining the finance
Moreover, there is no billing error § 226.4(g) as a special rule for closed- charge for closed-end credit transactions
resolution process for closed-end loans. end credit transactions secured by real secured by real property or a dwelling.
Finally, the Board noted in the property or a dwelling. Proposed The Board requests comment
December 2008 Open-End Final Rule § 226.4(g) would provide that the specifically on whether this approach
that an exception or exemption for the exclusions from the finance charge adequately or appropriately addresses
telephone purchase of credit insurance enumerated in §§ 226.4(a)(2) (closing the concerns raised by the ‘‘some fees
or debt cancellation or debt suspension agent charges), (c) (miscellaneous in, some fees out’’ approach in light of
coverage in connection with closed-end charges), (d) (premiums for certain the statute’s purposes, the need for
loans may be ‘‘less necessary.’’ 74 FR insurance and debt cancellation consumer protection and meaningful
5267. For open-end (not home-secured) coverage), and (e) (certain security- disclosures, and industry concerns
credit, new comments 4(b)(7) and (8)–2 interest charges) do not apply to closed- regarding complexity and burden. The
and 4(b)(10)–2 in the December 2008 end credit transactions secured by real Board also seeks comment on the
Open-End Final Rule clarify that credit property or a dwelling, except that the benefits and costs of the rules for
insurance and debt cancellation or debt exclusions in § 226.4(c)(2) for late, over- insurance and related products under
suspension coverage is ‘‘written in limit, delinquency, default, and similar the proposed amendments to § 226.4(d).
connection with a credit transaction’’ if fees, § 226.4(c)(5) for seller’s points, and
the consumer purchases it after the § 226.4(d)(2) for property and liability Section 226.17 General Disclosure
opening of an open-end (not home- insurance would continue to apply to Requirements
secured) plan because the consumer such transactions. As noted above, a The Board is proposing new rules
retains the ability to obtain advances of cross-reference to the special rule in governing format and content of
funds. 74 FR 5265. Therefore, in such a § 226.4(g) would be added to each of the disclosures for transactions secured by
transaction, the creditor must comply enumerated sections. With these real property or a dwelling under new
§§ 226.37 and 226.38. Accordingly, the Section 105(a). 15 U.S.C. 1604(a). real property or a dwelling only as
Board proposes conforming and Section 105(a) authorizes the Board to applicable. Current comment 17(a)(1)–6,
technical amendments to current make exceptions and adjustments to which permits creditors to design multi-
§§ 226.17 and 226.18, as discussed more TILA to effectuate the statute’s purpose forms for closed-end credit
fully below. In addition, in reviewing purposes, which include facilitating disclosures as long as they are clear and
the rules for closed-end credit, consumers’ ability to compare credit conspicuous, would be revised to clarify
regulatory text and associated terms, and avoiding the uninformed use that it does not apply to transactions
commentary have been redesignated, of credit. 15 U.S.C. 1601(a). secured by real property or a dwelling,
and footnotes moved to the text of the The Board believes requiring the
as discussed more fully below under
regulation or commentary, as creditor’s identity to be grouped
proposed § 226.37(a)(2).
appropriate, to facilitate compliance together with required disclosures could
with the regulation. assist consumers. The Board believes it Finally, the Board proposes to clarify
is important for the disclosures to bear in current comment 17(a)(1)–7 that
17(a) Form of Disclosures the creditor’s identity so that consumers transactions secured by real property or
17(a)(1) can more easily identify the appropriate a dwelling and that have balloon
entity. As a result, the Board believes payment financing with leasing
The Board proposes special rules in
the proposal would help serve TILA’s characteristics are treated as closed-end
new § 226.37 and associated
purpose to provide meaningful credit under TILA and subject to its
commentary to govern the format of
disclosure of terms. disclosure requirements.
disclosures required under proposed Commentary to § 226.17(a)(1)
§§ 226.38 and 226.20(d), and existing provides guidance to creditors regarding 17(a)(2)
§§ 226.19(b) and 226.20(c). These new the general disclosures standards
format rules would be in addition to the contained in § 226.17(a)(1). The Board Section 226.17(a)(2), which
rules contained in current § 226.17(a)(1). proposes to clarify the applicability of implements TILA Section 122(a),
Current § 226.17(a)(1) requires that comments 17(a)(1)–2, –5, –6, and –7 to requires the terms finance charge and
closed-end credit disclosures be transactions secured by real property or annual percentage rate, together with a
grouped together, segregated from a dwelling. corresponding amount or percentage
everything else, and not contain any Current comment 17(a)(1)–2 provides rate, to be more conspicuous than any
information not directly related to the an exception to the grouped and other disclosure, except the creditor’s
disclosures. The Board proposes to segregated requirement for disclosures identity under § 226.18(a). The Board
revise § 226.17(a)(1) to clarify that the on variable rate transactions required proposes new disclosure requirements
general disclosure standards continue to under existing §§ 226.19(b) and under proposed § 226.38(e)(5)(ii) for the
apply to transactions secured by real 226.20(c). For the reasons discussed finance charge (renamed ‘‘interest and
property or a dwelling, but under the under proposed § 226.37(a)(2), the settlement charges’’), and under
proposal, creditors would also be Board proposes to require that ARM proposed §§ 226.37(a)(2) and 226.38(b)
required to meet the higher standards loan program disclosures under for the APR. As a result, the Board
under proposed § 226.37. In addition, proposed § 226.19(b), and ARMs
§ 226.17(a)(1) would be revised to reflect would revise § 226.17(a)(2) to be
adjustment notices under proposed inapplicable to transactions secured by
the requirement of electronic § 226.20(c), be subject to the grouped
disclosures in certain circumstances, as real property or a dwelling.
and segregated requirement. As a result,
discussed under § 226.19(d). Under the the reference made to §§ 226.19(b) and 17(b) Time of Disclosures
proposal, the substance of footnotes 37 226.20(c) would be removed from
and 38 would be moved to the comment 17(a)(1)–2. Section 227.17(b) and comment
regulatory text of § 226.17(a)(1). Current comment 17(a)(1)–5, which 17(b)–1 require creditors to make
Footnotes 37 and 38 currently provide addresses information considered closed-end credit disclosures before
exceptions to the grouped and directly related to the segregated consummation of the transaction;
segregated requirement under disclosures, would be revised to clarify special timing requirements apply to
§ 226.17(a)(1). Footnote 37 allows that it does not apply to transactions dwelling-secured transactions and
creditors to include certain information secured by real property or a dwelling, variable-rate transactions. As discussed
not directly related to the required and to cross-reference proposed more fully under § 226.19, the Board is
disclosures, such as the consumer’s § 226.37(a)(2). Under the proposal, proposing to require creditors to make
name, address, and account number. cross-references in comments 17(a)(1)– pre-consummation disclosures for
Footnote 38, which implements TILA 5(viii), (xi), (xii), and (xvi) would be transactions secured by real property or
Section 128(b)(1) in part, allows updated; no substantive change is a dwelling in accordance with special
creditors to exclude certain required intended. In addition, as noted below, timing requirements. As a result, the
disclosures from the grouped and proposed revisions to § 226.18(f) Board proposes to revise § 226.17(b) and
segregated requirement, such as the regarding variable rate transactions, and
creditor’s identity under § 226.18(a). 15 comment 17(b)–1 to clarify that more
proposed § 226.38(j)(6) regarding
U.S.C. 1638(b)(1). The Board proposes specific timing rules would apply to
assumption disclosure for transactions
to revise the substance of footnote 38 to secured by real property or a dwelling, transactions secured by real property or
a dwelling. Current comment 17(b)–2,
require that the creditor’s identity under render comments 17(a)(1)–5(xiii) and
§ 226.18(a) be subject to the grouped (xiv) unnecessary and therefore those which addresses disclosure
together and segregated requirement for comments would be deleted. Finally, requirements for transactions converted
all closed-end credit disclosures. (See comment 17(a)(1)–5(xvi) would be from open-end to closed-end, would be
proposed § 226.37(a)(2), which parallels revised to update cross-references. revised to clarify that the special timing
this approach for transactions secured As discussed under proposed requirements under § 226.19(b) would
by real property or a dwelling). The §§ 226.37(a)(2) and 226.38, the Board apply for adjustable rate transactions
Board proposes to make this adjustment proposes to require that creditors make secured by real property or a dwelling.
pursuant to its authority under TILA disclosures for transactions secured by
17(c) Basis of Disclosures and Use of Comment 17(c)(1)–15 states that respectively; no substantive change is
Estimates where a deposit account is created for intended.
17(c)(1) Legal Obligation the sole purpose of accumulating
17(c)(1)(iii) Variable- or Adjustable-Rate
payments that are applied to satisfy the
Section 226.17(c)(1) requires that Transactions
consumer’s credit obligation—a practice
disclosures under subpart C reflect the used in Morris Plan transactions— Comment 17(c)(1)–8 currently
terms of the legal obligation between the payments to that account are treated the provides that creditors should base
parties. Commentary to § 226.17(c)(1) same as loan payments. Under the disclosures for variable- or adjustable-
provides guidance regarding disclosure proposal, comment 17(c)(1)–15 would rate transactions on the full term of the
of specific transaction types and loan be removed. As discussed below, Morris transaction and the terms in effect at the
features. The Board proposes to add Plan transactions are rare. In addition, time of consummation and should not
new provisions in § 226.17(c)(1)(i) the Board believes that such deposits assume that the rate will increase. The
through (vi) to move certain content clearly constitute loan payments and proposed rule would incorporate that
from commentary to the regulation, as therefore comment 17(c)(1)–15 is guidance into proposed
discussed below. In addition, the Board unnecessary. § 226.17(c)(1)(iii). Proposed
would revise certain commentary to The remaining commentary to § 226.17(c)(1)(iii) would require
§ 226.17(c)(1) to reflect the new § 226.17(c)(1) would be revised and creditors to base disclosures for
disclosure regime for mortgages, and redesignated as discussed below under variable- or adjustable-rate transactions
redesignate comments as appropriate. proposed subsections 17(c)(1)(i) through on the full loan term, and on the terms
Each of these proposed subsections, and (vi). in effect at the time of consummation,
accompanying commentary, is except as otherwise provided under
discussed below. 17(c)(1)(i) Buydowns proposed §§ 226.17(c)(1)(iii) or
Comments 17(c)(1)–1 and 17(c)(1)–2 Comments 17(c)(1)–3 through 226.38(a)(3) and (c) for transactions
generally address disclosure of the legal 17(c)(1)–5 address third-party secured by real property or a dwelling.
obligation and modification of such buydowns, consumer buydowns, and As discussed below under proposed
obligation. Comment 17(c)(1)–1 would split buydowns, respectively. The § 226.38(c), creditors would be required
be revised to include the general proposed rule would add a new to disclose specified rate and payment
principle that the consumer is presumed provision in § 226.17(c)(1)(i) that adjustments for adjustable-rate loans
to abide by the terms of the legal reflects that existing commentary about secured by real property or a dwelling.
obligation. For example, proposed buydowns. Proposed § 226.17(c)(1)(i) As a result, comment 17(c)(1)–8 would
comment 17(c)(1)–1 states that creditors requires creditors to disclose an APR be revised to clarify that creditors must
should assume that a consumer will that is a composite rate, based on the disclose specified rate and payment
make payments on time and in full. This rate in effect during the initial period adjustments for adjustable-rate loans
proposed revision is consistent with and the rate in effect for the remainder secured by real property or a dwelling
existing comment 17(c)(2)(i)–3, which of the loan’s term, if the consumer’s in accordance with the requirements
states that creditors may base all interest rate or payments are reduced for under proposed § 226.38(c). Current
disclosures on the assumption that all or part of the loan term. Proposed comment 17(c)(1)–8 would be
payments will be made on time, § 226.17(c)(1)(i) applies to seller or redesignated as comment 17(c)(1)(iii)–1.
disregarding any possible inaccuracies third-party buydowns if they are Current comment 17(c)(1)–9, which
resulting from consumers’ payment reflected in the legal obligation, and to states that a variable-rate feature does
patterns. Comment 17(c)(2)(i)–3 all consumer buydowns. not, by itself, make the disclosures
specifically addresses disclosures for Comments 17(c)(1)–3 through estimates, would be redesignated as
simple-interest transactions that 17(c)(1)–5 would be redesignated as comment 17(c)(1)(iii)–2. No substantive
potentially may be affected by late comments 17(c)(1)(i)–1 through –4 and change is intended.
payments. The proposed revisions to revised to reflect changes in the
comment 17(c)(1)–1 would clarify that terminology used under the proposed 17(c)(1)(iii)(A) and (B) Discounted and
disclosures for all transactions subject to rule to describe the finance charge, for Premium Rates
§ 226.17 should be based on the transactions secured by real property or Comment 17(c)(1)–10 provides that if
assumption that the consumer will a dwelling. the initial interest for a variable-rate
adhere to the terms of the legal transaction is not determined by the
obligation. 17(c)(1)(ii) Wrap-Around Financing index or formula used to make later
Comment 17(c)(1)–2 would be revised Comment 17(c)(1)–6 provides interest-rate adjustments, disclosures
to clarify that transactions secured by guidance on disclosures for transactions should reflect a composite APR based
real property or a dwelling are subject that involve wrap-around financing; on the initial interest rate for as long as
to the special disclosure rules under comment 17(c)(1)–7 provides guidance it is charged and, for the remainder of
proposed § 226.38(a)(3) and (c). Under on disclosures for wrap-around the term, the rate that would have been
the proposal, preferred-rate loans with a transactions that include a balloon applied using the index or formula at
fixed interest rate would not be payment. Both comments state that, in the time of consummation. The
considered ARMs, and therefore, transactions that involve wrap-around proposed rule would incorporate that
comment 17(c)(1)–2 also would be financing, the amount financed equals commentary into proposed
revised to remove the cross-reference to the sum of the new funds advanced by § 226.17(c)(1)(iii)(B).
§ 226.19(b). Comment 17(c)(1)–2 would the wrap creditor and the remaining Proposed § 226.17(c)(1)(iii) contains
be redesignated as 17(c)(1)–2(i) through principal owed to the original creditor two separate disclosure rules; which
(iii). Comment 17(c)(1)–16, which on the pre-existing loan. The proposed disclosure rule applies depends on
addresses disclosure for credit rule would incorporate this guidance whether or not the initial rate is
extensions that may be treated as into proposed § 226.17(c)(1)(ii). determined using the same index or
multiple transactions, would be moved Comments 17(c)(1)–6 and 17(c)(1)–7 formula used to make subsequent rate
and redesignated as comment 17(c)(1)– would be redesignated as comments adjustments. If the initial rate is
3; no substantive change is intended. 17(c)(1)(ii)–1 and 17(c)(1)(ii)–2, determined using the same index or
formula used for subsequent rate purposes of interest rate and payment 17(c)(1)(iv) Reverse Mortgages
adjustments, then the general rule that summary disclosures under proposed Comment 17(c)(1)–14 provides that if
disclosures must reflect the terms in § 226.38(c).) a reverse mortgage has a specified
effect at the time of consummation Further, certain shared-equity or period for disbursements but repayment
applies under proposed shared-appreciation mortgages are is due only upon the occurrence of a
§ 226.17(c)(1)(iii)(A). If the initial rate is considered variable-rate transactions future event such as the death of the
set using a different index or formula, under comment 17(c)(1)–11. However, consumer, the creditor must assume that
however, disclosures must reflect a under the proposal, if a mortgage is repayment will occur when
composite APR under proposed secured by real property or a dwelling, disbursements end. The proposed rule
§ 226.17(c)(1)(iii)(B). The composite the mortgage would not be considered would incorporate this commentary into
APR would be based on the initial rate an adjustable-rate loan solely because of the regulation as proposed
for as long as it is charged and, for the a shared-equity or shared-appreciation § 226.17(c)(1)(vi). Comment 17(c)(1)–14
remainder of the loan term, the rate that feature. As discussed under proposed would be revised to clarify that the
would have applied if such index or §§ 226.19(b)(2)(ii)(F) and disclosure requirements for reverse
formula had been used at the time of 226.38(d)(2)(vi), the Board would mortgage under § 226.33 apply only if
consummation. Comments 17(c)(1)– require creditors to disclose shared- the consumer’s death is one of the
10(i) through (vi) would be revised to equity or shared-appreciation as a loan conditions of repayment, as provided
reflect that, under the proposed rule, for feature for transactions secured by real under § 226.33(a). Comment 17(c)(1)–14
transactions secured by real property or property or a dwelling. As a result, also would be revised by removing the
a dwelling, new terminology would be guidance in comment 17(c)(1)–11 discussion of shared-equity and shared-
used for specified disclosures (for relating to shared-equity and shared- appreciation features because under the
example, the term ‘‘interest and appreciation mortgages would be proposed rule transactions with such
settlement charges’’ would be used in deleted. features would not be deemed
place of ‘‘finance charge’’), as discussed Comment 17(c)(1)–11 would be adjustable-rate loans solely because of
below. Comments 17(c)(1)–10(i) through redesignated as comment 17(c)(1)(iii)– such features, as discussed above.
(vi) also would be redesignated as 4(i) through (iii), except that guidance Further, comment 17(c)(1)–14 would be
comments 17(c)(1)(iii)–3(i) through (vi); under current comment 17(c)(1)–11 revised to state that, if a reverse
no substantive change is intended. regarding graduated payment mortgages mortgage has an adjustable interest rate
Finally, a cross-reference in comment and step-rate transactions without a and is secured by real property or a
24(c)–4 would be updated to reflect the variable-rate feature would be dwelling, the creditor must disclose the
redesignation of comment 17(c)(1)–10. redesignated as comment 17(c)(1)(iii)–5. shared-equity or shared-appreciation
Comment 17(c)(1)–11 provides that A cross-reference to comment 17(c)(1)– feature as required under
variable rate transactions include the 11 in comment 30–1 would be updated §§ 226.19(b)(2)(ii)(F) and
following transaction types, even if accordingly. Comment 17(c)(1)–12, 226.38(d)(2)(vi). Finally, under the
initially they feature a fixed interest which addresses graduated-payment proposed rule comment 17(c)(1)–14
rate: balloon-payment loans where the ARMs, would be redesignated as would be redesignated as comment
creditor is unconditionally obligated to comment 17(c)(1)(iii)–6(i) through (iii); 17(c)(1)(iv)–1(i) through (iii).
renew, but can increase the interest rate no substantive change is intended.
at the time of renewal; preferred-rate Current comment 17(c)(1)–13 states 17(c)(1)(v) Tax Refund-Anticipation
loans where the interest rate may that creditors may base disclosures for Loans
increase upon some future event; and growth-equity mortgages (also referred Comment 17(c)(1)–17 clarifies that if
price-level adjusted mortgages that to as ‘‘payment-escalated mortgages’’) a consumer is required to repay a tax
provide for periodic payment and loan on estimated payment increases, using refund-anticipation loan when the
balance adjustments. (But see the the best information reasonably consumer receives a tax refund,
discussion under proposed § 226.19(b) available, or may disclose by analogy to disclosures are to be based on the
on comment 19(b)–5, which clarifies the variable-rate disclosures in creditor’s estimate of the time the
that creditors need not provide the § 226.18(f)(1). As discussed below, refund will be delivered. Comment
disclosures required by § 226.19(b) for current § 226.18(f) contains disclosure 17(c)(1)–17 further clarifies that the
specified balloon-payment, preferred- requirements for variable-rate finance charge includes any repayment
rate, and price-level adjusted transactions that differ based on a loan’s amount that exceeds the loan amount
mortgages.) As discussed below, security interest and term. Under the that is not excluded from the finance
proposed § 226.38(a)(3), which address proposed rule, § 226.18(f) would be charge under § 226.4. The proposed rule
disclosure of loan type for transactions revised so that a loan’s security interest, would incorporate this guidance into
secured by real property or a dwelling, not its term, would determine whether the regulation as proposed
would treat each of these transaction the creditor would provide variable- or § 226.17(c)(1)(v). Comment 17(c)(1)–17
types as fixed-rate loans. As a result, adjustable-rate disclosures. Accordingly, which would be redesignated as
comment 17(c)(1)–11 would be revised under the proposal, the reference made comments 17(c)(1)(v)–1(i) and –1(ii)
to clarify that balloon-payment, in comment 17(c)(1)–13 to providing under the proposed rule. No substantive
preferred-rate, and price-level adjusted disclosures analogous to those under change is intended.
mortgages secured by real property or a current § 226.18(f)(1) would be deleted,

dwelling are considered fixed-rate and comment 17(c)(1)–13 would be 17(c)(1)(vi) Pawn Transactions
transactions for the purposes of the loan revised to require creditors to base For pawn transactions, proposed
type disclosure required under disclosures for growth-equity mortgages § 226.17(c)(1)(vi) would require
proposed § 226.38(a)(3). (See also the using estimated payment increases. The creditors to: (1) Disclose the initial sum
discussion under proposed § 226.38(c), reference to graduated-payment provided to the consumer as the amount
which clarifies that the loan type mortgages would be removed for clarity. financed; (2) include the difference
attributed to transactions under Comment 17(c)(1)–13 would be between the initial sum provided to the
proposed § 226.38(a)(3) applies for redesignated as comment 17(c)(1)(iii)–7. consumer and the price at which the
item is pledged or sold in the finance to reflect that proposed receive no later than three business days
charge; and (3) determine the APR using §§ 226.19(b)(2)(ii)(D) and before consummation for transactions
the redemption date as the end of the 226.38(d)(2)(iv) contain requirements secured by real property or a dwelling.
loan term. Proposed § 226.17(c)(1)(vi) is for disclosing a demand feature in Accordingly, comments 17(f)–1 through
consistent with comment 17(c)(1)–18, transactions secured by real property or –4 would be revised to clarify that the
which would be redesignated as a dwelling. Comment 17(c)(5)–2, which special disclosure timing requirements
comment 17(c)(1)(vi)–1. No substantive addresses future events such as the under § 226.19(a)(2) would apply to
change is intended. maturity date, would be revised to transactions secured by real property or
clarify that certain disclosures for a dwelling. In technical revisions,
17(c)(2) Estimates
transactions not secured by real guidance in current comment 17(f)–1
Under the proposal, § 226.17(c)(2) property or a dwelling may not contain would be renumbered and headings
would be revised to clarify that estimated disclosures, as discussed revised to clarify that some of the
proposed § 226.19(a) would limit below under proposed § 226.19(a)(2). current guidance would not apply to
creditors’ ability to provide estimated Comment 17(c)(5)–3, which addresses transactions secured by real property or
disclosures for transactions secured by demand after a stated period, would be a dwelling under the proposed rule.
real property or a dwelling. As revised to delete obsolete references to
discussed below, proposed § 226.19(a) 17(g) Mail or Telephone Orders—Delay
specific loan programs and update
requires creditors to provide disclosures in Disclosures
cross-references. Comment 17(c)(5)–4,
that consumers must receive no later which addresses balloon payment Section 226.17(g) and comment 17(g)–
than three business days before mortgages, would be revised to reflect 1 permit creditors to delay disclosures
consummation and which may not be that creditors must disclose a payment for transactions involving mail or
estimated disclosures. Comments summary table for transactions secured telephone orders until the first payment
17(c)(2)(i)–1 and 17(c)(2)(i)–2, which by real property or a dwelling under is due if certain information, such as the
address the basis and labeling of proposed § 226.38(c) (rather than a APR or finance charge, is provided to
estimates, respectively, also would be payment schedule, as required for the consumer in advance of any request.
revised to reflect this limitation. In transactions not secured by real As discussed under § 226.19(a) and
addition, comment 17(c)(2)(i)–3, which property or a dwelling under 226.20(c), the Board proposes special
states that creditors may base all § 226.18(g)) and to update a cross- timing requirements for disclosures for
disclosures on the assumption that reference. In technical revisions, a transactions secured by real property or
consumers will make timely payments, heading would be added to a dwelling and for adjustable rate
would be revised to clarify that creditors § 226.17(c)(5) for clarity; no substantive transactions. As a result, the Board
may also assume that consumers would change is intended. proposes to revise § 226.17(g) and
make payments in the amounts required comment 17(g)–1 to clarify that they do
by the terms of the legal obligation. In 17(c)(6) Multiple Advance Loans not apply to transactions secured by real
technical revisions, a heading would be In technical revisions, a heading property or a dwelling.
added to § 226.17(c)(2) for clarity; no would be added to § 226.17(c)(6) for
17(h) and 17(i) Series of Sales—Delay in
substantive change is intended. clarity; no substantive change is
Disclosures; Interim Student Credit
intended.
17(c)(3) Disregarded Effects Extensions
In technical revisions, a heading 17(d) Multiple Creditors; Multiple Sections 226.17(h) and (i) address
would be added to § 226.17(c)(3) for Consumers delay in disclosures in transactions
clarity, and guidance under current Section 226.17(d) addresses involving a series of sales and interim
comment 17(c)(3)–1 would be transactions that involve multiple student credit extensions. The Board
redesignated as 17(c)(3)–1(i) and (ii). No creditors and consumers. The Board does not propose any substantive
substantive change is intended. does not propose any changes to these changes to these provisions. In technical
provisions, except that the guidance revisions, a cross-reference is corrected.
17(c)(4) Disregarded Irregularities
contained in current comment 17(d)–1
Under the proposal, § 226.17(c)(4) Section 226.18 Content of Disclosures
would be redesignated as comment
would be revised to clarify that creditors 17(d)–1(i) through (iii); no substantive As noted, the Board proposes to
may disregard period irregularities change is intended. require creditors to provide new
when disclosing the payment summary disclosures for transactions secured by
table, as required under proposed 17(e) Effect of Subsequent Events real property or a dwelling under
§ 226.38(c), for transactions secured by Section 226.17(e) addresses whether a proposed § 226.38. Accordingly, the
real property or a dwelling. No subsequent event makes a disclosure Board would clarify under § 226.18 that
substantive change to the treatment of inaccurate or requires a new disclosure. creditors must provide the new
period irregularities is intended. Under proposed § 226.20(e), if a creditor disclosures under § 226.38 for
In technical revisions, a heading obtains insurance on behalf of the transactions secured by real property or
would be added to § 226.17(c)(4) for consumer subsequent to consummation, a dwelling. In addition, the Board
clarity. Also, comment 17(c)(4)–1 would the creditor would be required to proposes conforming amendments to
be redesignated as comment 17(c)(4)– provide notice before charging for such § 226.18 and associated commentary to
1(i) and (ii), and comment 17(c)(4)–2 insurance. The Board proposes to revise reflect the new disclosure regime for
would be redesignated as comment comment 17(e)–1 to reflect this new mortgages, and would redesignate
17(c)(4)–2(i) through (iii). No requirement. comments as appropriate.
substantive change is intended.
17(f) Early Disclosures 18(a) Creditor
17(c)(5) Demand Obligations Under the proposal, in addition to Currently, § 226.18(a), which
Under the proposal, comment providing early disclosures, creditors implements TILA Section 128(a)(1),
17(c)(5)–1, which addresses demand would be required to provide additional requires disclosure of the identity of the
obligation disclosures, would be revised disclosures that a consumer must creditor making the disclosures. 15
U.S.C. 1638(a)(1). Comment 18(a)–1 18(c) Itemization of Amount Financed consumer’s principal dwelling and
states, in part, that this disclosure may, Section 226.18(c) requires a separate variable-rate transactions secured by a
at the creditor’s option, appear apart disclosure of the itemization of amount consumer’s principal dwelling if the
from the other required disclosures. As financed and provides guidance on the loan term is one year or less. Section
discussed above, currently, amounts that must be included in such 226.18(f)(1) requires creditors to make
§ 226.17(a)(1) footnote 38, which itemization. As discussed below, the the following disclosures within three
implements TILA Section 128(b)(1), Board proposes new § 226.38(e)(5)(iii) to business days after receiving the
allows creditors to exclude from the address the calculation and disclosure consumer’s application: (1)
grouped and segregated requirement requirements of the amount financed for Circumstances under which the APR
certain required disclosures, such as the transactions secured by real property or may increase; (2) any limitations on the
creditor’s identity. 15 U.S.C. 1638(b)(1). a dwelling. Under the proposal, the increase; (3) the effect of an increase;
However, the Board proposes to revise substance of footnote 40, which permits and (4) an example of the payment
the substance of footnote 38 to require creditors to substitute good faith terms that would result from an
the creditor’s identity under § 226.18(a) estimates required under RESPA for the increase. Section 226.18(f)(2) applies to
to be subject to the grouped together and itemization of the amount financed for variable-rate transactions secured by a
dwelling-secured transactions, would be consumer’s principal dwelling with a
segregated requirement for all closed-
moved to new § 226.38(j)(1)(iii). loan term greater than one year, and
end credit disclosures. Thus, the Board
Comment 18(c)–2 affords creditors requires creditors to disclose that the
proposes to revise comment 18(a)–1 to
flexibility in the information that may loan has a variable-rate feature together
reflect this change.
be included in the itemization of with a statement that variable-rate
18(b) Amount Financed amount financed. Under the proposal, program disclosures (required by
the Board would revise comment 18(c)– current § 226.19(b)) have been provided
Section 226.18(b) addresses the 2(i) to remove references made to earlier.
disclosure and calculation of the escrow items and to the commentary The Board adopted § 226.18(f)(2) in
amount financed. The Board proposes to under § 226.18(g) because the proposal 1987, at the same time that it adopted
revise comment 18(b)–2, which renders them unnecessary, and 18(c)– § 226.19(b) (disclosures for variable-rate
provides guidance regarding treatment 2(vi) to reflect a technical revision with mortgages with terms greater than one
of rebates and loan premiums for the no intended change in substance or year). The Board adopted those
amount financed calculation required meaning. The Board also proposes to provisions based on recommendations
under § 226.18(b). Comment 18(b)–2 move comment 18(c)–4 regarding the by the Federal Financial Institutions
primarily addresses credit sales, such as exemption afforded to RESPA Examination Council (FFIEC). 52 FR
automobile financing, and provides that transactions, and 18(c)(1)(iv)–2 48665; Dec. 24, 1987. However, the
creditors may choose whether to reflect regarding prepaid mortgage insurance Board applied the requirements of those
creditor-paid premiums and seller- or premiums to proposed comments provisions only to loans secured by a
manufacturer-paid rebates in the 38(j)(1)(iii)–1 and 38(j)(1)(i)(D)–2, principal dwelling with a term greater
disclosures required under § 226.18. respectively, because they apply only to than one year. Loans secured by a
The Board believes that creditor-paid dwelling-secured transactions. principal dwelling with a term of one
premiums and seller- or manufacturer- 18(d) Finance Charge year or less, and loans not secured by
paid rebates are analogous to buydowns. a principal dwelling remained subject to
Section 226.18(d) requires disclosure rules in § 226.18(f)(1). The Board did
Like buydowns, such premiums and of the finance charge for closed-end
rebates may or may not be funded by the not apply the new variable-rate loan
credit. As discussed below, the Board disclosure requirements to such loans
creditor and reduce costs that otherwise proposes new § 226.38(e)(5)(ii) to
would be borne by the consumer. because public comments expressed
address disclosure of the finance charge concern about potential compliance
Accordingly, their impact on the (renamed ‘‘interest and settlement
amount financed, like that of buydowns, problems for creditors making short-
charges’’) for transactions secured by
properly depends on whether they are term loans. 52 FR at 48666.
real property or a dwelling. As a result,
part of the legal obligation. See reference to the finance charge Proposed §§ 226.19(b) and 226.38(c)
comments 17(c)(1)–1 through –5. The tolerances for mortgage loans would be contain disclosure requirements for
Board is proposing to revise comment moved from § 226.18(d) to proposed closed-end adjustable-rate loans secured
18(b)–2 to clarify that the disclosures, § 226.38(e)(5)(ii); no substantive change by real property or a dwelling, and
including the amount financed, must is intended. Technical amendments to would apply the same rules to loans
reflect loan premiums and rebates comment 18(d)(2) would reflect this with a term of one year or less as for
regardless of their source, but only if revision. loans with a term greater than one year.
they are part of the terms of the legal Disclosures required by those provisions
18(e) Annual Percentage Rate are discussed below. As a result,
obligation between the creditor and the
Section 226.18(e) requires disclosure § 226.18(f)(2) and comment 18(f)(2)–1,
consumer. As discussed below,
of the annual percentage rate, using that which address requirements and
proposed comment 38(e)(5)(iii)–2 would
term. The substance of footnote 42 guidance for closed-end adjustable-rate
parallel this approach for transactions
would be moved to the regulatory text loans secured by real property or a
secured by real property or a dwelling.
of § 226.18(e). Technical amendments to dwelling, are unnecessary and would be

In addition, the Board proposes to comment 18(e)–2 would reflect this deleted. The substance of footnote 43,
revise comment 18(b)(2)–1, which revision; no substantive change is which permits creditors to substitute
addresses amounts included in the intended. information required under
amount financed calculation that are not § 226.18(f)(2) and 226.19(b) for the
otherwise included in the finance 18(f) Variable Rate disclosures required by § 226.18(f)(1),
charge, to remove reference to real estate Section 226.18(f)(1) contains would also be deleted. Section
settlement charges for the reasons disclosure requirements for variable-rate 226.18(f)(1)(i) through (iv) would be
discussed more fully under § 226.4. transactions not secured by a redesignated as § 226.18(f)(1) through
(4), and references in comment 18(f)–1 this provision, except that comments disclosure requirement also applies to
would be updated. 18(i)–2 and –3 would be updated to debt suspension policies.
As discussed below, proposed cross-reference proposed
§§ 226.19(b)(3)(iii) and 226.38(d)(2)(iii) §§ 226.38(d)(2)(iv) and 226.38(c), which 18(o) and 18(p) Certain Security-Interest
regarding disclosure of shared-equity or address the disclosure requirements for Charges; Contract Reference
shared-appreciation loan features would a demand feature and payment Sections 226.18(o) and (p) address,
render guidance about shared-equity or schedule, respectively, for transactions
shared-appreciation mortgages in respectively, disclosures regarding
secured by real property or a dwelling.
comment 18(f)–1 unnecessary, and certain security-interest charges and
No substantive change is intended.
therefore that comment would be contract reference. The Board does not
deleted. Comment 18(f)(1)–1 regarding 18(k) Prepayment propose any changes to these
terms used in disclosures, and comment provisions. However, as noted below,
Section 226.18(k)(1) provides that,
18(f)(1)(i)–2 regarding conversion the Board would require creditors to
when an obligation includes a finance
features would be redesignated as charge computed from time to time by provide parallel contract references for
comments 18(f)–2 and –3, respectively. application of a rate to the unpaid transactions secured by real property or
Finally, comments 18(f)(1)(i)–1, principal balance, the creditor must a dwelling under proposed
18(f)(1)(ii)–1, 18(f)(1)(iii)–1, and disclose a statement that indicates § 226.38(j)(5). No parallel disclosure for
18(f)(1)(iv)–1 would be redesignated as whether or not a penalty may be security-interest charges is proposed for
comments 18(f)(1)–1, 18(f)(2)–1, imposed if the obligation is prepaid in transactions secured by real property or
18(f)(3)–1, and 18(f)(4)–1, respectively. full. Comment 18(k)(1)–1 provides a dwelling because such disclosures
18(g) Payment Schedule examples of charges considered would not apply to those transactions
penalties under § 226.18(k)(1). One such under the Board’s proposed revisions to
Section 226.18(g) and associated § 226.4, discussed above.
example is ‘‘interest charges for any
commentary address the disclosure of
period after prepayment in full is
the payment schedule for all closed-end 18(q) Assumption Policy
made.’’ When the loan is prepaid in full,
credit. As discussed under proposed
there is no balance to which the creditor Section 226.18(q) and associated
§ 226.38(c), the Board would require
may apply the interest rate. commentary require disclosure of
creditors to provide disclosures
Accordingly, the proposed rule would assumption policies for residential
regarding interest rates and monthly
revise this example for clarity; no mortgage transactions. Under the
payments in a tabular format for
substantive change is intended. proposal, the Board proposes to move
Proposed § 226.38(a)(5) contains
a dwelling. As a result, creditors would § 226.18(q) and comments 18(q)–1 and
requirements for disclosing prepayment
not need to comply with the disclosure –2 to proposed § 226.38(j)(6) and
penalties for transactions secured by
requirements of § 226.18(g) for such comments 38(j)(6)–1 and –2,
real property or a dwelling. As
transactions. However, as discussed respectively, because assumption
discussed below, commentary on
under proposed § 226.38(e)(5)(i), policies apply only to transactions
proposed § 226.38(a)(5) is consistent
creditors would be required to disclose secured by real property or a dwelling.
with the commentary on § 226.18(k), as
the number and total amount of No substantive change is intended.
proposed to be revised.
payments that the consumer would
make over the full term of the loan for 18(j) Through 18(m) Total Sale Price; 18(r) Required Deposit
transactions secured by real property or Prepayment; Late Payment; Security
Section 226.18(r) addresses disclosure
a dwelling. Proposed comment Interest
requirements when creditors require
18(e)(5)(i)–1 would require creditors to
Sections 226.18(j), (k), (l), and (m) consumers to maintain deposits as a
calculate the total payments following
address, respectively, disclosures condition to the specific transaction.
the rules under § 226.18(g) and
regarding: total sale price; prepayment; Footnote 45 provides additional
associated commentary. As a result, the
late payment; and security interest. The guidance on such required deposits and
Board proposes to revise comment
Board does not propose any changes to includes a reference to payments made
18(g)–3 to require creditors to disclose
these provisions, except for a minor under Morris Plans. Although at least
the total number of payments for all
technical amendment to comment one Morris Plan bank remains active,
payment levels as a single figure for
18(k)(1)–1, as discussed above. Morris Plans essentially are obsolete
However, as noted below, the Board today. Accordingly, the Board proposes
a dwelling, and to cross-reference
proposes new disclosure requirements to move the substance of footnote 45 to
proposed § 226.38(e)(5)(i).
under §§ 226.38(a)(5) and the regulation text but delete the
18(h) Total of Payments 226.38(d)(1)(iii) regarding prepayment reference to Morris Plans. Comments
In a technical revision, the substance penalties, § 226.38(j)(3) regarding late
18(r)–1, –3, and –5 would also be
of footnote 44 would be moved to the payment, and § 226.38(f)(2) regarding
similarly revised. In addition, under the
regulation text of § 226.18(e); technical security interest, for transactions
secured by real property or a dwelling. proposal, comment 18(r)–2 on pledged-
amendments to comment 18(h)–3 would account mortgages would be moved to
reflect this revision. 18(n) Insurance and Debt Cancellation comment 38(i)–2 because it applies only
18(i) Demand Feature Section 226.18(n) requires disclosure to transactions secured by real property.
Section 226.18(i) and associated of insurance and debt cancellation in (See also comment 17(c)(1)–15 on
commentary address the following for accordance with the requirements under Morris Plans, which the Board proposes
all closed-end credit: disclosure of a § 226.4(d) to exclude such fees from the to delete as unnecessary.) Comment
demand feature; the type of demand finance charge. For the reasons 18(r)–6 would be redesignated as
features covered; and the relationship to discussed under § 226.4(d), the Board comment 18(r)–6(i) through (vii).
payment schedule disclosures. The proposes to revise § 226.18(n) and
Board does not propose any change to comment 18(n)–2 to clarify that this
Section 226.19 Early Disclosures and § 226.19(a) would apply to transactions Although under the proposed rule
Adjustable-Rate Disclosures for secured by real property that does not § 226.38 rather than § 226.18 would
Transactions Secured by Real Property include a dwelling, such as vacant land, contain requirements for disclosure
or a Dwelling and transactions that are not subject to content for transactions secured by real
Section 226.19(a) currently contains RESPA, such as construction loans. property or a dwelling, the content
The Board also proposes to revise required in early disclosures is the same
timing requirements for providing
§ 226.19(a) so that, in addition to the as the content of disclosures provided in
disclosures for closed-end transactions
early disclosures, the creditor must cases where early disclosures are not
secured by a dwelling and subject to
provide final disclosures that the required. Applying the requirement to
RESPA. Section 226.19(b) contains
consumer must receive no later than provide early disclosures to all
disclosure timing and content
three business days before transactions secured by real property or
requirements for variable-rate loans
consummation. Under existing a dwelling would simplify creditors’
secured by a consumer’s principal § 226.19(a), by contrast, a consumer determination of the time by which
dwelling. The Board proposes to revise must receive new disclosures at least creditors must make the disclosures
§ 226.19(a) and (b) to apply the three business days before required by § 226.38. The Board
disclosures to any closed-end consummation only if changes to the requests comment about operational or
transaction secured by real property or previously disclosed APR exceed a other issues involved in providing early
a dwelling, for reasons discussed below. specified tolerance. The Board is disclosures for temporary loans,
Section 226.19(a) also would be revised proposing two alternative provisions to however. The Board also solicits
to require creditors to provide new address circumstances where terms comment on whether there are other
disclosures that a consumer must change after the consumer has received types of loans exempt from RESPA to
receive at least three business days the final disclosures. which it is not appropriate to apply
before consummation, in addition to the proposed § 226.19(a).
existing requirement to provide early 19(a)(1)(i) Time of Good Faith Estimates
Proposed new comment 19–1 states
disclosures within three business days of Disclosures
that proposed § 226.19 applies to
of application. The Board also proposes TILA Section 128(b)(2), 15 U.S.C. transactions secured by real property or
to revise the content of disclosures for 1638(b)(2), as amended by the MDIA, a dwelling even if such transactions are
ARMs required under § 226.19(b), requires creditors to provide early not subject to RESPA. The proposed
require new disclosures about risky loan disclosures if a transaction is secured by comment clarifies that TILA does not
features in proposed § 226.19(c), and to a dwelling and subject to RESPA. apply to transactions that are primarily
include existing rules about disclosures However, TILA’s early disclosure for business, commercial, or agricultural
provided through an intermediary agent requirements do not apply to mortgage purposes, however. (Proposed comment
or broker, or by telephone or electronic transactions for personal, family, or 19–1 addresses the introductory text to
communication, in proposed household purposes if they are secured proposed § 226.19, which provides that
§ 226.19(d). by real property that is not a dwelling, all of § 226.19, not only § 226.19(a),
for example a consumer’s business applies to closed-end transactions
19(a) Good Faith Estimates of Mortgage
property. Creditors need not provide secured by real property or a dwelling.)
Transaction Terms and New Disclosures
early disclosures for transactions Comment 19(a)(1)(i)–1, which
TILA Section 128(b)(2), 15 U.S.C. secured by property of 25 acres or more, discusses the coverage of § 226.19(a),
1638(b)(2), requires creditors to mail or temporary financing (such as a would be removed because proposed
deliver to consumers good faith construction loan), or transactions comment 19–1 would discuss the
estimates of disclosures required by secured by vacant land because RESPA coverage of all of proposed § 226.19.
TILA Section 128(a), 15 U.S.C. 1638(a) does not apply to such transactions. 24 Comment 19(a)(1)(i)–2 would be revised
(early disclosures), for a transaction CFR 3500.5(b)(1), (3), and (4). to clarify that under the proposed rule
secured by a dwelling and subject to The Board proposes to expand disclosures required by proposed
RESPA. As amended by the MDIA, TILA § 226.19(a) to cover transactions secured § 226.19(a)(2) may not contain estimated
Section 128(b)(2) requires creditors to by real property, even if the property is disclosures, with limited exceptions.
deliver or mail the early disclosures at not a dwelling and even if the The comment also would be revised to
least seven business days before transaction is not subject to RESPA. reflect that proposed § 226.37 contains
consummation. Further, TILA Section (Transactions secured by a consumer’s requirements for disclosure of estimates
128(b)(2), as amended by the MDIA, interest in a timeshare plan would be and contingencies, as discussed below.
requires that the creditor provide treated differently, as discussed under Comment 19(a)(1)(i)–3 would be revised
corrected disclosures if the disclosed § 226.19(a)(5) below.) Under TILA to reflect that creditors may rely on
APR changes in excess of a specified Section 128(b)(2), 15 U.S.C. 1638(b)(2), RESPA and Regulation X to determine
tolerance. The consumer must receive if the transaction is not secured by a when an application is received, even
the corrected disclosures no later than dwelling, or is not covered by RESPA, for transactions not subject to RESPA.
three business days before the creditor is only required to provide Comment 19(a)(1)(i)–5 would be revised
consummation. The Board implemented disclosures before consummation. The to refer to the itemization of the amount
these MDIA requirements in § 226.19(a) Board proposes to require creditors to financed disclosures in proposed
through a final rule effective July 30, provide early disclosures under TILA § 226.38(j) rather than in § 226.18(c), as
2009 (MDIA Final Rule). 74 FR 23289; for all closed-end transactions secured currently referenced. Finally, comments
May 19, 2009. by real property or a dwelling to 19(a)(1)(i)–2 through –5 would be
The Board proposes to expand the facilitate compliance. redesignated as comments 19(a)(1)(i)–1
coverage of § 226.19(a) so that the Section 226.18 currently contains through –4.
timing provisions would apply to requirements for the content of
closed-end mortgage transactions transaction-specific disclosures secured 19(a)(1)(ii) Imposition of Fees
secured by real property or a dwelling, by real property or a dwelling, whether On July 30, 2008, the Board published
and would not be limited to RESPA- or not creditors are required to provide the 2008 HOEPA Final Rule amending
covered transactions. Thus, proposed that content in early disclosures. Regulation Z, which implements TILA
and HOEPA. The July 2008 final rule three-business-day presumption of 1 percentage point. See § 226.22(a) and
requires creditors to give transaction- receipt. This comment is consistent footnote 46; comment 17(c)(1)–10(iv).
specific cost disclosures no later than with existing comment 19(a)(2)(ii)–3 Currently, if an APR stated in early
three business days after receiving a adopted through the MDIA Final Rule. disclosures for a closed-end transaction
consumer’s application, for closed-end (Comment 19(a)(2)(ii)–3 would be not subject to § 226.19(a) remains
mortgage transactions secured by a redesignated as comment 19(a)(2)(v)–1 accurate but other terms that were not
consumer’s principal dwelling, under and conforming edits would be made in labeled as estimates change, the creditor
§ 226.19(a)(1)(i). Further, the 2008 connection with the proposed must disclose those changed terms
HOEPA Final Rule prohibits creditors requirement that creditors provide final before consummation under § 226.17(f).
and other persons from imposing a fee disclosures that the consumer must Creditors also must provide corrected
on the consumer, other than a fee for receive no later than three business days disclosures if a variable-rate feature is
obtaining the consumer’s credit history, before consummation, as discussed added to a closed-end transaction under
before the consumer receives the early below.) § 226.17(f), whether or not the
disclosures, under § 226.19(a)(1)(ii) and An additional change would be made transaction is subject to § 226.19(a). See
(iii). Section 226.19(a)(1)(ii) provides to comment 19(a)(1)(ii)–1 under the comment 17(f)–2. In practice, most
that if the early disclosures are mailed proposed rule. Currently, comment creditors provide ‘‘final’’ disclosures to
to the consumer, the consumer is 19(a)(1)(ii)–1 provides that if the a consumer on the day of
considered to have received them three creditor places the early disclosures in consummation, whether or not the loan
business days after they are mailed. 73 the mail, the creditor may impose a fee terms stated in the early disclosures
FR 44522, 44600–44601. in all cases ‘‘after midnight on the third have changed.
The proposed rule would revise business day following mailing of the Under the proposed rule, after
§ 226.19(a)(1)(ii) to conform to the disclosures.’’ The Board recognizes that providing early disclosures for a closed-
presumption of receipt provision the the phrase ‘‘after midnight on the third end transaction secured by real property
Board subsequently adopted in the business day’’ may be construed to or a dwelling, creditors would provide
MDIA Final Rule in § 226.19(a)(2)(ii).40 mean either that the creditor may a second set of disclosures in all cases,
Under the proposed rule impose a fee at the beginning of the under § 226.19(a)(2)(ii). The consumer
§ 226.19(a)(1)(ii) would be revised to third business day after the creditor would have to receive these final
provide that if the early disclosures are receives the consumer’s application, or disclosures no later than three business
mailed to the consumer or delivered to at the beginning of the fourth business days before consummation. Proposed
the consumer by means other than day after the creditor receives the § 226.19(a)(2)(ii) is designed to address
delivery in person, the consumer is consumer’s application. Thus, the Board long-standing concerns that consumers
deemed to have received the corrected proposes to revise comment 19(a)(1)(ii)– may find out about different loan terms
disclosures three business days after 1 to provide that the creditor may or increased settlement costs only at
they are mailed or delivered. This is impose a fee after the consumer receives consummation. Members of the Board’s
consistent with comment 19(a)(1)(ii)–1, the early disclosures or, in all cases, Consumer Advisory Council and
which provides that creditors may after midnight following the third commenters on prior Board rulemakings
impose a fee any time after midnight business day after mailing the early have expressed concern about
following the third business day after disclosures. For example, proposed consumers not learning of changes to
the creditor delivers or mails the early comment 19(a)(1)(ii)–1 provides that credit terms until consummation.
disclosures in all cases, regardless of the (assuming that there are no intervening Further, several participants in the
legal public holidays) a creditor that Board’s consumer testing stated that
method the creditor uses to provide the
receives the consumer’s written they had been surprised at closing by
early disclosures. The Board does not
application on Monday and mails the important changes in loan terms. For
intend to make substantive changes by
early mortgage loan disclosure on example, some participants said that
conforming the presumption of receipt
Tuesday may impose a fee on the they had been told at closing that a loan
provisions under §§ 226.19(a)(1)(ii) and
consumer on Saturday. would have an adjustable rate even
226.19(a)(2)(ii).
The Board also proposes to revise though previously they had been told
19(a)(2)(ii) Three-Business-Day Waiting they would receive a fixed-rate loan.
comment 19(a)(1)(ii)–1 to clarify that the Period Participants said that they closed
three-business-day presumption of Under § 226.19(a), as revised by the despite unfavorable changes in loan
receipt applies in all cases, including MDIA Final Rule, if changes to the APR terms because they lacked alternatives,
where a creditor uses electronic mail or disclosed for a closed-end transaction especially in the case of a loan financing
a courier to provide the early secured by a dwelling and subject to a home purchase. Some participants
disclosures. Proposed comment RESPA exceed a specified tolerance, stated that they accepted changed terms
19(a)(1)(ii)–1 provides that creditors that creditors must provide corrected because the loan originator advised
use electronic mail or a courier other disclosures. The consumer must receive them that they could easily obtain a
than the postal service may use the the corrected disclosures no later than refinance loan with better terms in the
40 On the same day the July 2008 final rule was
three business days before near future.
published, the Congress passed the MDIA. Under
consummation. The tolerance specified Terms or costs may change after early
the MDIA, if the APR stated in the early disclosures for closed-end ‘‘regular transactions’’ disclosures are given for a variety of
changes in excess of a specified tolerance, the (those that do not involve multiple reasons, including that the consumer
creditor must provide corrected disclosures that the advances, irregular payment periods, or did not lock the interest rate at
consumer must receive no later than three business
days before consummation. The MDIA provides
irregular payment amounts) is 1⁄8 of 1 application or an appraisal report
that if the creditor mails the corrected disclosures, percentage point and for closed-end developed after early disclosures are
the consumer is considered to have received them ‘‘irregular transactions’’ (those that provided shows a different property
three business days after they are mailed. These involve multiple advances, irregular value than the creditor assumed when
early disclosure rules are contained in TILA Section
128(b)(2)(E) (to be codified at 15 U.S.C.
payment periods, or irregular payment providing the early disclosure.
1638(b)(2)(E)). Section 226.19(a)(2)(ii) implements amounts, such as an ARM with a Regardless of the reason for the changed
these rules. discounted initial interest rate) is 1⁄4 of terms, a consumer who receives notice
of changed loan terms at consummation on the operational and other practical no later than the third business day
that differ from those originally effects of requiring that consumers before consummation.
disclosed does not have a meaningful receive final TILA disclosures for Under Alternative 1, proposed
opportunity to make an informed credit closed-end loans secured by real comment 19(a)(2)(iii)–1 clarifies that a
decision. property or a dwelling no later than disclosed APR is accurate for purposes
To address concerns about changes to three business days before of § 226.19(a)(2)(iii) if the disclosure is
loan terms, proposed § 226.19(a)(2)(ii) consummation. accurate under proposed
requires creditors to provide final Proposed comment 19(a)(2)(ii)–1 § 226.19(a)(2)(iv). (Under proposed
disclosures that a consumer would have provides that creditors must provide § 226.19(a)(2)(iv), an APR disclosed
to receive no later than the third final disclosures even if the terms under proposed § 226.19(a)(2)(ii) or (iii)
business day before consummation. disclosed have not changed since the is considered accurate as provided by
Under proposed § 226.38(a)(4), the early creditor provided the early disclosures. § 226.22, except that in certain
disclosures and final disclosures would Proposed comment 19(a)(2)(ii)–2 circumstances the APR is considered
contain total estimated settlement costs provides that disclosures made under accurate if the APR decreases from the
disclosed under RESPA and HUD’s § 226.19(a)(2)(ii) must contain each of APR disclosed previously, as discussed
Regulation X, which implements the applicable disclosures required by below.) Proposed comment 19(a)(2)(iii)–
RESPA. Regulation X permits final § 226.38. 2 states that disclosures made under
settlement charges to be disclosed at If escrows for taxes and insurance will § 226.19(a)(2)(ii) must contain each of
consummation; the consumer may be required, creditors may disclose the disclosures required by § 226.38.
request that final settlement charges be periodic payments of taxes and Proposed comment 19(a)(2)(iii)–3
disclosed twenty-four hours in advance, insurance as estimates under clarifies that creditors may rely on
however. 24 CFR 3500.10(a) and (b). § 226.38(c). If the creditor includes proposed comment 19(a)(2)(ii)–3 in
Thus, under RESPA, creditors, escrowed amounts when calculating the determining which of the disclosures
settlement agents, and settlement total of payments under § 226.38(e)(5)(i), required by § 226.19(a)(2)(iii) may be
service providers have until the day of then the total of payments also would be estimated disclosures. Proposed
consummation to determine the disclosed as estimated disclosures, as comment 19(a)(2)(iii)–4 provides an
amounts of the various settlement costs. discussed in comment 38(e)(5)–1. example that shows when
Effective January 1, 2010, Regulation X Periodic payment disclosures that consummation may occur after the
provides that the sum of most lender- include escrowed amounts must be consumer receives corrected
required third party settlement costs estimated disclosures because the disclosures. Existing comments
may vary no more than 10 percent from creditor cannot know with certainty the 19(a)(2)(ii)–1 through –4 would be
the same costs disclosed on the good amounts for property taxes and removed under Alternative 1.
faith estimate (GFE) delivered earlier. insurance after the first year of the loan. Alternative 2. It is not clear that it is
Certain other changes, such as the Proposed comment 19(a)(2)(ii)–3 always in a consumer’s interest to delay
lender’s origination fee, cannot vary, clarifies that other disclosures may not consummation until three business days
unless the consumer did not lock the be estimated under proposed after the consumer receives corrected
interest rate. § 226.19(a)(2)(ii). Finally, comment disclosures if any terms or costs change.
The Board believes that proposed 19(a)(2)(ii)–4 provides an example that Thus, the Board proposes an alternative
§ 226.19(a)(2) would not conflict with illustrates when consummation may § 226.19(a)(2)(iii) that incorporates the
tolerance and timing rules under occur after the consumer receives the existing tolerance for APR changes
Regulation X—that is, creditors could final disclosures. under § 226.22 and incorporates an
comply with both Regulation Z and additional tolerance discussed under
19(a)(2)(iii) Additional Three-Business-
Regulation X. However, the Board’s § 226.19(a)(iv). If the APR changes
Day Waiting Period
proposal would require creditors to beyond the specified tolerances,
finalize settlement costs earlier than The Board is proposing two creditors would be required to provide
RESPA does: At least three business alternative requirements for creditors to corrected disclosures that the consumer
days before consummation, and as provide corrected disclosures after must receive no later than three
much as a week before consummation if making the final disclosures required by business days before consummation.
the creditor mails the disclosures to the § 226.19(a)(2)(ii), to be designated as Under the second alternative, after the
consumer.41 The Board recognizes that § 226.19(a)(2)(iii). Consumers would creditor provides the final disclosures,
requiring that loan terms and costs be have to receive the corrected disclosures only APR changes beyond the specified
finalized several days before required by proposed § 226.19(a)(2)(iii) tolerances or the addition of a variable-
consummation would require no later than the third business day rate feature to the loan would trigger a
significant changes to current settlement before consummation. Under both requirement that consumers receive
practices. These changes would generate Alternative 1 and Alternative 2, corrected disclosures no later than three
costs that creditors and third-party comment 19(a)(2)–2 would be revised to business days before consummation. In
service providers would pass on to reflect that there is more than one three- other cases, the creditor would have to
consumers. The Board solicits comment business-day waiting period under disclose changed terms no later than the
§ 226.19(a). day of consummation, under existing
41 Under existing and proposed § 226.19(a)(2), a Alternative 1. The first alternative § 226.17(f). Under this alternative, a
consumer is deemed to receive corrected would require that a creditor provide consumer would be alerted to
disclosures three business days after a creditor corrected disclosures if any terms stated significant increases in loan costs and
mails them. Under existing and proposed
§ 226.19(a)(2), creditors may but need not rely on
in the final disclosures required by would have three business days to
the presumption of receipt to determine when the proposed § 226.19(a)(2)(ii) change. This investigate the reason for the change or
three-business-day waiting period begins, whether would ensure that consumers are aware to consider other options. Smaller APR
creditors mail TILA disclosures using the postal of the final loan terms and costs at least increases or other changes to loan terms
service, use a courier other than the postal service,
or provide disclosures electronically. Alternatively,
three business days before would not trigger a three-day delay in
creditors may rely on evidence of receipt. 74 FR at consummation. The consumer would consummation, however. This
23293; 73 FR 44522, 44593; July 30, 2008. have to receive the corrected disclosures alternative is designed to prevent
relatively minor changes in loan terms ‘‘overstated’’). See §§ 226.22(a)(4) and render the APR inaccurate under
from repeatedly delaying 226.18(d)(1)(ii). In some transactions, § 226.19(a)(iv), the creditor must
consummation. the finance charge at consummation disclose the changed terms before
Under Alternative 2, comment might be lower than the amount consummation, consistent with
19(a)(2)(ii)–1 would be redesignated as previously disclosed, for example, if the § 226.17(f). The Board solicits comment
comment 19(a)(2)(iii)–1 and revised to parties agree to a smaller principal loan on whether a disclosed APR that is
clarify that creditors must provide amount after early disclosures were higher than the actual APR at
corrected disclosures if the APR made. In the same transaction, the APR consummation should be considered
disclosed pursuant to § 226.19(a)(ii) might increase because of an increase in accurate in other circumstances.
becomes inaccurate under proposed the interest rate after the early
§ 226.19(a)(2)(iv), which incorporates 19(a)(2)(v) Timing of Receipt
disclosures were made. In this
existing tolerances under § 226.22, or an transaction, at consummation the As adopted by the MDIA Final Rule,
adjustable-rate feature is added. previously disclosed finance charge § 226.19(a)(2)(ii) provides that
Comment 19(a)(2)(ii)–2 would be would be overstated and the previously consumers must receive corrected
redesignated as comment 19(a)(2)(iii)–2 disclosed APR understated. In such a disclosures, if required, no later than
and revised to: (1) Reflect that corrected case, the question has been raised as to three business days before
disclosures must comply with the whether the previously disclosed APR, consummation. Further,
format requirements of proposed which was derived from the overstated § 226.19(a)(2)(ii) provides that if the
§ 226.37 as well as those of § 226.17(a); finance charge, should be deemed corrected disclosures are mailed to the
(2) reflect that a different APR will accurate even though it is understated at consumer or delivered to the consumer
almost always result in changes in consummation. The Board believes the by means other than delivery in person,
‘‘interest and settlement charges’’ and APR in this case is not accurate. The the consumer is deemed to have
the ‘‘payment summary’’ (currently Board believes an APR ‘‘results from’’ received the disclosures three business
designated as the finance charge and an overstated finance charge only if the days after they are mailed or delivered.
payment schedule, respectively); (3) APR also is overstated. The Board The proposed rule applies this
clarify that the addition of an solicits comment on whether, should presumption for purposes of both the
adjustable-rate feature triggers the Alternative 2 be adopted, the Board also waiting period under proposed
requirement to provide corrected should adopt commentary under § 226.19(a)(2)(ii) and the waiting period
disclosures, by moving a cross-reference § 226.22(a)(4) to clarify this under proposed § 226.19(a)(2)(iii). The
to comment 17(f)–2; and (4) remove interpretation. presumption would be moved to
guidance on the timing and conditions Proposed § 226.19(a)(2)(iv) contains § 226.19(a)(2)(v) under the proposed
of new disclosures from guidance on APR tolerances, and proposed rule.
disclosure content, for clarity. Proposed § 226.38(e)(5)(ii) contains tolerances for Proposed comment 19(a)(2)(v)–1
comment 19(a)(2)(iii)–3 clarifies that interest and settlement charges (as the states that whether the creditor provides
creditors may rely on proposed finance charge would be referred to disclosures by delivery, postal service,
comment 19(a)(2)(ii)–3 in determining under the proposed rule), for electronic mail, or courier other than the
which of the disclosures required by transactions secured by real property or postal service, consumers are deemed to
§ 226.19(a)(2)(iii) creditors may a dwelling. The Board solicits comment receive the disclosures three business
estimate. Under the proposed rule, on whether, under § 226.38(e)(5)(ii), days after the creditor so provides them,
comment 19(a)(2)(iii)–4 would be tolerances would be appropriate for for purposes of determining when a
revised to update a cross-reference numerical disclosures other than the three-business-day waiting period
consistent with the proposed rule and APR and interest and settlement required by § 226.19(a)(2)(ii) or (iii)
reflect that consumers must receive charges. For example, would dollar begins. Further, proposed comment
disclosures under § 226.19(a)(2)(ii) tolerances for overstatements of periodic 19(a)(2)(v)–1 clarifies that creditors may
whether or not the disclosures correct payment disclosures required by rely on evidence of earlier receipt,
the early disclosures. § 226.38(c) be appropriate? What regardless of how the creditor provides
The Board solicits comment on standards should be used to prevent disclosures to the consumer. This
whether, under Alternative 2, changes overstated disclosures from commentary is consistent with the
other than APR changes in excess of the undermining the integrity of the early Board’s discussion of delivery and
specified tolerance or the addition of an disclosures and their usefulness as a mailing under the MDIA Final Rule and
adjustable-rate feature after the creditor shopping tool? the 2008 HOEPA Final Rule. See 74 FR
makes the new disclosures should at 23292–23293; 73 FR at 44593.
trigger an additional three-business-day 19(a)(2)(iv) Annual Percentage Rate
Accuracy 19(a)(3) Consumer’s Waiver of Waiting
waiting period. For example, should the
addition of a prepayment penalty, Under proposed § 226.19(a)(2)(iv), an Period
negative amortization, interest-only, or APR disclosed under proposed Section 226.19(a)(3) and comment
balloon payment feature trigger a § 226.19(a)(2)(ii) or (iii) is considered 19(a)(3)–1 would be revised to reflect
waiting period requirement? accurate as provided by § 226.22, except that under the proposed rule the
Proposed § 226.19(a)(2)(iii) (under that the APR also is considered accurate disclosures required for transactions
Alternative 2) would require corrected if the APR decreases due to a discount secured by real property or a dwelling
disclosures and a new three-business- (1) the creditor gives the consumer to are contained in § 226.38 rather than in
day waiting period if the previously induce periodic payments by automated § 226.18. Section 226.19(a)(3) also
disclosed APR has become inaccurate. debit from a consumer’s deposit account would be revised to reflect that there is
Under current rules, a disclosed APR is or (2) the title insurer gives the more than one three-business-day
considered accurate and does not trigger consumer on owner’s title insurance. waiting period under proposed
corrected disclosures if it results from a Thus, such APR changes would not § 226.19(a)(2); comment 19(a)(3)–1
disclosed finance charge that is greater trigger a new three-business-day waiting would be revised to clarify that a
than the finance charge required to be period. Comment 19(a)(2)(iv)–1 clarifies separate waiver is required for each
disclosed (i.e., the finance charge is that if a change occurs that does not waiting period to be waived.
Section 226.19(a)(2)(ii) currently disclosures; (2) waiting periods after the revised to reflect that cross-referenced
requires creditors to provide corrected creditor provides the early disclosures commentary on variable- or adjustable-
disclosures to a consumer if changes to and after the consumer receives rate transactions would be incorporated
the disclosed APR exceed the specified corrected disclosures (if any) and before into proposed § 226.17(c)(1)(iii). Finally,
tolerance (APR correction disclosures). consummation; (3) waiver of waiting commentary on § 226.19(a)(5)(ii) and
The consumer must receive APR periods; and (4) the requirement to (iii) would be redesignated as
correction disclosures no later than disclose a statement that the consumer commentary on § 226.19(a)(4)(ii) and
three business days before is not required to consummate a (iii), respectively.
consummation. Comment 19(a)(3)–2 transaction merely because the
19(b) Adjustable-Rate Loan Program
provides examples that show whether or consumer has received disclosures or
Disclosures
not the three-business-day waiting signed a loan application.
period would need to be waived to Section 226.19(a)(5)(ii) contains Section 226.19(b) currently requires
allow consummation to occur during timing requirements for early creditors to provide detailed disclosures
the seven-business-day waiting period disclosures, and § 226.19(a)(5)(iii) about adjustable-rate loan programs and
required by § 226.19(a)(2)(i), in the contains timing requirements for a CHARM booklet if a consumer
event of a bona fide personal financial corrected disclosures, for timeshare expresses an interest in ARMs. Section
emergency. This example would be transactions. Waiting periods are not 226.19(b) applies to closed-end
removed because proposed required for timeshare transactions, so transactions secured by a consumer’s
§ 226.19(a)(2)(ii) provides that, after the § 226.19(a)(5) does not contain principal dwelling with a term greater
creditor provides the early disclosures, requirements similar to the than one year. Creditors must provide
consumers must receive final requirements in § 226.19(a)(3) for these disclosures at the time an
disclosures no later than three business waiving waiting periods for non- application form is provided or before
days before consummation in all cases. timeshare transactions. Section the consumer pays a non-refundable fee,
Comment 19(a)(3)–3 provides examples 226.19(a)(5) also does not contain a whichever is earlier. Creditors need not
illustrating whether or not, after the requirement similar to that in provide these disclosures, however, if a
seven-business-day waiting period § 226.19(a)(4) that disclosures contain a loan is secured by a dwelling other than
required by § 226.19(a)(2)(i), the three- statement that a consumer need not a principal dwelling (such as a second
business-day waiting period triggered by consummate a transaction simply home) or real property that is not a
APR correction disclosures would need because the consumer receives dwelling (such as vacant land) or with
to be waived to allow consummation to disclosures or signs a loan application. a term of one year or less. For such
occur, in the event of a bona fide Section 226.19(a)(4) would be removed transactions, creditors instead must
personal financial emergency. Comment under the proposed rule, and a provide the less detailed variable-rate
19(a)(3)–3 would be revised to reflect substantially similar requirement would disclosures required by § 226.18(f)(1)
that in all cases consumers would have apply under proposed § 226.38(f)(1). within three business days after
to receive final disclosures after the Proposed § 226.38(f)(1) requires receiving the consumer’s application, as
creditor provides the early disclosures creditors to disclose a statement that a discussed above.
under the proposed rule and that under consumer is not obligated to The Board proposes to require
proposed § 226.19(a)(2)(iv) a disclosed consummate a loan and that the creditors to provide ARM loan program
APR that is overstated is considered consumer’s signature only confirms disclosures, and additional disclosures
accurate in specified circumstances. receipt of a disclosure statement. discussed below, at the time an
Comment 19(a)(3)–3 would be Proposed § 226.38(f)(1) applies to application form is provided, for all
redesignated as comment 19(a)(3)–2 timeshare transactions. The MDIA closed-end transactions secured by real
under the proposed rule. exempts timeshare transactions from the property or a dwelling, regardless of the
requirements of TILA Section length of the loan’s term. The ARM
19(a)(4) Notice 128(b)(2)(C), which existing disclosures and the new disclosures are
Section 226.19(a)(4) currently requires § 226.19(a)(4) implements. However, the intended to alert consumers to certain
creditors to disclose that a consumer Board does not believe that the Congress risks before they apply for a loan. The
need not enter into a loan agreement intended to exempt timeshare Board believes that consumers should
because the consumer has received transactions from any requirement to receive this information, even where the
disclosures or signed a loan application. disclose to a consumer that the loan would be secured by a second
This requirement would be moved to consumer is not obligated to home or unimproved real property, and
§ 226.38(f)(1) under the proposed rule. consummate a loan. Thus, the proposed where the loan term is one year or less.
Proposed § 226.38 contains all content rule does not exempt timeshare In these circumstances, the transaction
requirements for disclosures for transactions from § 226.38(f)(1). likely involves a significant asset and
transactions secured by real property or Section 226.19(a)(5) would be consumers should receive information
a dwelling. redesignated as § 226.19(a)(4) and cross- about risks, so that they can decide
references adjusted accordingly under whether the program or loan feature is
19(a)(5) Timeshare Transactions the proposed rule because § 226.19(a)(4) appropriate. The Board solicits
Section 226.19(a)(5) excludes would be removed, as discussed above. comment on whether loan program
transactions secured by a consumer’s Comment 19(a)(5)(ii)–1 would be disclosures should be given at the time
interest in a timeshare plan described in revised to reflect that the coverage of an application form is provided to a
11 U.S.C. 101(53(D)) (timeshare § 226.19 has been expanded to include consumer or before the consumer pays
transactions) from § 226.19(a)(1) through transactions not subject to RESPA, as a non-refundable fee, whichever is
(a)(4), which address the following: (1) discussed above. Comment 19(a)(5)(iii)– earlier, for transactions other than
The period within which the creditor 1 would be revised to clarify that ARMs.
must provide the early disclosures and timeshare transactions are subject to the The Board proposes to require
the fact that creditors and other persons general requirement to disclose changed creditors to provide the following
cannot collect fees from the consumer terms under § 226.17(f). Further, disclosures at the time an application is
before the consumer receives the early comment 19(a)(5)(iii)–1 would be provided:
• The ARM loan program disclosure, disclosure forms are available for the The Board has considered each of
for each program in which the consumer creditor’s other variable-rate loan these factors carefully and based on that
expresses an interest (proposed programs. review believes that the proposed
§ 226.19(b)); Amendments to maximum rate and exemption is appropriate. Consumer
• The ‘‘Key Questions about Risk’’ historical example disclosures. TILA testing conducted by the Board showed
document published by the Board Section 128(a)(14), 15 U.S.C. that examples based on hypothetical
(proposed § 226.19(c)); and 1638(a)(14), requires creditors to loan amounts and interest rates may be
• The ‘‘Fixed vs. Adjustable-Rate disclose at application (a) a statement confusing to consumers and may not
Mortgages’’ document published by the that the periodic payments may increase provide meaningful benefit. Several
Board (proposed § 226.19(c)). or decrease substantially and the participants thought the historical
Creditors no longer would be required maximum interest rate and payment for example showed payments and rates
to provide the CHARM booklet, as a $10,000 loan originated at a recent that actually would apply if the
discussed under § 226.19(c). interest rate, assuming the maximum participant chose the loan program
Current content of ARM loan program described in the disclosure. Some
periodic increases in rates and
disclosures. For adjustable-rate mortgage participants mistakenly thought that the
payments under the program or (b) an
transactions secured by a consumer’s disclosures described an ARM with a
historical example illustrating the
principal dwelling with a term greater fifteen-year term because the disclosure
effects of interest rate changes
than one year, § 226.19(b)(2) requires showed fifteen years’ worth of index
the creditor to provide disclosures to implemented according to the loan
program. Section 226.19(b)(2)(viii) changes under an ARM program. Some
consumers at the time an application consumer testing participants said that
form is provided or before the consumer implements TILA Section 128(a)(14).
For the reasons discussed below, the disclosures based on a hypothetical
pays a nonrefundable fee, whichever is $10,000 loan amount are not useful to
earlier. Section 226.19(b)(2) requires Board proposes not to require creditors
to provide either the historical example them; these consumers said they wanted
creditors to provide the following to see information about rates and terms
disclosures, as applicable, for each or the maximum interest rate and
payment based on a $10,000 loan. that would actually apply in the context
adjustable-rate loan program in which of their own loan amount.
the consumer expresses an interest: (1) The Board proposes to eliminate the
The Board’s exception and exemption
The fact that interest rate, payment, or disclosure of the historical example or
authority under Sections 105(a) and (f)
term of the loan can change, (2) the the maximum interest rate and payment does not apply in the case of a mortgage
index or formula used in making based on a $10,000 loan pursuant to the referred to in Section 103(aa), which are
adjustments, and a source of Board’s exception and exemption high-cost mortgages generally referred to
information about the index or formula, authorities in TILA Section 105. Section as ‘‘HOEPA loans.’’ The Board does not
(3) an explanation of how the interest 105(a) authorizes the Board to make believe that this limitation restricts its
rate and payment will be determined, exceptions to TILA to effectuate the ability to apply the proposed changes to
including an explanation of how the statute’s purposes, which include all mortgage loans, including HOEPA
index is adjusted, such as by the facilitating consumers’ ability to loans. This limitation on the Board’s
addition of a margin, (4) a statement that compare credit terms and helping general exception and exemption
the consumer should ask about the consumers avoid the uniformed use of authority is a necessary corollary to the
current margin value and current credit. See 15 U.S.C. 1601(a), 1604(a). decision of the Congress, as reflected in
interest rate, (5) the fact that the interest Section 105(f) authorizes the Board to TILA Section 129(l)(1), to grant the
rate will be discounted, and a statement exempt any class of transactions from Board more limited authority to exempt
that the consumer should ask about the coverage under any part of TILA if the HOEPA loans from the prohibitions
amount of the interest rate discount, (6) Board determines that coverage under applicable only to HOEPA loans in
the frequency of interest rate and that part does not provide a meaningful Section 129(c) through (i) of TILA. See
payment changes, (7) any rules relating benefit to consumers in the form of 15 U.S.C. 1639(l)(1). Here, the Board is
to changes in the index, interest rate, useful information or protection. See 15 not proposing any exemptions from the
payment amount, and outstanding loan U.S.C. 1604(f)(1). The Board must make HOEPA prohibitions. This limitation
balance, (8) pursuant to TILA Section this determination in light of specific does raise a question as to whether the
128(a)(14), 15 U.S.C. 1638(a)(14), either factors. See 15 U.S.C. 1604(f)(2). These Board could use its exception and
(a) an historical example based on a factors are (1) the amount of the loan exemption authority under Sections
$10,000 loan amount that illustrates and whether the disclosure provides a 105(a) and (f) to except or exempt
how interest rate changes implemented benefit to consumers who are parties to HOEPA loans, but not other types of
according to the terms of the loan the transaction involving a loan of such mortgage loans, from other, generally
program would have affected payments amount; (2) the extent to which the applicable TILA provisions. That
and the loan balance over the past requirement complicates, hinders, or question, however, is not implicated by
fifteen years or (b) the maximum makes more expensive the credit this proposal.
interest rate and payment for a $10,000 process; (3) the status of the borrower, Here, the Board is proposing to apply
loan originated at an initial interest rate including any related financial its general exception and exemption
in effect as of an identified month and arrangements of the borrower, the authority to eliminate information from
year and a statement that the periodic financial sophistication of the borrower the ARM loan program disclosure that
payments may increase or decrease relative to the type of transaction, and consumers find confusing or not useful,
substantially, (9) an explanation of how the importance to the borrower of the for all loans secured by real property or
the consumer may calculate the credit, related supporting property, and a dwelling, including both HOEPA and
payments for the loan, (10) the fact that coverage under TILA; (4) whether the non-HOEPA loans, in order to fulfill the
the loan program contains a demand loan is secured by the principal statute’s purpose of facilitating
feature, (11) the type of information that residence of the borrower; and (5) consumers’ ability to compare credit
will be provided in notices of whether the exemption would terms and helping consumers avoid the
adjustments and the timing of such undermine the goal of consumer uninformed use of credit. It would not
notices, and (12) a statement that the protection. be consistent with the statute or with
Congressional intent to interpret the rule would integrate the foregoing Accordingly, footnote 45a no longer
Board’s authority under Sections 105(a) commentary into § 226.19(b). Proposed appears to be necessary. The Board
and (f) in such a way that the proposed § 226.19(b) would apply to all closed- requests comment, however, on whether
revisions could apply only to mortgage end mortgage transactions secured by there are potential inconsistencies
loans that are not subject to HOEPA. real property or a dwelling regardless of between any ARM loan disclosures
Reading the statute in a way that would loan security or term, however, as required by other federal financial
deprive HOEPA borrowers of improved discussed above. institution supervisory agencies that
ARM loan program disclosures is not a The proposed rule would not require Regulation Z should specifically
reasonable construction of the statute program disclosures to contain an address.
and contravenes the Congress’s goal of explanation of how payments will be Comment 19(b)–5 currently states that
ensuring ‘‘that enhanced protections are determined, a disclosure that creditors creditors must provide disclosures
provided to consumers who are most must make under existing under § 226.19(b) for certain renewable
vulnerable to abuse.’’ 42 § 226.19(b)(2)(iii). In general, consumer balloon-payment, preferred-rate, and
The Board notes that proposed testing participants preferred to receive price-level adjusted mortgages with a
§ 226.38(c) would require creditors to specific information about the amount fixed interest rate, if they are secured by
provide consumers with the maximum of the payments they would have to a dwelling and have a term greater than
possible interest rate and payment make, which generally is not available one year. However, such mortgages lack
within three business days after the at the time the consumer submits a loan most of the adjustable interest rate and
consumer applies for an ARM or a loan application. Most participants found payment features required to be
in which payments may vary. See model loan program disclosures based disclosed under proposed § 226.19(b)(1).
discussion of § 226.38(c). Consumer on current requirements to be confusing For example, the frequency of rate and
testing indicated that consumers find because they contained complex payment changes for a preferred-rate
this information very useful when terminology. Participants responded loan with a fixed interest rate likely
provided in the context of an actual loan much more positively to revised model cannot be known because the loss of the
offer, in contrast to the information for disclosures, which did not discuss preferred rate is based on factors other
a hypothetical loan amount in relation technical issues about how payments than a formula or a change in the value
to an historical interest rate or the are determined. If a creditor chooses to of an index. Accordingly, under the
interest rate or for a recently originated include an explanation of how proposed rule creditors would not be
loan, as required by TILA Section payments will be determined, the required to provide ARM loan program
128(a)(14). explanation must be disclosed apart disclosures under § 226.19(b) for such
In addition to removing from the segregated disclosures that mortgages. Creditors would be required
§ 226.19(b)(2)(viii), the proposed rule proposed § 226.19(b) requires, as a to provide ARM loan program
would remove the related requirement general rule under proposed disclosures for such mortgages if their
under § 226.19(b)(2)(ix) that creditors § 226.37(a)(2), discussed below. interest rate is adjustable, however.
explain how a consumer may calculate Footnote 45a to § 226.19(b) currently Cross-references in comment 19(b)–5
payments for the consumer’s loan states that creditors may substitute would be updated and the comment
amount based on either the initial information provided in accordance would be redesignated as comment
interest rate used to calculate the with variable-rate regulations of other
19(b)–3 under the proposed rule.
maximum interest rate and payment federal agencies for the disclosures Existing comment 19(b)(2)–2(i)
disclosure or the most recent payment required by § 226.19(b). The proposed provides examples of particular loan
shown in the historical example. The rule would remove and reserve that features that distinguish separate loan
proposed rule also would eliminate footnote and comment 19(b)–4. The programs. That commentary would be
commentary on § 226.19(b)(2)(viii) and footnote was designed to account for the
redesignated as comment 19(b)–5(i) but
(ix). Further, the proposed rule would fact that disclosure rules for variable-
generally would be unchanged under
eliminate comment 19(b)(2)–2(i)(I), rate loans issued by HUD, the Federal
the proposal, with one exception.
which provides that if a loan feature Home Loan Bank Board, and the Office
Differences among rules relating to loan
must be taken into account in preparing of the Comptroller of the Currency
balance changes would be removed as
the historical example of payment and (OCC) were in effect when the Board
an example of a particular loan feature
loan balance movements required by adopted § 226.19(b). No comprehensive
that distinguishes separate loan
§ 226.19(b)(2)(viii), variable-rate loans disclosure requirements for variable-rate
programs. However, differences in the
that differ as to that feature constitute loans currently are in effect under the
possibility of negative amortization
separate loan programs under rules of HUD, the OCC, or the Office of
§ 226.19(b)(2). Thrift Supervision (OTS), the successor would continue to distinguish separate
Amendments to other regulations and agency to the FHLBB. No such loan programs, as discussed above.
comments. Comment 19(b)–1 currently requirements are in effect under the Also, existing comment 19(b)(2)(vii)–2(i)
provides that in an assumption of an rules of the Federal Deposit Insurance on disclosing a negative amortization
adjustable-rate mortgage transaction Corporation (FDIC) or the National feature would be redesignated as
secured by the consumer’s principal Credit Union Administration (NCUA) comment 19(b)–5 under the proposal.
dwelling with a term greater than one The requirement to provide loan
either. Moreover, HUD and the OTS
year, disclosures need not be provided program disclosures for each loan
have incorporated the disclosure
program in which a consumer expresses
under §§ 226.18(f)(2)(ii) or 226.19(b). requirements for variable-rate loans

Comment 19(b)–2(iv) currently provides an interest generally would remain
under TILA and Regulation Z into their
that in cases where an open-end credit unchanged. However, comment
own regulations by cross-reference.43
account will convert to a closed-end 19(b)(2)–4 would be revised to state that
transaction subject to § 226.19(b), the 43 See 24 CFR 203.49(g) (HUD); 12 CFR 560.210 a creditor ‘‘must describe’’—rather than
creditor must provide the disclosures (OTS). Some of those agencies have issued
regulations that apply to adjustable rate mortgages. available to and verifiable by a borrower and
required by § 226.19(b). The proposed See, e.g., 12 CFR 34.22 (OCC) (requiring that an beyond the bank’s control). Those requirements do
index specified in a national bank’s loan documents not establish comprehensive disclosure
42 H.R. Conf. Rept. 103–652 at 159 (Aug. 2, 1994). for an ARM subject to § 226.19(b) be readily requirements, however.
‘‘must fully describe’’—an ARM loan requires the creditor to disclose the 19(b)(2) Key Questions About Risk
program. The proposal would reduce frequency of interest rate and payment
some of the material that creditors must changes, as currently is required under Currently, TILA Section 128(a)(14), 15
disclose about ARM loan programs to § 226.19(b)(2)(vi). U.S.C. 1638(a)(14), and § 226.19(b)(2),
highlight information that is most Index. Proposed § 226.19(b)(1)(iii) require the creditor to disclose only
important to consumers, as discussed requires the creditor to disclose the certain information about certain
above. index or formula used in making adjustable-rate mortgage features early
Use of term ‘‘Adjustable-Rate adjustments and a source of information in the mortgage application process. The
Mortgage’’ or ‘‘ARM.’’ Proposed about the index or formula. Proposed Board believes, however, that the
§ 226.19(b) requires the creditor to § 226.19(b)(1)(iii) also requires the consumer should be aware early in the
disclose the heading ‘‘Adjustable-Rate creditor to provide an explanation of process of other risky features, in
Mortgage’’ or ‘‘ARM.’’ Participants in how the interest rate will be addition to adjustable-rate features. For
the Board’s consumer testing showed determined, including an explanation of this reason, the Board proposes to
greater familiarity with the term how the index is adjusted, such as by require ‘‘Key Question’’ disclosures
‘‘adjustable-rate mortgage’’ than with the addition of a margin. Those several times during the process to
‘‘variable-rate mortgage.’’ Format requirements are contained in existing allow consumers to become aware of
requirements in proposed § 226.19(b)(2)(ii) and (iii). However, the and track potentially risky features of
§ 226.19(b)(4)(iii) state that the proposed rule eliminates their loan. Consumer testing and
statement must be more conspicuous § 226.19(b)(2)(iv), which requires the document design principles suggest that
than, and must precede, the other creditor to disclose that the consumer keeping language and design elements
disclosures required by § 226.19(b) and should ask about the current margin consistent between forms improves
must be located outside of the tables value and current interest rate. consumers’ ability to identify and track
required by proposed § 226.19(b)(4)(iv). Limit on rate changes. Currently, any changes in the information being
Finally, proposed § 226.19(b)(4)(iii) requirements for disclosing interest rate disclosed. As discussed more fully
states that creditors may make the or payment limitations and carryover below, proposed § 226.19(c)(1) would
‘‘Adjustable-Rate Mortgage’’ or ‘‘ARM’’ are contained in existing require the creditor to provide a Board
disclosure in a heading that states the § 226.19(b)(2)(vii). The proposed rule publication entitled ‘‘Key Questions to
name of the creditor and the name of the would retain these requirements, under Ask about Your Mortgage’’ at the time
loan program, such as ‘‘ABC Bank 3/1 proposed § 226.19(b)(1)(iv). (Existing an application form is provided to the
Adjustable Rate Mortgage.’’ § 226.19(b)(2)(vii) also contains a consumer or before the consumer pays
requirement to disclose negative a non-refundable fee, whichever is
19(b)(1) Interest Rate and Payment amortization. The proposed rule would
Disclosures earlier. The content of this disclosure
retain that requirement as proposed
Proposed § 226.19(b)(1) requires the would be published by the Board and
§ 226.19(b)(2)(ii)(B), as discussed
creditor to disclose the following would address important terms related
below.)
information, as applicable, grouped Conversion feature. Existing comment to any type of mortgage, whether fixed-
together under the heading ‘‘Interest 19(b)(2)(vii)–3 provides that if a loan rate or adjustable-rate. At the same time,
Rate and Payment,’’ using that term: program permits consumers to convert a if the consumer expresses an interest in
(1) The introductory period, (2) the variable-rate loan to a fixed-rate loan, an ARM loan program, proposed
frequency of the rate and payment the creditor must disclose that the fixed § 226.19(b)(2) would require the creditor
change, (3) the index, (4) the limit on interest rate after conversion may be to disclose the ‘‘Key Questions about
rate changes, (5) the conversion feature, higher than the adjustable interest rate Risk’’ as part of the ARM loan program
and (6) the preferred rate. before conversion. Comment disclosure. These ‘‘Key Questions’’
Introductory period. Proposed 19(b)(2)(vii)–3 further provides that the would be tailored to the specific ARM
§ 226.19(b)(1)(i) requires the creditor to creditor must disclose any limitations loan program in which the consumer
disclose the period during which the on the period during which the loan has expressed an interest. Subsequently,
interest rate or payment remains fixed may be converted, a statement that within three days of the creditor
and a statement that the interest rate conversion fees may be charged, and receiving the consumer’s application for
may vary or the payment may increase any interest rate and payment a specific loan program, proposed
after that period. This disclosure is limitations that apply if the consumer § 226.38(d) would require the creditor to
similar to that required under existing exercises the conversion option. The make a similar disclosure of ‘‘Key
§ 226.19(b)(2)(i). Proposed proposed rule would integrate this Questions about Risk’’ in the
§ 226.19(b)(1)(i) also requires the commentary into proposed transaction-specific TILA disclosure.
creditor to provide an explanation of the § 226.19(b)(1)(v). The list of the ‘‘Key Questions about
effect on the interest rate of having an Preferred rate. Currently, if the Risk’’ for the transaction-specific TILA
initial interest rate that is not variable-rate mortgage transaction is a disclosure required under proposed
determined using the index or formula preferred-rate loan, the creditor must § 226.38(d) would be the same as that
that applies for interest rate disclose any event that would allow the required for the ARM loan program
adjustments, that is, of having a creditor to increase the interest rate, for disclosure under proposed
discounted or premium interest rate. example, upon the termination of the § 226.19(b)(2), but the information in the
This disclosure requirement is similar to consumer’s employment with the TILA disclosure would be specific to the
that required under existing creditor, whether voluntary or loan program for which the consumer
§ 226.19(b)(2)(v). However, the proposed involuntary. See comment 19(b)(2)(vii)– applied and would apply to fixed-rate or
rule would eliminate the requirement 4. The creditor also must disclose that adjustable-rate loan programs. The
that ARM loan program disclosures state fees may be charged when the preferred Board believes that consistently using
that the consumer should ask about the rate no longer is in effect, if applicable. the ‘‘Key Questions’’ terminology would
amount of the interest rate discount. The Board proposes to retain these enhance consumers’ ability to identify,
Frequency of rate and payment requirements in proposed review, and understand the disclosed
change. Proposed § 226.19(b)(1)(ii) § 226.19(b)(1)(vi). terms across all disclosures, and,
therefore, avoid the uninformed use of also believes that the prepayment payment increases. Consumer testing
credit. penalty is a key risk factor because it is showed that while most participants
Key questions about risk. As critical to the consumer’s ability sell the understood the general meaning of the
discussed above, current § 226.19(b)(2) home or to refinance the loan to obtain phrase ‘‘prepayment penalty,’’ they did
requires the creditor to disclose over 12 a lower rate and payments. While the not realize that the penalty would apply
loan features. Consumer testing showed other risk factors are important, those if they refinanced their loan or sold
that the current format for these factors are only required to be disclosed their home. The Board believes it is
disclosures was very difficult for as applicable to avoid information important for consumers to understand
participants to understand. In addition, overload. that a prepayment penalty may be
because the content was so general, Rate and payment increases. With imposed in various circumstances,
participants felt the current disclosure respect to rate increases, proposed including paying off the loan,
would not help them shop for a § 226.19(b)(2)(i)(A) would require the refinancing, or selling the home early.
mortgage. Therefore, the Board proposes creditor to disclose a statement that the Additional disclosures. As noted
to replace existing § 226.19(b)(2) with a interest rate on the loan may increase, above, proposed § 226.19(b)(2)(ii)
new streamlined ARM loan program along with a statement indicating when requires the creditor to disclose
disclosure that would contain key the first rate increase may occur and the information about the following six
information specific to that loan frequency with which the interest rate terms, as applicable: (1) Interest-only
program. The proposed rule would may increase. With respect to payment payments, (2) negative amortization, (3)
require creditors to disclose certain increases, proposed § 226.19(b)(2)(i)(B) balloon payment, (4) demand feature,
information grouped together under the would require the creditor to disclose a (5) no-documentation or low-
heading ‘‘Key Questions about Risk,’’ statement indicating whether or not the documentation loans, and (6) shared-
using that term, to draw the consumer’s periodic payment on the loan may equity or shared-appreciation. The
attention to information about the increase. If the periodic payment on the Board proposes to require these
potential adverse impact that certain loan may increase, then the creditor disclosures only when the feature is
loan features could have on the would disclose a statement indicating present, in contrast to the required
consumer’s ability to repay the loan. when the first payment may increase. disclosures of proposed § 226.19(b)(2)(i).
Proposed § 226.19(b)(2)(i) requires the For payment option loans, if the Proposed comment 19(b)(2)(ii)–1 would
creditor to always disclose information periodic payment may increase, the clarify that ‘‘as applicable’’ means that
about the following three terms: (1) Rate creditor would disclose a statement any disclosure not relevant to a
increases, (2) payment increases, and (3) indicating when the first minimum particular ARM loan program may be
prepayment penalties. Proposed payment would increase. Proposed omitted. Although consumer testing
§ 226.19(b)(2)(ii) would require the comment 19(b)(2)(i)–1 would clarify showed that some participants felt
creditor to disclose information about that the requirement to disclose when reassured by seeing all of the risk factors
the following six terms, but only if they the first rate or payment increase may whether they were a feature of the loan
are applicable to the loan program: (1) occur refers to the time period in which or not, the Board is concerned about the
Interest-only payments, (2) negative the increase may occur, not the exact potential for information overload if the
amortization, (3) balloon payment, (4) calendar date. For example, the entire list is included on every ARM
demand feature, (5) no-documentation disclosure may state, ‘‘Your interest rate loan program disclosure.
or low-documentation loans, and (6) may increase at the end of the 3-year Interest-only payments. Proposed
shared-equity or shared-appreciation. introductory period.’’ § 226.19(b)(2)(ii)(A) requires the creditor
The ‘‘Key Questions about Risk’’ Prepayment penalties. If the to disclose a statement that periodic
disclosure would be subject to special obligation includes a finance charge payments will be applied only toward
format requirements, including a tabular computed from time to time by interest on the loan. The creditor would
format and a question and answer application of a rate to the unpaid also disclose a statement of any
format, as described under proposed principal balance, proposed limitation on the number of periodic
§ 226.19(b)(4). The Board believes it is § 226.19(b)(2)(i)(C) would require the payments that will be applied only
critical that consumers be alerted to creditor to disclose a statement toward interest on the loan and not
certain risk factors before they have indicating whether or not a penalty towards the principal, that such
applied for an ARM, so that they can could be imposed if the obligation is payments will cover the interest owed
decide whether they want a loan with prepaid in full. If the creditor could each month, but none of the principal,
those terms. The Board solicits impose a prepayment penalty, the and that making these periodic
comment on whether there are other creditor would disclose the payments means the loan amount will
risk factors that loan program circumstances under which and the stay the same and the consumer will not
disclosures or publications should period in which the creditor could have paid any of the loan amount. For
identify. impose the penalty. Because of the payment option loans, the creditor
Required disclosures. As noted above, importance of prepayment penalties, the would disclose a statement that the loan
proposed § 226.19(b)(2)(i) requires the proposed rule would also require gives the consumer the choice to make
creditor to disclose information about disclosure of this feature under periodic payments that cover the
the following three terms: (1) Rate proposed § 226.38(a)(5). To avoid interest owed each month, but none of
increases, (2) payment increases, and (3) duplication, proposed comments the principal, and that making these
prepayment penalties. The Board 19(b)(2)(i)(C)–1 to –3 cross-reference periodic payments means the loan
believes that these three factors should proposed comments 38(a)(5)–1 to –3 for amount will stay the same and the
always be disclosed. Rate and payment information about whether there is a consumer will not have paid any of the
increases pose the most direct risk of prepayment penalty and examples of loan amount. Consumer testing showed
payment shock. In addition, consumer charges that are or are not prepayment that many participants did not
testing showed that interest rate and penalties. understand that there are loans where
monthly payment were by far the two Some consumers take out ARM loans the periodic payments do not pay down
most common terms that participants planning to refinance or sell the home the mortgage principal. The Board
used to shop for a mortgage. The Board securing the loan before the rate or believes it is important to alert
consumers to this feature in order to the creditor exercises such right. statement that consumers should ask the
avoid payment shock when the Proposed comment § 226.19(b)(2)(ii)(D)– creditor about the current margin value
principal becomes due or the periodic 1 would clarify that this requirement and current interest rate or the amount
payment increases. would apply not only to transactions of any interest rate discount. Existing
Negative amortization. Proposed payable on demand from the outset, but § 226.19(b)(2)(xii) requires a notice that
§ 226.19(b)(2)(ii)(B) would require the also to transactions that convert to a disclosure forms are available for the
creditor to disclose a statement that the demand status after a stated period. creditor’s other variable-rate programs.
loan balance may increase even if the Proposed comments Consumer testing indicated that many
consumer makes the required periodic § 226.19(b)(2)(ii)(D)–2 and –3 cross- consumers skim disclosures quickly and
payments. In addition, the creditor reference comment 18(i)–2 regarding become frustrated if they cannot quickly
would disclose a statement that the covered demand features and comment locate the key information they seek.
minimum payment covers only a part of 18(i)–3 regarding the relationship to the Reducing the number of non-specific
the interest the consumer owes each payment schedule disclosures. The notices in the loan program disclosures
period and none of the principal, that proposed rule replaces existing would increase the likelihood that
the unpaid interest will be added to the § 226.19(b)(2)(x). The Board believes consumers will read and understand
consumer’s loan amount, and that over that demand features are rare in specific disclosures. Under proposed
time this will increase the total amount consumer mortgage transactions, but § 226.19(b)(3), the creditor would be
the consumer is borrowing and cause pose a considerable risk when present required to disclose that the consumer
the consumer to lose equity in the and, therefore, should be brought to the may visit the Web site of the Federal
home. The proposed requirement would consumer’s attention. Consumer testing Reserve Board for more information
replace existing § 226.19(b)(2)(vii), showed that participants understood the about adjustable-rate mortgages and for
which requires the creditor to disclose revised language regarding a demand a list of licensed housing counselors in
any rules relating to changes in the feature and thought it was important the consumer’s area that can help the
outstanding loan balance, including an information. consumer understand the risks and
explanation of negative amortization. No-documentation or low- benefits of the loan. The Board believes
The Board believes that information documentation loans. Proposed that streamlining the notice will reduce
regarding negative amortization should § 226.19(b)(2)(ii)(E) would require the information overload.
be disclosed because it is a complicated creditor to disclose a statement that the
feature that significantly impacts a consumer’s loan could have a higher 19(b)(4) Format Requirements
consumer’s ability to repay the loan. rate or fees if the consumer does not Proposed § 226.19(b)(4) contains
Consumer testing showed that document employment, income, or format requirements for ARM loan
participants were generally unfamiliar other assets. In addition, the creditor program disclosures. As discussed more
with the term or concept. However, would disclose a statement that if the fully in proposed § 226.37, consumer
participants generally understood the consumer provides more testing showed that the location and
revised transaction-specific plain- documentation, the consumer could order in which information was
language explanation of negative decrease the interest rate or fees. The presented affected consumers’ ability to
amortization’s causes and effects when Board is concerned that consumers who locate and comprehend the information
disclosed in the ‘‘Key Questions’’ obtain loans with such features may not disclosed. Based on these findings, the
format. understand that they may pay a higher Board proposes, under § 226.19(b)(4)(i),
Balloon payment. Proposed price for this feature. to require that creditors disclose the
§ 226.19(b)(2)(ii)(C) requires the creditor Shared-equity or shared-appreciation. ‘‘Key Questions about Risk’’ using the
to disclose a statement that the Proposed § 226.19(b)(2)(ii)(F) requires format requirements for similar
consumer will owe a balloon payment, the creditor to disclose a statement that disclosures required by § 226.38, except
along with a statement of when it will any future equity or appreciation in the as otherwise provided in proposed
be due. Proposed comment real property or dwelling that secures § 226.19(b)(4). Proposed
19(b)(2)(ii)(C)–1 would clarify that the the loan must be shared, along with a § 226.19(b)(4)(ii) would require that the
creditor must make this disclosure if the statement of the percentage of future disclosures required by paragraphs
loan program includes a payment equity or appreciation to which the (b)(1) through (b)(3) be grouped together
schedule with regular periodic creditor is entitled, and the events that and placed in a prominent location.
payments that when aggregated do not may trigger such an obligation. The Proposed § 226.19(b)(4)(iii) would
fully amortize the outstanding principal Board is aware that a number of shared- require that the heading ‘‘Adjustable
balance. Proposed comment equity and shared-appreciation Rate Mortgage’’ or ‘‘ARM’’ required
19(b)(2)(ii)(C)–2 would clarify that the programs are being offered to under § 226.19(b) be more conspicuous
requirement to disclose when the consumers, including low- and than and precede the other disclosures.
balloon payment is due refers to the moderate-income borrowers, on various The heading would be required to be
time period when it is due, not the exact terms. Consumer testing showed that outside the tables required under this
calendar date. For example, the participants were generally unfamiliar paragraph. The creditor would be
disclosure may state, ‘‘You would owe with the concept of shared-equity or permitted to use a heading with the
a balloon payment due in seven years.’’ shared-appreciation. However, to the name of the loan program and the name
The Board believes it is important for extent that a shared-equity or a shared- of the creditor, such as ‘‘XXX Bank
the consumer to be aware early in the appreciation feature is being offered as 3/1 ARM.’’ Proposed § 226.19(b)(4)(viii)
process of any potential payment shock. one of the loan terms, participants would require the disclosure of the
Demand feature. Proposed stated that they would want it disclosed Board’s Web site and list of licensed
§ 226.19(b)(2)(ii)(D) would require the clearly and prominently. housing counselors to be disclosed
creditor to disclose a statement that the outside of the required tables described
creditor may demand full repayment of 19(b)(3) Additional Information and below.
the loan, along with a statement of the Web Site Proposed § 226.19(b)(4)(iv) to (vii)
timing of any advance notice the Currently, § 226.19(b)(2)(iv) and (v) would require the following special
creditor will give the consumer before require the creditor to disclose a formats for the ARM loan program
disclosure: tabular format, question and consumers two Board publications for application form electronically and
answer format, highlighted answers, and closed-end transactions secured by real when the creditor receives a consumer’s
special order of disclosures. Proposed property or a dwelling. The first application from an intermediary agent
§ 226.19(b)(4)(iv) would require the publication, entitled ‘‘Key Questions to or broker are discussed below. The
creditor to provide the interest rate Ask about Your Mortgage,’’ discusses Board solicits comment on whether
disclosure required under § 226.19(b)(1) loan terms and conditions that are there are other loan types for which loan
and the ‘‘Key Questions about Risk’’ important for consumers to consider program publications should be given at
disclosure required under § 226.19(b)(2) when selecting a closed-end mortgage the time an application form is provided
in the form of two tables with headings, loan. The second publication, entitled to a consumer or before the consumer
content and format substantially similar ‘‘Fixed vs. Adjustable Rate Mortgages,’’ pays a non-refundable fee, whichever is
to Model Form H–4(B) in Appendix H. discusses the respective costs and earlier.
Consumer testing showed that using a benefits of fixed-rate mortgages and
19(d) Timing of Disclosures
tabular format improved participants’ ARMs.
ability to readily identify and Under existing § 226.19(b)(1), the Proposed comment 19(c)–1 states that
understand key information. Only the creditor must provide to the consumer creditors are not required to provide
information required or permitted by a copy of the CHARM booklet published disclosures under proposed § 226.19(c)
paragraphs (b)(1) and (b)(2) would be in by the Board, or a suitable substitute. in cases where an open-end credit
this table. In addition, under The Board consumer tested the CHARM account will convert to a closed-end
§ 226.19(b)(4)(v), the ‘‘Key Questions booklet and a sample current loan transaction. The ‘‘Key Questions to Ask
about Risk’’ disclosures would be program disclosure. Few of the About Your Mortgage’’ disclosure and
required to be grouped together and consumer testing participants who had the ‘‘Fixed vs. Adjustable Rate
presented in the format of a question obtained an ARM recalled having seen Mortgages’’ disclosure would not be
and answer in a manner substantially the CHARM booklet. Although many helpful at that time, because the creditor
similar to Model Form H–4(B) in participants thought that the and consumer already will have entered
Appendix H. The table with interest rate information in the CHARM booklet is into a written agreement. By contrast,
information would precede the table useful, particularly the descriptions of transaction-specific disclosures are
with the ‘‘Key Questions about Risk.’’ ‘‘payment shock,’’ prepayment required in such cases under
Consumer testing showed that using a penalties, and negative amortization, § 226.19(b), both as in effect (see
question and answer format improved most participants thought that the comment 19(b)–2(iv)) and as proposed
participants’ ability to recognize and CHARM booklet is too long and that (see proposed § 226.19(b) and comment
understand potentially risky or costly they likely would not read it. 19(b)–2).
features of a loan. Proposed The proposed rule would eliminate Existing § 226.19(b) requires that
§ 226.19(b)(4)(vi) would require the the requirement under § 226.19(b)(1) for creditors provide variable-rate loan
creditor to disclose each affirmative creditors to provide the CHARM booklet program disclosures at the time an
answer in bold text and in all to consumers who express interest in an application form is provided to a
capitalized letters to highlight the fact ARM transaction, and instead, under consumer or before the consumer pays
that a risky feature is present in the proposed § 226.38(c)(2) require a brief a non-refundable fee, whichever is
loan. Negative answers (required under Board publication showing the principal earlier. Comment 19(b)–2 currently
proposed § 226.19(b)(2)(i) but not under differences between a fixed-rate loan discusses when a creditor should
proposed § 226.(b)(2)(ii)) would be and an ARM. Comment 19(b)(1)– and –2 provide such disclosures in cases where
disclosed in non-bold text. Finally, on the CHARM booklet would be the creditor receives a consumer’s
proposed § 226.19(b)(4)(vii) would removed accordingly. Also, proposed application through an intermediary
require the creditor to make the § 226.38(c)(1) would require creditors to agent or broker or a consumer requests
disclosures, as applicable, in the provide to all consumers—regardless of an application by telephone. The
following order: Rate increases under whether they express interest in an comment also clarifies that if the
§ 226.19(b)(2)(i)(A), payment increases ARM—two new single-page Board creditor solicits applications by mailing
under § 226.19(b)(2)(i)(B), interest-only publications. These new disclosure application forms, the creditor must
payments under § 226.19(b)(2)(ii)(A), forms would contain a notice stating send the ARM loan program disclosures
negative amortization under where consumers may obtain additional with the application form. Existing
§ 226.19(b)(2)(ii)(B), balloon payments information about ARMs. The Board § 226.19(c) contains requirements for
under § 226.19(b)(2)(ii)(C), prepayment believes that requiring that creditors providing variable-rate loan program
penalties under § 226.19(b)(2)(i)(C), provide the ‘‘Key Questions to Ask disclosures when a consumer accesses
demand feature under about Your Mortgage’’ publication and an application form electronically.
§ 226.19(b)(2)(ii)(D), no-documentation the ‘‘Fixed versus Adjustable Rate (Section 226.17(a)(1) currently permits
or low-documentation loans under Mortgages’’ publication without creditors to provide the ARM loan
§ 226.19(b)(2)(ii)(E), and shared-equity modifications would promote program disclosures electronically,
or shared-appreciation under consistency in the information without regard to the consumer-consent
§ 226.19(b)(2)(ii)(F). This order would consumers receive about ARMs. or other provisions of the Electronic
ensure that consumers receive critical Accordingly, proposed § 226.19(c) Signatures in Global and National
information about their payments first. would require creditors to provide this Commerce Act, 15 U.S.C. 7001 et seq.
Model Clauses and Samples are information ‘‘as published.’’ (E-Sign Act)).
proposed at Appendix H–4(C) through The Board proposes to require Under the Board’s proposal, timing
H–4(F). creditors to provide these publications requirements for ARM loan program
at the time a consumer is given an disclosures would be consolidated in
19(c) Publications for Transactions application form or pays a non- proposed § 226.19(d). These timing
Secured by Real Property or a Dwelling refundable fee, whichever is earlier, for requirements also would apply to the
Based on the results of consumer fixed-rate mortgage loans as well as provision of the proposed new ‘‘Key
testing, under the proposal creditors variable-rate mortgage loans. Special Questions to Ask About Your Mortgage’’
would be required to provide to rules for when a consumer accesses an and ‘‘Fixed vs. Adjustable Rate
Mortgages’’ disclosures. Proposed expresses such interest to the creditor or creditor expressly agrees in writing with
§ 226.19(d)(1) contains the general the creditor receives notice from an a subsequent consumer to accept that
requirement to provide ARM loan intermediary broker or agent that the consumer as a primary obligator on an
program disclosures (if a consumer consumer has expressed interest in an existing residential mortgage
expresses interest in ARMs) at the time ARM. This is consistent with existing transaction. The Board proposes
an application form is provided or footnote 45b. Existing comment 19(b)–3 technical changes to § 226.20(b) and
before the consumer pays a non- is redesignated as comments 19(d)(3)–1 associated commentary to reflect the
refundable fee, whichever is earlier. through 19(d)(3)–3 under the proposed new format and content disclosure
Proposed § 226.19(d)(1) also specifies rule. requirements for transactions secured by
that creditors must provide ARM loan Proposed § 226.19(d)(5) provides that real property or a dwelling under
program disclosures before charging a if the consumer expresses an interest in §§ 226.37 and 226.38.
fee for obtaining a consumer’s credit negotiating loan terms that are not 20(c) Rate Adjustments
report. generally offered, the creditor need not
Proposed § 226.19(d)(2) states that if a provide the disclosures required by For ARM transactions subject to
consumer accesses an ARM loan § 226.19(b) before an application form is § 226.19(b), § 226.20(c) currently
application electronically, a creditor provided. Proposed § 226.19(d)(5) requires creditors to mail or deliver to
must provide the disclosures in requires that the creditor provide such consumers a notice of interest rate
electronic form, except as provided in disclosures as soon as reasonably adjustment at least 25, but no more than
§ 226.19(d)(2). Proposed § 226.19(d)(2), possible after the terms to be disclosed 120, calendar days before a payment at
in turn, states that if a consumer who is have been determined and not later than a new level is due. Section 226.20(c)
physically present in a creditor’s office the time the consumer pays a non- also requires creditors to mail or deliver
accesses an ARM loan application refundable fee. Further, proposed to consumers an adjustment notice at
electronically, the creditor may provide § 226.19(d)(5) provides that in all cases least once each year during which an
disclosures in either electronic or paper the creditor must provide the interest rate adjustment is implemented
form. These provisions are consistent disclosures required by § 226.19(c) of without an accompanying payment
with existing comment 19(c)–1(i) and this section at the time an application change.
(ii). Comment 19(c)–1 on the form of form is provided or before the consumer Those adjustment notices must state:
electronic disclosures would be pays a non-refundable fee, including a (1) The current and prior interest rates
redesignated as comment 19(d)(2)(i)–1. for the loan; (2) the index values upon
fee for obtaining a consumer’s credit
Commentary on the timing of electronic which the current and prior interest
history, whichever is earlier.
disclosures, currently contained in Comment 19(b)(2)–1 currently rates are based; (3) the extent to which
comment 19(b)–2(v), would be provides that, if ARM loan program the creditor has foregone any increase in
redesignated as comments 19(d)(2)(i)–2 disclosures cannot be provided because the interest rate; (4) the contractual
and 19(d)(2)(ii)–1. Further, under the a consumer expresses an interest in effects of the adjustment, including the
proposed rule existing § 226.17(a) individually negotiating loan terms that payment due after the adjustment is
would be revised to include the the creditor generally does not offer, the made, and a statement of the loan
proposed new Key Questions to Ask creditor may provide disclosures balance; and (5) the payment, if
About Your Mortgage’’ and ‘‘Fixed vs. reflecting those terms as soon as different from the payment due after
Adjustable Rate Mortgages’’ disclosures reasonably possible after the terms have adjustment, that would be required to
among the disclosures creditors may been decided upon, but not later than fully amortize the loan at the new
provide without regard to the consumer- the time the consumer pays a non- interest rate over the remainder of the
consent or other provisions of the refundable fee. Proposed § 226.19(d)(5) loan term. Model clauses in Appendix
E-Sign Act. incorporates that guidance into the H–4(H) illustrate how creditors may
Proposed § 226.19(d)(3) contains rules regulation. Further, comment 19(b)(2)–1 comply with the requirements of
for applications made by telephone or provides that if, after an application § 226.20(c).
through an intermediary. These rules form is provided or the consumer pays
are consistent with existing comment Discussion
a non-refundable fee, a consumer The Board adopted the requirements
19(b)–2. Existing comments 19(b)–2(i)
expresses an interest in an adjustable- for post-consummation disclosures
through –2(iii) are redesignated as
mortgage loan program for which the (subsequent disclosures) in 1987. The
comments 19(d)(3)–1 through 19(d)(3)–
creditor has not provided the ARM loan minimum advance notice of a rate
3. Existing comment 19(b)–2(iii) states
program disclosures, the creditor must adjustment was set at 25 days to track
that the creditor must include the
provide such disclosures as soon as the rules of the Office of the Comptroller
disclosures required by § 226.19(b) with
reasonably possible. Proposed of the Currency (OCC) and to provide
any application form the creditor sends
§ 226.19(d)(6) incorporates that creditors with flexibility in giving
by mail to solicit consumers. This
guidance into the regulation. The adjustment notices for a variety of
comment is redesignated as proposed
comment 19(d)(3)–3 and revised to foregoing guidance is removed from ARMs. See 52 FR 48665, 48668; Dec. 24,
cover the Key Questions and Fixed comment 19(b)(2)–1 (which the 1987. Since 1987, ARMs have grown in
versus Adjustable Rate Mortgages proposed rule would redesignate as popularity, especially from 2003 to
disclosures required by proposed comment 19(b)–4) because under the 2007. Beginning in 2007, ARM growth
proposed rule timing rules for ARM
§ 226.19(c). began to slow as consumers experienced

Proposed § 226.19(d)(4) provides that, loan program disclosures are contained difficulty repaying such loans and
where a consumer does not express in § 226.19(d) rather than § 226.19(b). concerns grew about the risk of payment
interest in an ARM until after receiving Section 226.20 Subsequent Disclosure shock ARMs pose.
or accessing an application form or Requirements Because ARMs pose the risk of
paying a non-refundable fee, the payment shock, it is critical that
creditor must provide an ARM loan 20(b) Assumptions consumers receive notice of ARM
program disclosure(s) within three Section 226.20(b) currently requires payment changes so they can prepare to
business days after the consumer post-consummation disclosures if the make higher payments if necessary. If
the new payments are unaffordable, telephone number and Internet Web site refinance a loan, they may need time to
borrowers need time to seek a refinance for HUD-licensed housing counselors. adjust other spending in order to afford
loan with lower payments or make other Proposed § 226.20(c)(5) contains higher mortgage loan payments.
arrangements. Even if a consumer can formatting requirements for discloses The Board issued the current rule
afford a higher payment, the consumer required by proposed § 226.20(c). requiring 25 days’ notice before a
may want to refinance into a fixed-rate Section 226.20(c) currently provides payment at a new level is due in 1987.
loan for payment certainty or into that an adjustment to the interest rate Home Mortgage Disclosure Act (HMDA)
another ARM loan with lower with or without a corresponding data for the years 2004 through 2007
payments. It is particularly important adjustment to the payment in an suggest that a requirement to provide
that consumers with subprime loans adjustable-rate mortgage subject to ARM adjustment 60, rather than 25,
receive adequate notice before a § 226.19(b) is an event requiring new days before payment at a new level is
payment increase, as these borrowers disclosures to the consumer. The due more closely reflects the time
tend to be more vulnerable to payment proposed rule would retain this needed for consumers to refinance a
shock. provision. Comment 20(c)–1 provides loan.44 In each of those years, for first-
The Board believes the current 25-day that the requirements of § 226.20(c) lien refinance loans, the period between
notice is insufficient to allow many apply where the interest rate and loan application and origination was 25
consumers to refinance into a loan with payment change due to the conversion days or less for 50 percent of the loans
affordable payments or to make other of an adjustable-rate mortgage subject to originated, 45 days or less for 75 percent
arrangements. In the ‘‘Subprime § 226.19(b) to a fixed-rate mortgage. The of the loans originated, and 65 days or
Mortgage Guidance’’ issued in 2007, the proposed rule would incorporate this less for 90 percent of the loans
Board, the OCC, FDIC, OTS, and NCUA guidance into proposed § 226.20(c). originated. (These data do not include
stated that consumers should be given at Further, the proposed rule would revise time needed to compare available
least 60 days before an ARM adjustment comment 20(c)–1 for clarity and to refinance loans.) Requiring creditors to
in which to refinance without paying a remove commentary on timing provide an ARM adjustment notice at
prepayment penalty. Several consumer requirements, because timing least 60 days before payment at a new
advocates who commented on the requirements are contained in proposed level is due would better enable
Board’s 2008 HOEPA Final Rule stated § 226.20(c)(1). consumers to arrange to make a higher
that consumers with subprime ARMs The proposed rule would revise payment (if applicable) without missing
may need significant time in which to comment 20(c)–2 to clarify that price- a payment or paying less than the
seek out a refinancing, in some cases as level adjusted mortgages and similar amount due.
much as 6 months. mortgages are not subject to the The Board believes that a 60-day
disclosure requirements of § 226.20(c)
The Board’s Proposal minimum notice requirement is
because they are not subject to the
The Board proposes to require consistent with many existing ARM
disclosure timing requirements of
creditors to mail or deliver a notice of agreements. For most ARMs, creditors
§ 226.19(b), as discussed above. The
an interest rate adjustment at least 60 base the calculation of interest rate
proposed rule would remove the
days before payment at a new level is changes on the value of an index 30 or
commentary stating that ‘‘shared-
due, instead of the current 25-day 45 days prior to the effective date of a
equity’’ and ‘‘shared-appreciation’’
provision. Creditors would provide rate change (calculation date). Creditors
mortgages are not subject to the
notice annually where interest rate generally refer to the period from the
disclosure requirements of § 226.20(c) to
changes are made without calculation date to the effective date of
conform with the removal of reference
accompanying payment changes under to such mortgages as examples of the interest rate change as the ‘‘look-
the proposed. Proposed § 226.20(c)(1)(i) variable-rate transactions from comment back period.’’ (Interest rate change dates
contains timing requirements for 17(c)(1)–11 (redesignated as proposed tend to be the first of a month to
circumstances where a payment change comment 17(c)(1)(iii)–4), as discussed correspond with payment due dates.) In
accompanies an interest rate above. Under the proposed rule, turn, payment in the new amount is due
adjustment, and proposed § 226.20(c)(ii) whether or not creditors must provide on the first day of the month following
contains timing requirements for ARM adjustment notices for a shared- the month in which interest accrued at
circumstances where no payment equity or shared-appreciation mortgage the new rate.
change accompanies interest rate depends on whether such mortgage has Thus, for most ARM loans creditors
changes made during a year. an adjustable rate or a fixed rate. know what the new interest rate and
Proposed § 226.20(c)(2) contains Shared-equity and shared-appreciation payment will be well before payment at
content requirements for disclosures mortgages with a fixed rate would not a new level is due, even assuming a
required where a payment change be considered adjustable-rate mortgages week-long lag between publication of an
accompanies an interest rate under the proposed rule. index’s level and the creditor’s
adjustment. Proposed § 226.20(c)(3) verification of that level. In fact, many
contains content requirements for 20(c)(1) Timing of Disclosures creditors mail or deliver notice of an
disclosures required once each year The Board proposes to require interest rate and payment change 60 or
where no payment change accompanies creditors to mail or deliver a notice of more days before payment at a new
an interest rate change. Whether or not an interest rate adjustment for a closed- level is due.
a payment change is made, under end ARM at least 60, but no more than
44 HMDA data consist of information reported by
proposed § 226.20(c)(4) creditors would 120, days before payment at a new level
about 8,600 home lenders, including all of the
disclose the following information: (1) is due. This proposal is designed to nation’s largest mortgage originators. Reported
The date until which the creditor may provide borrowers with enough advance loans are estimated to represent about 80 percent
impose a prepayment penalty if the notice about an impending rate and of all home lending nationwide. Accordingly,
consumer prepays the obligation in full, payment change to enable them to HMDA data likely provide a broadly representative
view of U.S. home lending. Robert B. Avery,
if applicable; (2) a phone number the refinance the loan if they cannot afford Kenneth P. Brevoort, and Glenn B. Canner, The
consumer may call to obtain additional the adjusted payment. Even if 2007 HMDA Data, 94 Fed. Reserve Bulletin A107
information about the loan; and (3) a consumers do not need or want to (Dec. 23, 2008).
However, some ARM agreements may payment adjustment is due to the mortgage-related insurance, as
provide for shorter look-back periods. conversion of an adjustable-rate applicable; and (3) the current and new
For example, the calculation date for mortgage to a fixed-rate mortgage under periodic payment amounts and the due
some ARM products is the first business a written agreement, should creditors date for the first new payment. This
day of the month that precedes the continue to be required to provide an content is substantially similar to the
effective date of the interest rate change. adjustment notice at least 25, rather content of the ‘‘Payment Summary’’
The first day of that month may not be than at least 60, days before payment at table in the TILA disclosures provided
a business day, in which case the look- a new level is due? before consummation for most types of
back period would be fewer than 30 Coverage. Section 226.20(c) currently ARMs. (Under proposed § 226.38, the
days. In addition, it takes time for index applies to transactions subject to ‘‘Payment Summary’’ table for
levels to be reported and for creditors to § 226.19(b), which applies to closed-end negatively amortizing ARMs differs
confirm the index level and prepare ARMs secured by a consumer’s from the ‘‘Payment Summary’’ table for
disclosures for delivery or mailing. principal dwelling with a term greater other ARMs, as discussed below.) Under
Proposed § 226.20(c)(1) requires than one year. The Board is proposing proposed § 226.20(c)(5)(iii), this table
creditors to provide advance notice of to apply § 226.19(b) to all closed-end would have to contain headings,
an adjustment at least 60, but no more ARMs secured by real property or a content, and format substantially similar
than 120, days before payment at a new dwelling, as discussed above. Proposed to those in Appendix H–4(G), as
level is due, not before the interest rate § 226.20(c) would apply to the same discussed below.
changes. Comment 20(c)–1 would be category of transactions. Currently, ARM adjustment notices
revised to reflect the increase in the The Board recognizes that currently need not state how payments are
required advance notice of a payment creditors need not provide ARM allocated among principal, interest, and
adjustment. Proposed comment adjustment notices under existing escrow accounts. The Board believes
20(c)(1)–1 provides that if an adjustable- § 226.20(c) for a short-term transaction, that a table showing payment
rate feature is added when an open-end such as a construction loan, with an allocations would benefit consumers
credit account is converted to an adjustable rate. The Board solicits with interest-only or negatively
adjustable-rate transaction, creditors comment on whether a 60-day notice amortizing loans. Participants in the
must provide disclosures under period is appropriate for such loans and Board’s consumer testing generally
§ 226.20(c)(1) where payments change if not, what period would be understood a sample form with a table
due to conversion of a transaction appropriate and still provide consumers showing the transition from interest-
subject to § 226.19(b) to a fixed-rate sufficient notice of a payment change. only payments to payments of both
transaction. Because relevant payment Existing ARM loan agreements. The principal and interest. Further, all
changes under existing and proposed Board is aware that some ARM loan participants correctly identified the new
§ 226.20(c) are those due to interest agreements may provide for a look-back payment and the due date of the first
changes, proposed comment 20(c)(1)–2 period that is too short for the creditor payment at the new level shown in the
clarifies that payment changes due to to be able to provide an adjustment table. Almost all participants recognized
adjustments in property tax obligations notice at least 60 days before payment the increase in the interest rate and
or premiums for mortgage-related at a new level is due. The Board seeks amounts escrowed for taxes and
insurance do not trigger requirements to comment on the number or proportion property-related insurance and that part
disclose interest rate and payment of existing ARM loan agreements under of the new payment would be allocated
adjustments. which creditors or servicers could not to pay principal.
The Board solicits comment on the comply with a minimum 60-day Comment 20(c)(1)–1 on disclosing
operational changes creditors and advance notice requirement. ‘‘current’’ and ‘‘prior’’ interest rates
servicers would need to make to provide would be revised for clarity to refer
disclosures at least 60 days before 20(c)(2)(i) instead to ‘‘current’’ and ‘‘new’’ interest
payment at a new level is due. Are there Where a payment change rates. Under the proposed rule,
indices that are published at times that accompanies an interest rate change, § 226.20(c)(3) contains content
would make compliance with such a proposed § 226.20(c)(2)(i) requires requirements for annual notice
rule difficult? Are reported levels for creditors to disclose a statement that disclosures and § 226.20(c)(2) contains
particular indices difficult to confirm changes are being made to the interest content requirements for payment
within a few days? The Board requests rate and the date such change is change notices. Accordingly,
comment on whether requiring creditors effective. Proposed § 226.20(c)(2)(i) also commentary on disclosure where no
to provide 45, rather than 60, days’ requires creditors to state that more payment change has occurred during a
advance notice of a payment change detailed information is available in the year would be removed from comment
better balance concerns about providing loan agreements. Proposed 20(c)(1)–1.
sufficient notice to consumers and § 226.20(c)(5)(ii) requires that these
sufficient time for creditors to verify 20(c)(2)(iii)
disclosures appear before the other
reported indices and prepare required disclosures, as discussed Creditors currently must disclose the
disclosures. below. index values upon which the prior and
A look-back period of 45 days likely new interest rates are based, under
provides ample time for a creditor to 20(c)(2)(ii) existing § 226.19(c)(2). Some consumer
determine a loan’s new interest rate and Proposed § 226.20(c)(2)(ii) requires testing participants had difficulty
provide disclosures at least 60 days creditors to provide the following understanding the relationship among
before payment at a new level is due, as disclosures for covered loans in the an index, a margin, and an interest rate.
discussed above. Are there reasons why form of a table: (1) The current and new Accordingly, proposed § 226.20(c)(2)(iii)
a look-back period of forty-five days is interest rates; (2) if payments are substitutes a requirement that
not feasible for certain loan types for interest-only or negatively amortizing, disclosures contain a description of the
which a shorter look-back period is the amount of the current and new change in the index or formula for the
common, for example, subordinate-lien payment allocated to pay interest, disclosure required under existing
loans? Also, where an interest rate and principal, and property taxes and § 226.20(c)(2). For example, rather than
disclose that payments previously were 20(c)(2)(v) redesignated as proposed § 226.20(c)(3).

based on a 1-year LIBOR rate of 3.75 and Proposed § 226.20(c)(2)(v) would Currently, § 226.20(c) contains a single
now would be based on a new rate of require creditors to disclose limits on list of required disclosures creditors
5.75, a creditor might disclose the interest rate or payment increases at must provide as applicable, in a
following: ‘‘Your interest rate will each adjustment, if any, and the payment change notice and an annual
change due to an increase in the 1-year maximum interest rate or payment over notice of interest rate changes without
LIBOR index.’’ Further, proposed the life of the loan. This is consistent payment changes. Proposed
§ 226.20(c)(2)(iii) requires creditors to with the disclosure of rate change limits § 226.20(c)(3) specifies the disclosures
disclose any application of previously in the ‘‘More Information about Your that are applicable for purposes of
foregone increases together with the Payments’’ section of the disclosures annual notices.
description of the change in the index provided within three business days of
or formula. 20(c)(3)(i)
application. See proposed § 226.38(e).
A simple statement of the occurrence Under proposed § 226.20(c)(3)(i),
that caused the interest rate and 20(c)(2)(vi) where no payment adjustment has been
payment to change likely conveys a Currently, where the required loan made during a year, the creditor must
level of information suitable for most payment is different from the payment disclose that the interest rate on the loan
consumers’ needs. In consumer testing disclosed under § 226.20(c)(4), has changed without changing the
conducted for the Board, participants § 226.20(c)(5) requires a creditor to payments the consumer must make.
indicated that they found explanations disclose the payment required to fully Further, proposed § 226.20(c)(3)(i)
of interest rates difficult to follow. Thus, amortize the loan over the remainder of requires creditors to disclose the
providing more information would the loan term. This requirement would specific time period for which the
likely result in information overload. be redesignated as proposed annual notice discloses interest rates
Consumers who prefer more § 226.20(c)(2)(vi). Further, in all cases that were not accompanied by payment
information can review the loan creditors would disclose a statement changes. Proposed § 226.20(c)(5)(ii)
agreement to determine the interaction regarding whether or not part of the new requires that this disclosure appear
between the interest rate and the index payment will be allocated to pay the before the other required disclosures, as
and margin or to learn more about the loan principal. This is consistent with discussed below.
formula used to determine the interest the focus on the impact of loan
rate. The loan agreement also will payments on loan principal in the 20(c)(3)(ii)
contain information about how the proposed new ‘‘Key Questions’’ Under proposed § 226.20(c)(3)(ii), a
creditor may apply previously foregone disclosure in § 226.19(c) and the ‘‘Key creditor must disclose the highest and
interest. For these reasons, proposed Questions about Risk’’ section of the lowest interest rates applied during the
§ 226.20(c)(2)(ii) does not require disclosure creditors provide within year in which no payment change has
creditors to disclose the current and three business days of application in accompanied interest rate changes.
prior index values. Comment 20(c)(2)–1 proposed § 226.38(d). Creditors would not disclose all interest
would be removed accordingly. Existing comment 20(c)(5)–1, on fully
Comment 20(c)(4)–1, which discusses rates applied to a transaction if the
amortizing payments, would be payment has not changed. By contrast,
the types of contractual effects redesignated as comment 20(c)(2)(vi)–1.
§ 226.20(c) requires creditors to existing comment 20(c)–1 provides that
The comment also would be revised for creditors either may disclose all interest
disclose—for example, effects on the clarity and to update cross-references.
loan term and balance—also would be rates that applied or the highest and
Consistent with existing comment lowest rates. The Board believes that a
removed under the proposed rule. 20(c)(4)–1, proposed comment
Proposed comments 20(c)(2)(vi)–2, simple and clear disclosure of the
20(c)(2)(vi)–2 clarifies that the creditor highest and lowest interest rates applied
20(c)(2)(vii)–1, and 20(c)(3)(v)–1 reflect must disclose any change in the term or
the removed commentary, however. better conveys to consumers the impact
maturity of the loan if the change of interest rate changes than does a list
20(c)(2)(iv) resulted from the rate adjustment.
of all of the interest rates applied. This
Existing § 226.20(c)(3) requires that a 20(c)(2)(vii) is especially true where interest rates
creditor disclose the extent to which the Existing § 226.20(c)(4) requires change more frequently than monthly.
creditor has foregone any increase in the creditors to disclose the loan balance. 20(c)(3)(iii)
interest rate. This requirement would be This requirement would be redesignated
redesignated as proposed as proposed § 226.20(c)(2)(vii) and Creditors disclose the extent to which
§ 226.20(c)(2)(iv). Further, proposed would require creditors to disclose the the creditor has foregone any increase in
§ 226.20(c)(iv) would require creditors loan balance as of the effective date of the interest rate under existing
to disclose the earliest date a creditor the interest rate adjustment. Proposed § 226.20(c)(3). This requirement would
may apply foregone interest to future comment 20(c)(2)(vii)–1 clarifies that be contained in proposed
adjustments, subject to any rate caps. the balance required to be disclosed is § 226.20(c)(3)(iii) for notices where
Proposed comment 20(c)(3)(iv)–1 states the balance on which the new adjusted payment changes do not accompany
that creditors may rely on proposed payment is based. This is consistent interest rate changes made during a
comment 20(c)(2)(iv)–1 in determining with existing comment 20(c)(4)–1. year.
to which transactions the requirement to 20(c)(3)(iv)

disclose foregone interest applies and 20(c)(3) Content of Annual Interest Rate
how to disclose such increases. Notice Proposed § 226.20(c)(3)(iv) requires
Proposed comment 20(c)(3)(iv)–1 Existing § 226.20(c) requires creditors creditors to disclose the maximum
clarifies that creditors need not disclose to provide ARM adjustment notices at interest rate that may apply over the life
the earliest date the creditor may apply least once each year during which an of the loan. This is consistent with the
foregone interest in notices provided interest rate adjustment is implemented disclosure of rate change limits in the
annually when no payment change without an accompanying payment ‘‘More Information about Your
occurs during a year. change. This requirement would be Payments’’ section of the disclosures
provided within three business days of day the creditor may impose the resources required by proposed
application in proposed § 226.38(e). penalty. § 226.20(c)(4). These grouped
disclosures must be segregated from
20(c)(3)(v) 20(c)(4)(ii)
everything else.
Existing § 226.20(c)(4) requires Proposed § 226.20(c)(4)(ii) requires
creditors to disclose a phone number to 20(c)(5)(ii)
creditors to disclose the loan balance.
Under the proposal, this requirement call for additional information about the Under proposed § 226.20(c)(5)(ii), the
would be contained in proposed consumer’s loan. Creditors must provide statement that changes are being made
§ 226.20(c)(3)(v) for purposes of annual this information whether or not a to the interest rate and payments (under
notices where payment changes do not payment change accompanies an proposed § 226.20(c)(2)(i)) or that the
accompany interest rate changes. interest rate change, under the proposed interest rate has changed without
Creditors would disclose the loan rule. Most consumer testing participants accompanying payments changes (under
balance as of the last date of the year responded positively to tested proposed § 226.20(c)(3)(i)) must precede
covered by the disclosure. Proposed disclosures stating how to contact their the other required disclosures. The
comment 20(c)(3)(v)–1 clarifies that the lender with questions and stated that additional disclosures on information
balance required to be disclosed is the they would call their lender if they on prepayment penalties, contacting the
balance on which the new adjusted realized they were unable to afford creditor, and housing counseling
payment is based. This is consistent higher payments on an ARM. resources required by proposed
with existing comment 20(c)(4)–1. § 226.20(c)(4) must follow the interest
20(c)(4)(iii)
rate disclosures, under proposed
20(c)(4) Additional Information Proposed § 226.20(c)(4)(iii) requires § 226.20(c)(5)(ii).
creditors to disclose a phone number
Proposed § 226.20(c)(4) requires that and an Internet Web site consumers may 20(c)(5)(iii)
ARM adjustment notices creditors use to obtain a list of HUD-licensed Under proposed § 226.20(c)(5)(iii),
provide information about prepayment housing counselors. The proposed rule where a payment change accompanies
penalties, contacting the creditor, and requires creditors to provide this an interest rate adjustment, the interest
locating housing counseling resources. disclosure whether or not a payment rate and payment change disclosures
Proposed § 226.20(c)(5)(ii) requires that change accompanies an interest rate required by proposed § 226.20(c)(2)(ii)
these additional disclosures be located change. Most consumer testing must contain headings, content, and
directly below the required interest rate participants thought that information format substantially similar to those in
disclosures, as discussed below. about how to locate a HUD-licensed the table contained in Appendix H–
20(c)(4)(i) housing counselor would be useful to 4(G). The textual disclosures required
consumers. Some said that they would by proposed § 226.20(c)(2)(iii) through
Proposed § 226.20(c)(4)(i) requires use the information themselves if they (vii) must be located directly below the
creditors to disclose the last date the had difficulty affording payments. table. Further, the format requirements
creditor may impose a penalty if the in § 226.37 apply to ARM adjustment
consumer prepays the obligation in full 20(c)(5) Format of Disclosures
notices, as discussed below.
and the amount of the maximum 20(c)(5)(i) Regulations of other agencies.
penalty possible before that date, if Proposed § 226.20(c)(5)(i) requires Footnote 45c to § 226.20(c) currently
applicable. Under proposed that the heading, content, and format of states that creditors may substitute
§ 226.20(c)(4)(i), if an ARM has a the disclosures required by § 226.20(c) information provided in accordance
prepayment penalty, the creditor must be substantially similar to the heading, with variable-rate subsequent disclosure
disclose the required information content, and format of the model form regulations of other federal agencies for
whether or not a payment change in Appendix H–4(G), where an interest the disclosure required by § 226.20(c).
accompanies the interest rate change. rate adjustment is accompanied by a The Board adopted footnote 45c in
The Board believes that disclosures payment change, or the model form in 1987, a time when OCC, FHLBB, and
regarding a prepayment penalty would Appendix H–4(K), where a creditor HUD regulations contained subsequent
assist consumers in determining when provides an annual notice of interest disclosure requirements for ARMs. See
to seek a refinance loan. When rate adjustments without an 52 FR 48665, 48671; Dec. 24, 1987. The
presented with a sample ARM accompanying payment change. proposed rule would remove footnote
adjustment notice for a loan with a Proposed § 226.20(c)(5)(i) also requires 45c. No comprehensive disclosure
prepayment penalty, almost all that the disclosures required by requirements for variable-rate mortgage
consumer testing participants § 226.20(c) be placed in a prominent transactions presently are in effect
recognized that a prepayment penalty location. (Comment 37(d)–1 states that under the regulations of the other
would apply if they obtained a refinance disclosures meet the prominent location Federal financial institution supervisory
loan before a specified date. standard if they are located on the first agencies, as discussed above.
Proposed § 226.20(c)(4)(i) provides page and on the front side of the
that the creditor shall disclose the disclosure statement.) 20(d) Periodic Statement for Negative
maximum prepayment penalty possible Further, under proposed Amortization Loans
if the consumer prepays in full between § 226.20(c)(5)(i) the interest rate The Board proposes to require
the date the creditor delivers or mails disclosures required by § 226.20(c)(2) creditors to provide periodic statements
the ARM adjustment notice and the last (where a payment change accompanies for payment option ARMs with a
day the creditor may impose the an interest rate change) or § 226.20(c)(3) negative amortization feature that are
penalty. The Board requests comment (where no payment change occurs secured by real property or a dwelling.
on whether creditors should determine during a year) must be grouped together Such ARMs permit consumers to choose
the maximum prepayment penalty with the additional disclosures on the amount paid (above a specified
during some other period, for example prepayment penalties, contacting the minimum) each period. In 2006, the
between the date the creditor prepares creditor or servicer for loan information, Board, the OCC, the OTS, the FDIC, and
the ARM adjustment notice and the last and locating housing counseling the NCUA expressed concerns about
consumer understanding of how such payment at a new level is due, however, 17(c)(1)–1, discussed above. Proposed
loans function and of the effect of proposed § 226.20(c) requires creditors comment 20(d)(1)–2 clarifies, however,
negative amortization on a loan’s to provide an ARM adjustment notice that creditors may not base disclosures
balance in the Interagency Guidance on no later than 60 days beforehand, as for loans with a negatively amortizing
Nontraditional Mortgage Product Risks discussed above. feature on the fully amortizing, interest-
issued in 2006. 71 FR 58609; October 4, 20(d)(1)(i) Payment only, or other payment unless that
2006. The agencies issued related payment is the amount the consumer is
sample illustrations that include a Proposed § 226.20(d)(1)(i) would required to pay under the legal
payment summary table showing the require creditors to disclose, based on
obligation. Finally, proposed comment
impact of various payment options on the interest rate in effect at the time the
20(d)(1)(i)–1 states that creditors may
the loan balance that creditors may disclosure is made, the payment amount
required to: (1) Pay off the loan balance rely on comment 38(c)(5)–1 to
include with periodic statements for determine whether a payment is a
payment option ARMs. 72 FR 31825, in full by the end of the term through
regular periodic payments, without a regular periodic payment or a balloon
31831; Jun. 8, 2007. The illustrations payment.
were not consumer-tested. The Board’s balloon payment; (2) prevent negative
proposed model table showing payment amortization, if the legal obligation 20(d)(1)(ii) Effects
options is similar to the summary table explicitly permits the consumer to elect
the agencies issued but has been revised to pay interest only without paying Proposed § 226.20(d)(1)(ii) requires
based on consumer testing. principal; and (3) pay the minimum creditors to disclose the effects of
Payment option ARMs are complex payment required under the legal making payments in the amounts
products. Most participants in the obligation. Under the proposed rule, required to be disclosed under proposed
Board’s consumer testing were creditors would provide each disclosure § 226.20(d). Appendix H¥4(L) contains
unfamiliar with such loans and with as applicable. For example, if the terms a proposed model form with accessible
negative amortization generally. These of the loan obligation did not provide language on fully amortizing payments,
loans present consumers with choices the option for consumers to make interest-only payments, and negatively
each month, and how the consumer interest-only payments, creditors would amortizing minimum payments. First,
exercises his or her choice may result in disclose only the required minimum the model form states that a fully
negative amortization and much higher payment and the fully amortizing amortizing payment will cover all the
payments when the consumer must payment.
interest owed in a particular payment
In consumer testing conducted for the
begin to make fully amortizing plus some principal and decrease the
Board, participants generally
payments or a balloon payment. The loan balance and that if the consumer
understood the options presented in the
Board believes that consumers should table. Most were able to understand that regularly makes the fully amortizing
be informed of the consequences of making the minimum required payment payment the consumer will pay off the
making minimum payments on such a would cause their loan balance to grow. loan on schedule. Second, the model
loan. Thus, the Board proposes to They also understood that making a form states that an interest-only
require creditors to provide a periodic fully amortizing payment would be a payment will cover all the interest owed
statement that describes a consumer’s safe choice and would pay their loan in a particular payment but none of the
payment options and the effects of balance off over time. principal, that the consumer’s balance
making payments in those amounts.45 Proposed comment 20(d)(1)–1 will remain the same, and that if the
20(d)(1) Timing and Content of clarifies that creditors must provide a consumer regularly makes interest-only
Disclosures summary table under § 226.20(d) for payments the consumer will have to
covered loans that allow a consumer to make larger payments as early as a
For closed-end transactions secured choose to make a payment that results specified date. Third, the model form
by real property or a dwelling that in negative amortization even if the states that a minimum payment will
permit the consumer to select among initial payments required do not
multiple payment options that include cover only part of the interest owed in
negatively amortize the loan. Proposed a particular payment and result in a
an option that results in negative comment 20(d)(1)–1 states that a
amortization, proposed § 226.20(d) specified amount of unpaid interest
payment summary table need only being added to the loan balance and that
requires creditors to provide a periodic contain those disclosures that apply to
statement that discloses payment if the consumer makes a minimum
payment options available to a payment the consumer in effect will be
options not later than fifteen business consumer, however. For example, the
days before a payment is due. Where borrowing more money and will lose
proposed comment states that if a home equity. Further, the model form
45 The Federal financial institution supervisory
negatively amortizing loan recasts and a states that if a consumer regularly makes
agencies (the Board, the OCC, the OTS, the FDIC, consumer must begin to make fully minimum payments the consumer will
and the NCUA (collectively, the agencies)) amortizing payments, the payment have to make significantly larger
expressed concerns about consumer understanding summary table need not disclose payments as early as a specified date.
of how such loans function and of the effect of payments other than the fully
negative amortization on a loan’s balance in the Proposed comment 20(d)(1)(ii)–1
Interagency Guidance on Nontraditional Mortgage amortizing payment.
Product Risks issued in 2006. 71 FR 58609; October Proposed comment 20(d)(1)–2 states states that the disclosures required by
4, 2006. The agencies issued related sample that creditors may base all disclosures § 226.20(d) must be consistent with the
illustrations that include a payment summary table on the assumption that payments will terms of the legal obligation. For
showing the impact of various payment options on example, the proposed comment
the loan balance that creditors may include with
be made on time and in the amounts
periodic statements for payment option ARMs. 72 required by the terms of the legal clarifies that disclosures may not state
FR 31825, 31831; Jun. 8, 2007. Proposed § 226.20(d) obligation, disregarding any possible that making fully amortizing payments
requires creditors to provide periodic statements inaccuracies resulting from consumers’ on an interest-only loan will reduce a
that disclose payment options in the form of a table.
The proposed model table is similar to the summary
payment patterns. This is consistent consumer’s loan balance if the creditor
table the agencies issued but has been revised based with existing comment 17(c)(2)(i)–3 and will not apply payments that exceed the
on consumer testing. proposed revisions to comment interest-only payment to principal.
20(d)(1)(iii) Unpaid Interest frequently, for example quarterly. Those Currently, there is no provision in
Proposed § 226.20(d)(1)(iii) requires statements assist consumers in Regulation Z or federal law that requires
creditors to disclose the amount that monitoring account changes related to the creditor to provide notice of the cost
will be added to the loan balance due changes in taxes or property insurance to the consumer before charging the
to unpaid interest, if the consumer costs. consumer for creditor-placed property
elects to make a payment that results in 20(e) Creditor-Placed Property insurance. It appears that only a few
negative amortization. Insurance states require creditors to provide
notice, and these requirements differ.
20(d)(2) Format of Disclosures Creditor-placed property insurance Under Michigan law, for example, a
requirements. The security instrument creditor may not impose charges on a
Proposed § 226.20(d)(2)(i) requires
or promissory note typically contains a debtor for creditor-placed property
that periodic statements for loans with
requirement that the consumer maintain insurance unless the creditor provides
a negative amortization feature contain
insurance on the property securing the two notices and allows the borrower a
payment disclosures with content
loan, such as the consumer’s dwelling total of 30 days to provide evidence of
substantially similar to the content of or automobile. If the consumer fails to
Form H–4(L) in Appendix H. Further, insurance.50 New Mexico law, on the
maintain the insurance or the insurance other hand, simply requires the insurer
the proposed provision requires is cancelled, the credit agreement
creditors to make payment disclosures to provide notice to the debtor within 15
typically authorizes the creditor to days after the placement or renewal of
in a payment summary table with obtain such insurance at the consumer’s
headings, content, and format creditor-placed property insurance.51
expense. The premium becomes The majority of states have no notice
substantially similar to Form H–4(L). additional debt of the consumer. This
Proposed § 226.20(d)(2)(ii) requires that requirement. The servicing guidelines of
practice is known as ‘‘creditor-placed Fannie Mae and Freddie Mac also vary
disclosures be placed in a prominent property insurance.’’
location (that is, located on the first greatly. Fannie Mae’s guidelines state
Industry reports indicate that the
page and on the front side of the that the servicer ‘‘should’’ provide the
volume of creditor-placed property
disclosure statement, as clarified by borrower with at least one written
insurance premiums has increased
proposed comment 37(d)(1)–1), with notice and a total of at least 60 days to
significantly in the past few years.46
one exception. Under proposed provide evidence of insurance before
Consumers struggling financially may
§ 226.20(d)(2)(ii), if the payment charging for creditor-placed property
fail to pay required property insurance
disclosures required by § 226.20(d) are insurance.52 Freddie Mac’s guidelines
premiums unaware that the creditor has
made together with the ARM adjustment do not require the servicer to provide
the right to obtain such insurance on
disclosures required by § 226.20(c), the notice to the borrower.53
their behalf and add the premiums to
payment disclosures must be located In order to ensure that consumers are
the outstanding loan balance.47 In some
directly below the ARM adjustment informed of the cost of creditor-placed
instances, creditors have improperly
disclosures. property insurance, the Board proposes
obtained property insurance when they
Proposed § 226.20(d)(2)(iii) requires to use its authority under TILA Section
arguably knew or should have known
that the table required by 105(a), 15 U.S.C. 1604(a), to add
that the consumer already had
§ 226.20(d)(2)(i) contain only the § 226.20(e) to require the creditor to
insurance.48 Generally, creditor-placed
information required by § 226.20(d)(1). provide notice of the cost and coverage
insurance is more costly and provides
Other information may be presented of creditor-placed property insurance
less coverage than insurance that a
with the table under the proposed rule, consumer purchases through an before charging the consumer for such
provided that such information appears insurance agent.49 insurance. In addition, proposed
outside of the required table. § 226.20(e)(4) would require the creditor
Alternatives not proposed. The Board 46 See, e.g., Consumer Credit Industry to provide the consumer with evidence
is proposing to apply the requirement to Association, Fact Book of Credit-Related Insurance of creditor-placed property insurance
provide periodic statements that contain at 1 (2007) (finding that the 2007 volume of within 15 days of imposing a charge for
creditor-placed property insurance premiums was such insurance. Proposed § 226.20(e)(1)
a payment summary table, for payment over twice the 2002 amount).
option ARMs with a negative 47 See State of Wisconsin, Office of the
would define ‘‘creditor-placed property
amortization feature that are secured by Commissioner of Insurance, ‘‘Force-Placed’’ insurance’’ as ‘‘property insurance
real property or a dwelling. The Board Insurance Surprises Those Who Let Policies Lapse coverage obtained by the creditor when
(May 30, 2002) available at http://oci.wi.gov/ the property insurance required by the
considered requiring periodic pressrel/0502home.htm (‘‘Many people don’t
statements for all loans secured by real realize that if they let that [homeowner’s] insurance
credit agreement has lapsed.’’ Section
property or a dwelling. The Board is not lapse, banks and other lenders can legally re-insure 226.20(e) would apply to secured
proposing such a requirement, however. their home loan by buying insurance to replace it closed-end loans, including mortgage
and making the homebuyer pay for it.’’). and automobile loans. The Board
It is not clear that a monthly statement 48 See, e.g., United States of America v. Fairbanks
on a fixed-rate mortgage or an ARM Capital Corp., Civ. Action No. 03–12219–DPW,
solicits comment as to whether this rule
without payment options would provide Complaint at ¶ 17 (D. Mass. Nov. 12, 2003) (finding should also apply to HELOCs.
sufficient benefits to consumers to offset that Fairbanks improperly obtained property Proposed § 226.20(e)(2) contains three
the costs of providing statements. For
insurance when it knew or should have known that conditions for charging for creditor-
borrowers already had insurance); Ocwen Federal
these loans, the consumer cannot Bank FSB, OTS Docket No. 04592, Supervisory
property or provide coverage for personal liability
exercise any choice in payments. Agreement, OTS Docket No. 04592 (Apr. 19, 2004)
or medical payments to others).
Moreover, creditors must give borrowers (requiring the bank to take reasonable actions to
50 Mich. Comp. Laws § 500.1625 (2009).
determine whether appropriate hazard insurance is
advance notice each time the required already in place before it obtained creditor-placed 51 N.M. Admin. Code § 13.18.3.17 (2009).
payment for a variable-rate transaction property insurance). 52 Fannie Mae Single-Family Servicing Guide,
adjusts, under § 226.20(c), as discussed 49 See, e.g., Webb, et al. v. Chase Manhattan Part II, Ch. 6 Lender-Placed Property Insurance
above. Servicers send borrowers with Mortgage Corp., No. 2:05–CV–0548, 2008 U.S. Dist. (2005).
LEXIS 42559, at *15 (S.D. Ohio May 28, 2008) 53 Freddie Mac Single-Family Seller/Servicer
escrow accounts annual statements (finding that the creditor-placed property insurance Guide, Vol. 2, § 58.9 Special Insurance
under RESPA. Some servicers send premium was four times higher than the plaintiff’s Requirements and Changes in Insurance
additional escrow notices more original premium and did not cover personal Requirements (2007).
placed property insurance. First, consumer for the cost of any required U.S.C. 1601(a). Currently, few
proposed § 226.20(e)(2)(i) would require property insurance obtained during the consumers are aware of the cost or
the creditor to make a reasonable 45-day notice period if such charge is coverage of creditor-placed property
determination that the required property not prohibited by applicable State or insurance, or that the premiums become
insurance had lapsed. Second, proposed other law. additional debt of the consumer. The
§ 226.20(e)(2)(ii) would require the Content and format of notice. Board believes that this proposed rule
creditor to mail or deliver to the Proposed § 226.20(e)(3) would require would inform consumers of the cost and
consumer a written notice containing the creditor to provide the written coverage of the creditor-placed property
the information required by the notice clearly and conspicuously. insurance and avoid the uninformed use
proposed rule at least 45 days before a Proposed § 226.20(e)(3)(i) would require of credit. In addition, this proposed rule
charge is imposed on the consumer for that the notice contain the creditor’s would not prohibit the creditor from
the creditor-placed property insurance. name and contact information, the loan charging for creditor-placed property
Finally, proposed § 226.20(e)(2)(iii) number, and the address or description insurance, but would simply delay the
would permit the creditor to charge the of the property securing the credit charge until the consumer has been
consumer if, during the 45-day notice transaction. The Board solicits comment provided sufficient notice of the cost
period, the consumer did not provide as to whether the creditor should be and sufficient time to shop for his or her
the creditor with evidence of adequate required to establish a local or toll-free own homeowner’s insurance.
property insurance. telephone number for the consumer to
Notice period timing and charges. contact the creditor. Section 226.25 Record Retention
Under the proposed rule, the creditor Under proposed § 226.20(e)(ii)–(viii), 25(a) General Rule
would have to mail or deliver to the the notice would also need to contain
consumer the required written notice at the following statements: (1) That the Section 226.25(a) provides that
least 45 days before charging the consumer is obligated to maintain creditors must retain records to
consumer for the cost of creditor-placed insurance on the property securing the evidence compliance with Regulation Z
property insurance. This 45-day notice credit transaction; (2) that the required for two years. As discussed in detail
period is consistent with the 45-day property insurance has lapsed; (3) that below, the Board is proposing to add a
notice period required by the Flood the creditor is authorized to obtain the new comment to § 226.25(a) to provide
Disaster Protection Act of 1973 Section property insurance on the consumer’s guidance on record retention
102(e), 42 U.S.C. 4012a(e), and behalf; (4) the date the creditor can requirements relating to proposed
represents the midpoint between State charge the consumer for the cost of the § 226.36(d)(1), which would prohibit
law 30-day notice periods 54 and the 60- creditor-placed property insurance; (5) any person from paying compensation
day Fannie Mae Servicing Guide how the consumer may provide to a loan originator based on any of the
recommendation.55 The Board notes evidence of property insurance; (6) the terms or conditions of the transaction.
that the provision in the Fannie Mae cost of the creditor-placed property Proposed comment 25(a)–5 would
Servicing Guide is stated as a insurance stated as an annual premium, provide that, to evidence compliance
recommendation, but not a requirement. and that this premium is likely with proposed § 226.36(d)(1), a creditor
The Board believes that a 45-day notice significantly higher than a premium for must retain for each covered transaction
period would allow the consumer property insurance purchased by the a record of the agreement between it and
reasonable time to shop for and provide consumer; and (7) that the creditor- the loan originator that governs the
evidence of insurance. The Board placed insurance may not provide as originator’s compensation and a record
recognizes that it may take several days much coverage as homeowner’s of the amount of compensation actually
for the consumer to receive a notice sent insurance. The Board solicits comment paid to the originator in connection
by mail, but the consumer would still on whether the notice should also with the transaction.
have at least one calendar month in contain statements, if applicable, that Section 226.27 Language of
which to shop for and purchase the creditor will receive compensation Disclosures
property insurance. Comment is for obtaining creditor-placed property
solicited, however, on whether a insurance and that the creditor will Currently, § 226.27, permits TILA
different time period would better serve establish an escrow account to pay for disclosures in a language other than
the needs of consumers and creditors. the creditor-placed insurance premium. English as long as the disclosures are
Proposed comment 20(e)–1 would Although such statements would be provided in English upon the
make clear that if the creditor complies informative, the Board is concerned that consumer’s request. Many consumers do
with § 226.20(e), the creditor could providing these additional disclosures not speak English or speak English as a
charge the consumer for creditor-placed could result in information overload for second language. According to the 2000
insurance as of the 46th day after the consumer. A Model Clause is Census, at least 18% of the population
sending the notice to the consumer. For proposed at Appendix H–18. (47 million people) speak a language
example, a creditor that mails the The Board proposes to use its other than English at home.56 To protect
required notice on January 2, 2011, may authority under TILA Section 105(a), 15 non-native English speakers from fraud
begin to charge the consumer for the U.S.C. 1604(a), to add § 226.20(e) to and discrimination in credit
cost of the creditor-placed property require the creditor to provide notice transactions, recent enforcement actions
insurance on February 18, 2011. before charging the consumer for the have required that creditors or mortgage
Proposed comment 20(e)–1 would also cost of creditor-placed property brokers provide translations of
clarify that the creditor may charge the insurance. TILA Section 105(a), 15 presentations, disclosures, or
U.S.C. 1604(a), authorizes the Board to documents.57 Moreover, several states
54 See Ark. Code Ann. § 23–101–113 (2008); prescribe regulations to carry out the
Mich. Comp. Laws § 500.1625 (2009); Miss. Code purposes of the act. TILA’s purpose 56 U.S. Census Bureau, Language Use and
Ann. § 83–54–25 (2008); Tenn. Code Ann. § 56–49– includes promoting ‘‘the informed use English-Speaking Ability: 2000 at 2 (Oct. 2003),
113 (2009). available at http://www.census.gov/prod/2003pubs/
55 Fannie Mae Single-Family Servicing Guide, of credit,’’ which ‘‘results from an c2kbr-29.pdf.
Part II, Ch. 6 Lender-Placed Property Insurance awareness of the cost thereof by 57 See, e.g., In the Matter of First Mariner Bank,
(2005). consumers.’’ TILA Section 102(a), 15 Baltimore, Maryland, FDIC–07–285b, FDIC–08–
have enacted laws to require credit hand, raise concerns about the cost and provided before, at, or subsequent to
disclosures or documents in Spanish or burden of translating documents into consummation?
other foreign languages.58 In 2006, multiple foreign languages and the • Should a translation requirement
Fannie Mae and Freddie Mac potential liability for inaccurate apply to Web sites that provide early
announced the availability of non- translations. Both consumer advocates TILA disclosures?
executable Spanish translations of the and industry representatives question • Should a translation requirement
Fannie Mae/Freddie Mac Uniform whether consumers who speak minority apply only to one or a few languages, or
Instrument to help the residential languages will still have access to credit should it apply to any foreign language?
mortgage industry better serve Spanish- if creditors have to bear the cost and Section 226.32 Requirements for
speaking consumers.59 Finally, Congress liability for translating documents into Certain Closed-End Mortgages
recently asked the General Accounting little-known languages. Creditors may
Office to conduct a study examining the be reluctant to engage in outreach to 32(b) Definitions
relationship between fluency in English consumers who speak those languages. 32(b)(1)
and financial literacy, and the extent, if The Board solicits comment on Section 226.32(b)(1) defines the
any, to which individuals whose native whether it should use its rulemaking ‘‘point and fees’’ used to determine
language is not English are impeded in authority to require creditors to provide whether a loan is a HOEPA loan. That
the conduct of their financial affairs.60 translations of credit disclosures. definition consists of four elements: (i)
Consumer advocates are concerned Comment is requested on whether the All items required to be disclosed under
that consumers who do not speak failure to provide credit disclosure § 226.4(a) and 226.4(b), except interest
English or speak English as a second translations is unfair or deceptive, or or the time-price differential; (ii) All
language may be more susceptible to impedes the informed use of credit. compensation paid to mortgage brokers;
abusive credit practices or offered less Comment is also requested on potential (iii) All items listed in § 226.4(c)(7)
favorable credit terms or products litigation issues, such as whether a (other than amounts held for future
because they are not provided with translation would be admissible into payment of taxes) unless the charge is
disclosures they can understand. evidence or whether an inaccurate reasonable, the creditor receives no
Industry representatives, on the other translation would toll TILA’s statute of direct or indirect compensation in
limitations or extend the right of connection with the charge, and the
358k, Consent Agreement at 5 (April 22, 2009) rescission. Finally, comment is charge is not paid to an affiliate of the
(alleging that the bank discriminated against requested on the effectiveness of State
Hispanics, African-Americans, and women by creditor; and (iv) Premiums or other
charging them higher prices for residential mortgage laws that require translations of charges for credit life, accident, health,
loans and requiring the bank to provide financial disclosures or documents and whether or loss-of-income insurance, or debt-
literacy courses in English and Spanish); Fed. Trade the Board should adopt similar cancellation coverage (whether or not
Comm’n v. MortgagesParaHispanos.com and Daniel regulations.
Moises Goldberg, Civ. Action No. 4:06cv19, Final the debt-cancellation coverage is
Judgment and Order at 5 (E.D. Tex. Sept. 27, 2006) The Board requests comment on the insurance under applicable law) that
(alleging that the mortgage broker misrepresented following translation issues: provides for cancellation of all or part
the mortgage terms to Spanish-speaking consumers • What is the scope of the problem? of the consumer’s liability in the event
and requiring the broker to provide a disclosure and
consumer education brochure in Spanish to any
That is, approximately how many of the loss of life, health, or income or
consumer if they have reason to believe that the consumers do not understand TILA in the case of accident, written in
consumer’s primary language is Spanish); In re disclosures because of language connection with the credit transaction.
Ameriquest Mortgage Co., et al., Settlement barriers?
Agreement at 17–18 (Jan. 23, 2006) (requiring
In light of the changes to the finance
documents and disclosures to be translated to
• Should creditors be required to charge under proposed § 226.4,
Spanish or to any language in which Ameriquest provide consumers with translations of discussed above, the Board is proposing
advertises). required TILA disclosures? If such technical amendments to this provision.
58 Ariz. Rev. Stat. § 6–631 (requiring a consumer
translations were required, what should The reference to ‘‘items required to be
loan lender to provide a notice in English and be the trigger for such disclosures (e.g.,
Spanish that the consumer may request the TILA
disclosed under § 226.4(a) and 226.4(b),
disclosure in Spanish); Cal. Civ. Code § 1632 the language of the negotiation, the except interest or the time-price
(requiring any person engaged in a trade or business language of the creditor’s presentation, differential’’ in § 226.32(b)(1)(i)
who negotiates certain transactions primarily in the language of the creditor’s implements TILA Section 103(aa)(4)(A).
Spanish, Chinese, Tagalog, Vietnamese, or Korean advertisement, a consumer request)?
to deliver a translation of the contract in the
That provision includes in points and
language in which the contract was negotiated); DC • Should there be an exception for fees ‘‘all items included in the finance
Code Ann. § 26–1113 (requiring a post-application consumers who are accompanied by an charge, except interest or the time-price
mortgage disclosure to be provided in the language interpreter? differential.’’ 15 U.S.C. 1602(aa)(4)(A).
of the mortgage lender’s presentation to the • Would a translation requirement
borrower); 815 Ill. Comp. Stat. Ann. 122/2–20
Thus, ‘‘items required to be disclosed
(requiring payday lenders to provide consumers negatively affect consumers and the under § 226.4(a) and 226.4(b)’’ is
with a written disclosure in English and in the type and terms of credit offered because intended to capture the finance charge.
language in which the loan was negotiated); Tex. creditors would be reluctant to risk Section 226.32(b)(1)(ii) and (iii) parallel
Fin. Code Ann. § 341.502 (requiring that the TILA liability for engaging in transactions in
disclosure be provided in Spanish if the terms for
the additional elements in TILA Section
the consumer loan, retail installment transaction, or a language other than English? 103(aa)(4)(B) and (C). See 15 U.S.C.
home equity loan were negotiated in Spanish). Finally, the Board solicits comment 1602(aa)(4)(B) and (C). Finally, TILA
59 News Release, Fannie Mae and Freddie Mac

on the following coverage issues: Section 103(aa)(4)(D) provides for the
Offer Mortgage Documents in Spanish to Aid • Should a translation requirement inclusion of such other charges as the
Lenders and Industry Partners with Helping More
Hispanics Become Homeowners; Collaborative apply only to mortgages loans, or also to Board determines to be appropriate. 15
Effort Aimed at Helping Close the Hispanic and other types of credit products, such as U.S.C. 1602(aa)(4)(D). Pursuant to that
Overall Minority Homeownership Gaps (Sept. 25, auto loans or credit cards? authority, in § 226.32(b)(1)(iv), the
2006), available at http://www.fanniemae.com/ • Should a translation requirement Board included credit insurance
newsreleases/2006/
3803.jhtml?p=Media&s=News+Releases. apply only to the TILA disclosures premiums and debt cancellation
60 Credit CARD Act of 2009, Public Law 111–24, provided before or at consummation, or coverage fees. Thus, the statutory
§ 513, 123 Stat. 1734, 1765 (2009). to any credit disclosures or documents definition reflects Congress’s intent to
include in points and fees mortgage on the credit application does not following ‘‘security interest’’ statement
broker compensation, certain real-estate obligate the consumer to accept the in connection with a HOEPA loan: ‘‘If
related fees, and the insurance charges terms of the loan. The next two you are unable to make the payments on
added by the Board, even if those items sentences are ‘‘security interest’’ this loan, you could lose your home.’’
would be excluded from the finance disclosures to inform the consumer of As discussed more fully in
charge under other applicable rules. the potential consequences when the § 226.38(f)(2), consumer testing showed
Under TILA Section 103(aa)(1), creditor takes a security interest in the that participant comprehension of this
HOEPA applies to certain transactions consumer’s home. Comment 32(c)(1)–1 disclosure improved when the plain-
that are secured by a consumer’s states that these disclosures need not be language version of the ‘‘security
principal dwelling. 15 U.S.C. in a particular format or part of the note interest’’ disclosure was used. The
1602(aa)(1). Proposed § 226.4(g), and or mortgage document. A Model Clause Board believes that the plain-language
therefore the more inclusive definition is currently provided at Appendix H– versions of the ‘‘no obligation’’ and
of finance charge it would create, would 16. ‘‘security interest’’ disclosures will
apply to any transaction secured by real As discussed more fully in better inform consumers who are
property or a dwelling. Consequently, § 226.38(f)(1), the MDIA amended TILA considering obtaining HOEPA loans.
all loans that are potentially subject to Section 128(b)(2), 15 U.S.C. 1638(b)(2), The proposal would delete comment
HOEPA would be subject to the to require the creditor to provide the 32(c)(1)–1 and require these statements
proposed ‘‘but for’’ finance charge following ‘‘no obligation’’ statement on to be in bold text and a minimum 10-
definition. Under that definition, the the TILA disclosure: ‘‘You are not point font, consistent with proposed
items included under the points and required to complete this agreement §§ 226.37 and 226.38. A revised Model
fees definition in addition to the finance merely because you have received these Clause is proposed at Appendix H–16.
charge (other than interest or the time- disclosures or signed a loan
32(c)(5) Amount Borrowed
price differential) would never be application.’’ Based on consumer
excluded from the finance charge for testing, the Board proposes to use its For HOEPA mortgage refinancing
transactions secured by real property or adjustments and exception authority loans, § 226.32(c)(5) requires the
under TILA Section 105(a), 15 U.S.C. creditor to disclose the amount
a dwelling.
The Board believes that proposed 1604(a), to modify the specific wording borrowed, and states that ‘‘where the
§ 226.4 would render § 226.32(b)(1)(ii) on the disclosure. Proposed amount borrowed includes premiums or
§ 226.38(f)(1) would require the creditor other charges for optional credit
through (iv) unnecessary because all
to provide a statement that the insurance or debt-cancellation coverage,
items included in points and fees under
consumer has no obligation to accept that fact shall be stated, grouped
those provisions already would be
the loan, and, if the creditor provides together with the disclosure of the
included as part of the finance charge.
space for a consumer’s signature, a amount borrowed.’’ In the December
To eliminate unnecessary complexity,
statement that a signature by the 2008 Open-End Final Rule, the existing
the Board proposes to streamline
consumer only confirms receipt of the rules for credit insurance and debt
§ 226.32(b)(1) by deleting those
disclosure statement. During consumer cancellation coverage were applied to
additional elements. The Board also
testing, participants’ comprehension debt suspension coverage for purposes
proposes to revise § 226.32(b)(1) to
improved when they reviewed the of excluding a charge for debt
provide that points and fees means all suspension coverage from the finance
items included in the finance charge plain-language version of the clause.
Similarly, based on consumer testing, charge. See 74 FR 5244, 5255; Jan. 29,
pursuant to § 226.4, except interest or 2009. In the final rule, the Board stated
the Board proposes to use its
the time-price differential, instead of that ‘‘[d]ebt cancellation coverage and
adjustments and exception authority
§ 226.32(b)(1)(i)’s reference to ‘‘items debt suspension coverage are
under TILA Section 105(a), 15 U.S.C.
required to be disclosed under § 226.4(a) fundamentally similar to the extent they
1604(a), to require the creditor under
and 226.4(b).’’ This change would offer a consumer the ability to pay in
proposed § 226.32(c)(1) to provide the
reflect the language of TILA more advance for the right to reduce the
following ‘‘no obligation’’ statement in
closely and is not meant to effect any consumer’s obligations under the plan
connection with a HOEPA loan: ‘‘You
substantive change to HOEPA’s on the occurrence of specified events
have no obligation to accept this loan.
coverage. Your signature below only confirms that that could impair the consumer’s ability
32(c) Disclosures you have received this form.’’ TILA to satisfy those obligations.’’ 74 FR
Section 105(a), 15 U.S.C. 1604(a), states 5266. The Board also noted that the two
32(c)(1) Notices products are different because debt
that the Board ‘‘may provide for such
For HOEPA loans, TILA Sections adjustments * * * as in the judgment of cancellation coverage cancels the debt
129(a)(1)(A) and (B), 15 U.S.C. the Board are necessary or proper to while debt suspension merely suspends
1639(a)(1)(A) and (B), and § 226.32(c)(1), effectuate the purposes of [TILA]’’. One payment of the debt. Id. Despite this
require the creditor to provide the of the purposes of TILA is to promote difference, the Board adopted a final
following disclosures in conspicuous the informed use of credit. TILA Section rule treating the two products the same
type size: ‘‘You are not required to 102(a), 15 U.S.C. 1601(a). Consumer for purposes of the finance charge, but
complete this agreement merely because testing showed that the ‘‘no obligation’’ adding a special disclosure warning
you have received these disclosures or language improved participants’ consumers of the risks of debt
have signed a loan application. If you understanding of the key point that suspension coverage. Id. Consistent
obtain this loan, the lender will have a signing or accepting a disclosure did not with this approach, the Board proposes
mortgage on your home. You could lose obligate the consumer to accept the to treat debt suspension coverage in the
your home, and any money you have terms of the loan. same manner as debt cancellation
put into it, if you do not meet your In addition, the Board proposes to use coverage for purposes of the disclosing
obligations under the loan.’’ The first its adjustments and exception authority the amount borrowed for a HOEPA
sentence is a ‘‘no obligation’’ statement under TILA Section 105(a), 15 U.S.C. mortgage refinancing loan. The Board
to inform the consumer that the space 1604(a), to require the creditor under proposes to revise § 226.32(c)(5) to
for the consumer’s signature that may be proposed § 226.32(c)(1) to provide the clarify that where the amount borrowed
includes charges for debt suspension apply to closed-end transactions transactions secured by real property or
coverage, that fact should be stated, secured by any dwelling, not just a a dwelling, for the reasons discussed
grouped together with the disclosure of consumer’s principal dwelling. This above.
the amount borrowed. Proposed approach would be consistent with
36(d) Prohibited Payments to Loan
comment 32(c)(5)–1 would also be recent amendments to the TILA effected
Originators
revised to include a reference to debt by the MDIA.
suspension coverage. Comment is The Board is proposing to use its
36(a) Loan Originator and Mortgage authority in HOEPA to prohibit unfair
solicited on this approach.
Broker Defined or deceptive acts or practices in
Section 226.35 Prohibited Acts or As discussed below in more detail, mortgage lending to restrict certain
Practices in Connection With Higher- the Board proposes to prohibit certain practices related to the payment of loan
Priced Mortgage Loans payments to loan originators that are originators. See TILA Section
35(a) Higher-Priced Mortgage Loans based on a transaction’s terms and 129(l)(2)(A), 15 U.S.C. 1639(l)(2)(A). For
conditions, and also proposes to this purpose, a ‘‘loan originator’’
35(a)(2) prohibit loan originators from ‘‘steering’’ includes both mortgage brokers and
In its final rule implementing new consumers to transactions that are not in employees of creditors who perform
requirements for higher-priced mortgage their interest in order to increase the loan origination functions.
loans, 73 FR 44522; July 30, 2008, the originator’s compensation. Accordingly, Specifically, to address the potential
Board adopted the ‘‘average prime offer the Board proposes to amend the unfairness that can arise with certain
rate’’ as the benchmark for coverage of regulation to provide a definition of loan originator compensation practices,
new § 226.35. In so doing, the Board ‘‘loan originator’’ in § 226.36(a)(1), the proposed rule would prohibit a
adopted commentary under new which would include persons who are creditor or other party from paying
§ 226.35(a)(2) regarding the calculation covered by the current definition of compensation to a loan originator based
of the average prime offer rate and mortgage broker but also would include on the credit transaction’s terms or
related guidance. Comment 35(a)(2)–4 employees of the creditor, who are not conditions. This prohibition would not
indicated that the Board publishes considered ‘‘mortgage brokers.’’ Existing apply to payments that consumers make
average prime offer rates and the § 226.36(a) defines the term ‘‘mortgage directly to a loan originator. However, if
methodology for their calculation on the broker’’ because mortgage brokers are a consumer directly pays the loan
Internet. The Board is proposing to subject to the prohibition on coercion of originator, the proposed rule would
amend comment 35(a)(2)–4 to specify appraisers in § 226.36(b). A revised prohibit the originator from also
where on the Internet the table and definition of mortgage broker would be receiving compensation from any other
methodology may be found (http:// designated as § 226.36(a)(2). The party in connection with that
www.ffiec.gov/hmda). provision of existing § 226.36(a) stating transaction.
The Board also is proposing new that a creditor making a ‘‘table funded’’ The Board is soliciting comment on
comment 35(a)(2)–5 to provide transaction is considered a mortgage an alternative that would allow loan
additional guidance on determination of broker would be revised for clarity; no originators to receive payments that are
applicable average prime offer rates for substantive change is intended other based on the principal loan amount,
purposes of § 226.35. The comment than the expansion of the definition which is a common practice today. The
would clarify that the average prime from mortgage broker to loan originator. Board is also soliciting comment on
offer rate is defined identically under Thus, under proposed § 226.36(a)(1), a whether it should adopt a rule that
§ 226.35 and under Regulation C creditor that does not provide the funds seeks to prohibit loan originators from
(HMDA), 12 CFR 203.4(a)(12)(ii). Thus, for the transaction at consummation out directing or ‘‘steering’’ consumers to
for purposes of both coverage of of its own resources, out of deposits loans based on the fact that the
§ 226.35 and coverage of the rate spread held by it, or by drawing on a bona fide originator will receive additional
reporting requirement under Regulation warehouse line of credit would be compensation, unless that loan is in the
C, 12 CFR 203.4(a)(12)(i), the applicable considered a loan originator for consumer’s interest. The Board is
average prime offer rate is identical. The purposes of § 226.36. expressly soliciting comment on
comment would clarify further that whether the rule would be effective in
36(b) and (c) Misrepresentation of Value
guidance on the applicable average achieving the stated purpose. Comment
of Consumer’s Dwelling; Servicing
prime offer rate is provided in the staff is also solicited on the feasibility and
Practices
commentary under Regulation C, the practicality of such a rule, its
Board’s A Guide to HMDA Reporting: The Board proposes to amend enforceability, and any unintended
Getting it Right!, and the relevant § 226.36(b) and (c) to reflect the adverse effects the rule might have.
‘‘Frequently Asked Questions’’ on expanded scope of coverage of § 226.36, These proposals and alternatives are
HMDA compliance posted on the as noted above. Existing § 226.36(b) discussed more fully below.
FFIEC’s Web site referenced above. prohibits creditors and mortgage brokers
and their affiliates from coercing, Background
Section 226.36 Prohibited Acts or influencing, or otherwise encouraging In the summer of 2006, the Board held
Practices in Connection With Credit appraisers to misstate or misrepresent public hearings on home equity lending
Secured by Real Property or a the value of the consumer’s principal in four cities. During the hearings,
Consumer’s Dwelling
dwelling in connection with a closed- consumer advocates urged the Board to

The Board proposes to amend end mortgage transaction. Section ban ‘‘yield spread premiums,’’ payments
§ 226.36 to extend the scope of the 226.36(c) currently prohibits certain that mortgage brokers receive from the
section’s coverage to all closed-end practices of servicers of closed-end creditor at closing for delivering a loan
transactions secured by real property or consumer credit transactions secured by with an interest rate that is higher than
a dwelling. Currently, this section a consumer’s principal dwelling. Under the creditor’s ‘‘buy rate.’’ The consumer
applies to closed-end credit transactions this proposal, the rules relating to advocates asserted that yield spread
secured by a consumer’s principal appraiser coercion and loan servicing premiums provide brokers an incentive
dwelling. As revised, § 226.36 would would apply to all closed-end to increase consumers’ interest rates
unnecessarily. They argued that a A yield spread premium is the present Moreover, consumers often wrongly
prohibition would align reality with dollar value of the difference between believe that brokers have agreed, or are
consumers’ perception that brokers the lowest interest rate the wholesale required, to obtain the best interest rate
serve consumers’ best interests. lender would have accepted on a available. Several commenters in
In light of the information received at particular transaction and the interest connection with the 2006 hearings
the 2006 hearings and the rise in rate the broker actually obtained for the suggested that mortgage broker
defaults that began soon after, the Board lender. This dollar amount is usually marketing cultivates an image of the
held an additional hearing in June of paid to the mortgage broker, though it broker as a ‘‘trusted advisor’’ to the
2007 to explore how it could use its may also be applied to reduce the consumer. Consumers who have this
authority under HOEPA to prevent consumer’s upfront closing costs. The perception may rely heavily on a
abusive lending practices in the creditor’s payment to the broker based broker’s advice, and there is some
subprime mortgage market while still on the interest rate is an alternative to evidence that such reliance is common.
preserving responsible lending. the consumer paying the broker directly In a 2003 survey of older borrowers who
Although the Board did not expressly from the consumer’s preexisting had obtained prime or subprime
solicit comment on mortgage broker resources or from loan proceeds. refinancings, majorities of respondents
compensation in its notice of the June Preexisting resources or loan proceeds with refinance loans obtained through
2007 hearing, a number of commenters may not be sufficient to cover the both brokers and creditors’ employees
and some hearing panelists raised the broker’s total fee, or may appear to the reported that they had relied ‘‘a lot’’ on
topic. Consumer and creditor consumer to be a more costly way to their loan originators to find the best
representatives alike raised concerns finance those costs if the consumer mortgage for them.61 The Board’s recent
about the fairness and transparency of expects to prepay the loan in a relatively consumer testing also suggests that
creditors’ payment of yield spread short period. Thus, consumers many consumers shop little for
premiums to brokers. Several potentially benefit from having an mortgages and often rely on one broker
commenters and panelists stated that option to pay brokers for their services or lender because of their trust in the
consumers are not aware of the indirectly by accepting a higher interest relationship.
payments creditors make to brokers, or rate. If consumers believe that brokers
that such payments increase consumers’ The Board shares concerns, however, protect consumers’ interests by
interest rates. They also stated that that creditors’ payments to mortgage shopping for the lowest rates available,
brokers are not transparent to then consumers will be less likely to
consumers may mistakenly believe that
consumers and are potentially unfair to take steps to protect their interests when
a broker seeks to obtain the best interest
them. Creditor payments to brokers dealing with brokers. For example, they
rate available. Consumer groups have
based on the interest rate give brokers may be less likely to shop rates across
expressed particular concern about
an incentive to provide consumers loans retail and wholesale channels
increased payments to brokers for
with higher interest rates. Some brokers simultaneously to assure themselves the
delivering loans both with higher
may refrain from acting on this broker is providing a competitive rate.
interest rates and prepayment penalties.
incentive out of legal, business, or They may also be less likely to shop and
Consumer groups suggested a variety of
ethical considerations. Moreover, negotiate brokers’ services, obligations,
solutions, such as prohibiting creditors
competition in the mortgage loan market or compensation upfront, or at all. For
paying brokers yield spread premiums, may often limit brokers’ ability to act on example, they may be less likely to seek
imposing on brokers that accept yield the incentive. The market often leaves out brokers who will promise in writing
spread premiums a fiduciary duty to brokers room to act on the incentive to obtain the lowest rate available.
consumers, imposing on creditors that should they choose, however, especially In response to these concerns, the
pay yield spread premiums liability for as to consumers who are less 2008 HOEPA proposal would have
broker misconduct, or including yield sophisticated and less likely to shop prohibited a creditor from paying a
spread premiums in the points and fees among either loans or brokers. broker more than the consumer agreed
test for loans subject to HOEPA. Several Large numbers of consumers are in writing to pay. Under the proposal,
creditors and creditor trade associations simply not aware the incentive exists. the consumer and mortgage broker
advocated requiring brokers to disclose Many consumers do not know that would have had to enter into a written
whether the broker represents the creditors pay brokers based on the agreement before the broker accepted
consumer’s interests, and how and by interest rate, and the current legally the consumer’s loan application and
whom the broker is to be compensated. required disclosures seem to have only before the consumer paid any fee in
Some of these commenters limited effect. Some consumers may not connection with the transaction (other
recommended that brokers be required even know that creditors pay brokers: A than a fee for obtaining a credit report).
to disclose their total compensation to common broker practice of charging a The agreement also would have
the consumer and that creditors be small part of its compensation directly disclosed (i) that the consumer
prohibited from paying brokers more to the consumer, to be paid from the ultimately would bear the cost of the
than the disclosed amount. consumer’s existing resources or loan entire compensation even if the creditor
To address these concerns, the proceeds, may lead consumers to paid part of it directly; and (ii) that a
Board’s January 2008 proposed rule believe, incorrectly, that this amount is creditor’s payment to a broker could
would have prohibited a creditor from all the consumer will pay or that the influence the broker to offer the
paying a mortgage broker any broker will receive. Consumers who do consumer loan terms or products that
compensation greater than the amount understand that the creditor pays the would not be in the consumer’s interest
the consumer had previously agreed in broker based on the interest rate may
writing that the broker would receive. not fully understand the implications of 61 See Kellie K. Kim-Sung & Sharon Hermanson,
73 FR 1672, 1698–1700; Jan. 9, 2008 the practice. They may not appreciate Experiences of Older Refinance Mortgage Loan
(HOEPA proposal). In support of the the full extent of the incentive the Borrowers: Broker- and Lender-Originated Loans,
Data Digest No. 83 (AARP Public Policy Inst.,
rule, the Board explained its concerns practice gives the broker to increase the Washington, DC, Jan. 2003, at 3, available at http://
about yield spread premiums, which are rate because they do not know the dollar assets.aarp.org/rgcenter/post-import/
summarized below. amount of the creditor’s payment. dd83_loans.pdf.
or the most favorable the consumer compensate mortgage brokers and other consumers. Currently, such injury is
could obtain. loan originators. These rules would be common because consumers typically
Based on the Board’s analysis of adopted pursuant to the Board’s are not aware of the practice or do not
comments received on the HOEPA authority under HOEPA, as contained in understand its implications and cannot
proposal, the results of consumer TILA Section 129(l), which authorizes effectively negotiate its use.
testing, and other information, the the Board to prohibit acts or practice in Creditors’ payments to mortgage
Board withdrew the proposed connection with mortgage loans that the brokers or their own employees that
provisions relating to broker Board finds to be unfair or deceptive. As originate loans (‘‘loan officers’’)
compensation. 73 FR 44522, 44563–65; discussed in part IV above, in generally are not transparent to
July 30, 2008. The Board’s withdrawal considering whether a practice is unfair consumers. Brokers may impose a direct
of those provisions was based on its or deceptive under TILA Section 129(l), fee on the consumer which may lead
concern that the proposed agreement the Board has generally relied on the consumers to believe that this is the sole
and disclosures could confuse standards that have been adopted for source of the broker’s compensation.
consumers and undermine their purposes of Section 5(a) of the FTC Act, While consumers expect the creditor to
decision-making rather than improve it. 15 U.S.C. 45(a), which also prohibits compensate its own loan officers, they
The risks of consumer confusion arose unfair and deceptive acts and practices. do not necessarily understand that the
from two sources. First, an institution For purposes of the FTC Act, an act loan originator may have the ability to
can act as either creditor or broker or practice is considered unfair when it increase the creditor’s interest rate or
depending on the transaction. At the causes or is likely to cause substantial include certain loan terms for the
time the agreement and disclosures injury to consumers that is not originator’s own gain.
would have been required, such an reasonably avoidable by consumers To guard effectively against this
institution could be uncertain as to themselves and not outweighed by practice, a consumer would have to
which role it ultimately would play. countervailing benefits to consumers or know the lowest interest rate the
This could render the proposed to competition. As explained below, the creditor would have accepted to
disclosures inaccurate and misleading practice of basing a loan originator’s ascertain that the offered interest rate
in some, and possibly many, cases. compensation on the credit transaction’s represents a rate increase by the loan
Second, the Board was concerned by the terms or conditions appears to meet originator. Most consumers will not
reactions of consumers who participated these standards and constitute an unfair know the lowest rate the creditor would
in one-on-one interviews about the practice. Furthermore, based on its be willing to accept. The consumer also
proposed agreement and disclosures as experience with consumer testing, would need to understand the dollar
part of the Board’s consumer testing. particularly in connection with the amount of the yield spread premium
These consumers often concluded, not HOEPA proposal, the Board believes that is generated by the rate increase to
necessarily correctly, that brokers are that disclosure alone would be determine what portion, if any, is being
more expensive than creditors. Many insufficient for most consumers to avoid applied to reduce the consumer’s
also believed that brokers would serve the harm caused by this practice. Thus, upfront loan charges. Although HUD
their best interests notwithstanding the the Board is proposing a rule that would recently adopted disclosures in
conflict resulting from the relationship remedy the practice through substantive Regulation X, implementing RESPA,
between interest rates and brokers’ regulations that prohibit particular that could enhance some consumers’
compensation.62 The proposed practices. understanding of mortgage broker
disclosures presented a significant risk Specifically, under proposed compensation, the details of the
of misleading consumers regarding both § 226.36(d)(1), compensation payments compensation arrangements are
the relative costs of brokers and lenders made to a mortgage broker or any other complex and the disclosures are limited.
and the role of brokers in their loan originator based on a mortgage A creditor may show the yield spread
transactions. transaction’s terms or conditions would premium as a credit to the borrower that
In withdrawing the broker be prohibited. Unlike the 2008 HOEPA is applied to cover upfront costs, but is
compensation provisions of the HOEPA proposal, the rule would also apply to also permitted to add the amount of the
proposal, the Board stated it would creditors’ employees who originate yield spread to the total origination
continue to explore options to address loans. As noted above, such payments charges being disclosed. This would not
potential unfairness associated with when made to a mortgage broker are necessarily inform the consumer that
loan originator compensation commonly referred to as yield spread the rate has been increased by the
arrangements, such as yield spread premiums. There are analogous originator and that a lower rate with a
premiums. The Board indicated it payments made by creditors to their smaller origination charge was also
would consider whether disclosures or employees who originate loans at a available. In addition, the Regulation X
other approaches could effectively higher interest rate than the minimum disclosure concerning yield spread
remedy this potential unfairness rate required by the creditor. This premiums would not apply to overages
without imposing unintended arrangement is frequently referred to as occurring when the loan originator is
consequences. an ‘‘overage.’’ For convenience, the employed by the creditor. Thus, the
discussion below uses the term ‘‘yield Regulation X disclosure, while perhaps
Potential for Unfairness in Loan spread premium’’ also to refer to these an improvement over previous rules, is
Originator Compensation Practices types of payments, which would be not likely by itself to prevent consumers
As noted above, the Board is now covered by the proposed rule as well. from incurring substantial injury from
proposing rules to prohibit certain Substantial injury. When loan the practice.
practices relating to payments made to originators receive compensation based Because consumers generally do not
on a transaction’s terms and conditions, understand the yield spread premium
62 For more details on the consumer testing, see they have an incentive to provide mechanism, they are unable to engage in
the report of the Board’s contractor, Macro consumers loans with higher interest effective negotiation. Instead they are
International, Inc., Consumer Testing of Mortgage
Broker Disclosures (July 10, 2008), available at
rates or other less favorable terms. Yield more likely to rely on the loan
http://www.federalreserve.gov/newsevents/press/ spread premiums, therefore, present a originator’s advice and frequently obtain
bcreg/20080714regzconstest.pdf. significant risk of economic injury to a higher rate or other unfavorable terms
solely because of greater originator compensation. This may lead reasonable Nevertheless, without a clear
compensation. These consumers suffer consumers to believe, erroneously, that understanding of yield spread
substantial injury by incurring greater loan originators are working on their premiums or effective disclosure, the
costs for mortgage credit than they behalf and are under a legal or ethical majority of consumers are not equipped
would otherwise be required to pay. obligation to help consumers obtain the to police the market to ensure that yield
Injury not reasonably avoidable. Yield most favorable loan terms and spread premiums are in fact applied to
spread premiums create a conflict of conditions. There is evidence that reduce their closing costs, especially in
interest between the loan originator and consumers often regard loan originators the case of loan originator
consumer. As noted above, many as ‘‘trusted advisors’’ or ‘‘hired experts’’ compensation. This would be
consumers are not aware of creditor and consequently rely on originators’ particularly difficult because consumers
payments to loan originators, especially advice. Consumers who regard loan are not likely to have any basis for
in the case of mortgage brokers, because originators in this manner are far less determining a ‘‘typical’’ or ‘‘reasonable’’
these arrangements lack transparency. likely to shop or negotiate to assure amount for originator compensation.
Although consumers may reasonably themselves that they are being offered Accordingly, the Board is proposing a
expect creditors to compensate their competitive mortgage terms. Even for rule that prohibits any person from
own employees, consumers do not consumers who shop, the lack of basing a loan originator’s compensation
know how the loan officer’s transparency in originator compensation on the loan’s rate or terms but still
compensation is structured or that the arrangements makes it unlikely affords creditors the flexibility to
loan officer can increase the creditor’s consumers will avoid yield spread structure loan pricing to preserve the
interest rate or offer certain loan terms premiums that unnecessarily increase potential consumer benefit of
to increase their own compensation. the cost of their loan. compensating an originator through the
Without this understanding, consumers Consumers generally lack expertise in interest rate.
cannot reasonably be expected to complex mortgage transactions because
appreciate or avoid the risk of financial The Board’s Proposal
they engage in such mortgage
harm these arrangements represent. Under § 226.36(d)(1), the Board
transactions infrequently. Their reliance
Yield spread premiums are complex proposes to prohibit any person from
on the loan originator is reasonable in
and may be counter-intuitive even to compensating a loan originator, directly
light of the originator’s greater
well-informed consumers. Based on the or indirectly, based on the terms or
experience and professional training in conditions of a loan transaction secured
Board’s experience with consumer
the area, the belief that originators are by real property or a dwelling. This
testing, the Board believes that
working on their behalf, and the prohibition would apply to any person,
disclosures are insufficient to overcome
apparent ineffectiveness of disclosures rather than only a creditor, to prevent
the gap in consumer comprehension
regarding this critical aspect of the to dispel that belief. evasion by structuring loan originator
transaction. Currently, the required Injury not outweighed by benefits to payments through non-creditors. For
disclosures of originator compensation consumers or to competition. Yield example, secondary market investors
under federal and State laws seem to spread premiums can represent a that purchase closed loans from
have little, if any, effect on originators’ potential consumer benefit in cases creditors would not be permitted to pay
incentive to provide consumers with where the amount is applied to reduce compensation to loan originators that is
increased interest rates or other consumers’ upfront closing costs, based on the terms or conditions of their
unfavorable loan terms, such as a including originator compensation. A transactions.
prepayment penalty, that can increase creditor’s increase in the interest rate (or Under the proposal, compensation
the originator’s compensation.63 The the addition of other loan terms) may be that is based on the loan amount would
Board’s consumer testing, discussed used to generate additional income that be considered a payment that is based
above, supported the finding that the creditor uses to compensate the on a term or condition of the loan. The
disclosures about yield spread originator, in lieu of adding origination prohibition would not apply to
premiums are ineffective; consumers in points or fees that the consumer would consumers’ direct payments to loan
these tests did not understand yield be required to pay directly from the originators. Under § 226.36(d)(2),
spread premiums and did not grasp how consumer’s preexisting funds or the however, if the consumer compensates
they create an incentive for loan loan proceeds. This can benefit a the loan originator directly, the
originators to increase consumers’ costs. consumer who lacks the resources to originator would be prohibited from
Consumers’ lack of comprehension of pay closing costs in cash, or who might receiving compensation from the
yield spread premiums is compounded have insufficient equity in the property creditor or any other person.
where the originator also imposes a to increase the loan amount to cover Because the loan originator could not
direct charge on the consumer. A these costs. Further, some consumers receive compensation based on the
mortgage broker might charge the prefer to fund closing costs, including interest rate or other terms, the
consumer a direct fee, for example $500, origination fees, through a higher rate if originator would have no incentive to
for arranging the consumer’s mortgage the consumer expects to own the alter the terms made available by the
loan. This charge encourages consumers property or have the loan for a relatively creditor to deliver a more expensive
to infer that the broker accepts the short period, for example, less than five loan. For example, a company acting as
consumer-paid fee to represent the years. For those consumers who a mortgage broker could not provide
consumer’s financial interests. understand this trade-off there could be greater compensation to its employee
Consumers may believe that the fee they potential benefits. In such cases, acting as the loan originator for a
pay is the originator’s sole however, the yield spread premium transaction with a 7 percent interest rate
does not increase the amount of than for a transaction with a 6 percent
63 Creditors may be willing to offer a loan with compensation paid by the creditor to the interest rate. A creditor would be under
a lower interest rate in return for including a originator, who would receive the same the same restriction in compensating its
prepayment penalty. A loan originator that offers a
loan with a prepayment penalty might not offer the
amount whether the loan has a higher loan officer. For this purpose, the term
lower rate, resulting in a premium interest rate and rate or a lower rate accompanied by ‘‘compensation’’ would not be limited to
the payment of a yield spread premium. higher upfront fees. commissions, but would include
salaries or any financial incentive that is brokers more than its own loan officers. otherwise be obligated to pay directly
tied to the transaction’s terms or Likewise, a creditor might pay one loan (in cash or out of the loan proceeds),
conditions, including annual or periodic originator of either type more than it including the originator’s compensation,
bonuses or awards of merchandise or pays another, as long as each originator provided this does not affect the amount
other prizes. See proposed comment receives compensation that is not based the originator receives for the
36(d)(1)–1. on the terms of the transactions they transaction. Thus, a creditor could
Proposed comment 36(d)(1)–2 deliver to the creditor. recoup costs by adding to the loan
provides examples of compensation that Scope of coverage. The Board believes pricing terms an origination point
is based on the transaction’s terms or that the proposed rule should apply to (calculated as one percentage point of
conditions, such as payments that are creditors’ employees who originate the loan amount) even though the
based on the interest rate, annual loans in addition to mortgage brokers. A creditor could not pay the originator’s
percentage rate, or the existence of a creditor’s loan officers frequently have compensation on that basis. Similarly, a
prepayment penalty. Examples of loan the same discretion over loan pricing creditor could add a constant premium
originator compensation that is not that mortgage brokers have to modify a of, for instance, 1⁄4 of one percent to the
based on the transaction’s terms or loan’s terms to increase their interest rates on all transactions for
conditions are listed in proposed compensation, and there is evidence which the creditor will pay
comment 36(d)(1)–3. These include suggesting that loan officers engage in compensation to the loan originator, as
compensation based on the originator’s such practices.64 Accordingly, the a means of recouping the cost of the
loan volume, the performance of loans coverage of § 226.36(d)(1) is broader originator’s compensation. The creditor
delivered by the originator, or hourly than the 2008 HOEPA proposal, which would not recoup the same dollar
wages. covered only mortgage brokers. Some amount in each transaction, however,
The Board recognizes that loans commenters on the HOEPA proposal because the present value of the
originators may need to expend more expressed concern that it would create premium in dollars would vary with the
time and resources in originating loans an ‘‘unlevel playing field’’ by creating loan amount. Consequently, even
for consumers with limited or an unfair advantage for creditors that though loan pricing could be set in this
blemished credit histories. Because such would not have to comply with the manner, this method could not be used
loans are likely to carry higher rates, same requirements as brokers. to set the loan originator’s
originators currently rely on higher The proposed rule would apply to compensation. See proposed comment
yield spread premiums to compensate covered transactions whether or not 36(d)(1)–5.
them for the additional time and efforts. they are higher-priced mortgage loans. A Effect of modification of loan terms.
Paying an originator based on the time loan originator’s financial incentive to The proposed rule is designed to
expended would be permissible under deliver less favorable loan terms to a prevent consumers from being harmed
the proposed rule. consumer could result in consumer by loan originators making unfavorable
Although the proposed rule would injury whether or not the loan has a rate modifications to loan terms, such as
not prohibit a creditor from basing above the coverage threshold in increasing the interest rate, to increase
compensation on the originator’s loan the originator’s compensation.
§ 226.35. The risks of harm could be
volume, such arrangements may raise Currently, loan originators might also
reduced in the lower-priced segment of
concerns about whether it creates exercise discretion to make
the market, however, where consumers
incentives for originators to deliver modifications in the consumer’s favor.
historically have more choices.
loans without proper regard for the For example, to retain the consumer’s
Comment is solicited on the relative
credit risks involved. The Board expects business, today a loan originator might
costs and benefits of applying the rule
creditors to exercise due diligence to agree with the consumer to reduce the
to all segments of the market, and
monitor and manage such risks. amount the consumer must pay in
whether the costs would outweigh the
Financial institution regulators origination points on the loan, which
benefits for loans below the higher-
generally will examine creditors they would be funded by a reduction in the
priced mortgage loan threshold.
supervise to ensure they have systems amount the originator receives from the
Creditors’ pricing flexibility. The
in place to exercise such due diligence. creditor as compensation for delivering
The proposed rule also would not proposed rule would not affect
creditors’ flexibility in setting rates or the loan. Under the proposed rule,
prohibit compensation that differs by however, a creditor would not be
geographical area, but any such other loan terms. The rule does not limit
the creditor’s ability to adjust the loan permitted to reduce the amount it pays
arrangements must comply with other to the loan originator based on such a
applicable laws such as the Equal Credit terms it offers to consumers as a means
of financing costs the consumer would change in loan terms. As a result, the
Opportunity Act (15 U.S.C. 1691–1691f) reduction in origination points would
and Fair Housing Act (42 U.S.C. 3601– 64 For example, the Federal Trade Commission’s be a cost borne by the creditor.
3619). See proposed comment 36(d)(1)– settlement with Gateway Funding, Inc. in December Thus, when the creditor offers to
4. Creditors that use geography as a 2008 illustrates a case where a creditor’s loan extend a loan with specified terms and
criterion for setting originator officers created ‘‘overages,’’ although the primary conditions (such as the rate and points),
compensation would need to be able to legal theory concerned disparate treatment by race the amount of the originator’s
in the imposition of overages. The FTC’s complaint
demonstrate that this reflects legitimate and the court’s final judgment and order can be compensation for that transaction is not
differences in the costs of origination found on the FTC’s web-site at http://www.ftc.gov/ subject to change, through either an
and in the levels of competition for os/caselist/0623063/index.shtm. The FTC has since increase or a decrease, even if different
originators’ services. filed a complaint alleging similar patterns of loan terms are negotiated. If this were
overages in violation of fair lending laws, against
Under the proposed rule, creditors Golden Empire Mortgage, Inc. The May 2009
not the case, a creditor generally could
also may compensate their own loan complaint can be found at http://www.ftc.gov/os/ agree to compensate originators at a
officers differently than mortgage caselist/0623061/090511gemcmpt.pdf. A similar high level and then subsequently lower
brokers. For instance, in light of the fact pattern of overages was alleged in legal actions the compensation only in selective
brought by the Department of Justice (DOJ), which
that mortgage brokers relieve creditors resulted in settlement agreements with Huntington
cases, such as when the consumer
of certain overhead costs of loan Mortgage Company (1995) and Fleet Mortgage Corp. obtains a competing offer with a lower
originations, a creditor might pay (1996). interest rate. This would have the same
effect as increasing the originator’s ratio and decreases the consumer’s paid by a consumer to a loan originator
compensation for higher rate loans. equity in the property. If the loan-to- would not be limited to ‘‘origination
Proposed comment 36(d)(1)–6 would value ratio increases sufficiently, the fees,’’ ‘‘broker fees,’’ or similarly labeled
address this issue. consumer may incur additional costs in charges. Rather, compensation for this
Periodic changes in loan originator the form of a higher interest rate or purpose includes any payment by the
compensation. Under proposed additional points and fees, including the consumer that is retained by the loan
§ 226.36(d)(1) a creditor would not be cost of mortgage insurance premiums. originator. Thus, a creditor that is a loan
prevented from periodically revising the Because the consumer’s monthly originator by virtue of making a table
compensation it agrees to pay a loan payment would also be larger, the funded transaction, as discussed above,
originator. However, a creditor may not originator might direct the consumer to would be subject to this prohibition if
revise a loan originator’s compensation riskier loan products that have it imposes and retains any direct charge
arrangement in connection with each discounted initial rates but are subject on the consumer for the transaction.
transaction. This guidance is reflected to significant payment increases after Consumers reasonably may believe
in proposed comment 36(d)(1)–7. The the introductory period expires. that when they pay a loan originator
revised compensation arrangement must Because of the foregoing concerns, the directly, that amount is the only
result in payments to the loan originator Board is publishing two alternative compensation the originator will
that are not based on the terms or versions of proposed § 226.36(d)(1). The receive. As discussed above, consumers
conditions of a credit transaction. A first alternative would consider the loan generally are not aware of creditor
creditor might periodically review amount as a term or condition of the payments to originators. If the consumer
factors such as loan performance, loan, thereby prohibiting the payment of were aware of such payments, the
transaction volume, as well as current originator compensation as a percentage consumer might reasonably expect that
market conditions for originator of the loan amount. The second making a direct payment to an
compensation, and prospectively revise alternative provides that the loan originator would reduce or eliminate the
the compensation it agrees to pay to a amount is not a term or condition of the need for the creditor to fund the
loan originator. For example, assume loan, and would permit such payments. originator’s compensation through the
that during the first six months of the The second alternative would be consumer’s interest rate. Because the
year, a creditor pays $3,000 to a accompanied by proposed comment consumer is unaware of yield spread
particular loan originator for each loan 36(d)(1)–10 to provide further guidance. premiums, however, the consumer
delivered, regardless of the loan terms. Under proposed comment 36(d)(1)–10, a cannot effectively negotiate the
After considering the volume of loan originator could be paid a fixed originator’s compensation. In fact, if
business produced by that originator, percentage of the loan amount even consumers pay loan originators directly
the creditor could decide that as of July though the dollar amount paid by a and creditors also pay originators
1, it will pay $3,250 for each loan particular creditor would vary from through higher rates, consumers may be
delivered by that originator, regardless transaction to transaction and would injured by unwittingly paying
of the loan terms. The change in increase as the loan amount increases. originators more in total compensation
compensation would not be a violation Comment 36(d)(1)–10 also permits (directly and through the rate) than
even if the loans made by the creditor compensation paid as a fixed percentage consumers believe they agreed to pay.
after July 1 generally carry higher of the loan amount to be subject to a The Board believes that simply
interest rates than loans made before specified minimum or maximum dollar disclosing the yield spread premium
that date. amount. For example, a loan originator’s
would not address this injury to
Alternative to permit compensation compensation could be set at one
consumers. Consumer testing in
based on loan amount. The Board is percent of the principal loan amount but
also publishing for comment a proposed connection with the Board’s 2008
not less than $1,000 or greater than
alternative that would allow loan HOEPA Final Rule shows that, even
$5,000.
originator compensation to be based on The Board seeks comment on the two with a disclosure, consumers do not
the loan amount, which would not be alternatives. Further, if the final rule understand how a creditor payment to
considered a transaction term or permits compensation based on the loan a loan originator can result in a higher
condition for purposes of the amount, should creditors be permitted interest rate for the consumer. A
prohibition in § 226.36(d)(1). Currently, to apply different percentages to loans disclosure therefore cannot inform
the compensation received by many of different amounts? Should creditors consumers that they effectively are
mortgage originators is structured as a be allowed to pay a larger percentage for paying the loan originator more than
percentage of the loan amount. Other smaller loan amounts, which could be they believe they agreed to pay. Without
participants in the mortgage market, an incentive to originate loans in lower- that knowledge, consumers cannot take
such as creditors, mortgage insurers, priced neighborhoods that ensures that steps to protect their own interests, such
and other service providers, also receive the originator receives an amount that is as by negotiating for a smaller direct
compensation based on the loan comparable to loans originated in high- payment, a lower rate, or both.
amount. The Board is therefore seeking priced neighborhoods? If so, should The Board also believes that this
comment on whether prohibiting creditors also be permitted to pay prohibition would increase
originator compensation on this basis originators a higher percentage for larger transparency for consumers by requiring
might be unduly restrictive and loan amounts? that all originator compensation come
from the creditor or from the consumer,
unnecessary to achieve the purposes of Prohibition of compensation from

the proposed rule. both the consumer and another source. but not both. This additional
On the other hand, prohibiting Proposed § 226.36(d)(2) would provide consequence of proposed § 226.36(d)(2)
compensation based on the loan amount that, if a loan originator is compensated would reduce the total number of loan
would eliminate an incentive for the directly by the consumer for a pricing variables with which the
originator to steer consumers to a larger transaction secured by real property or consumer must contend. There is
loan amount. Such steering maximizes a dwelling, no other person may pay evidence that such simplification is
the originator’s compensation but also any compensation to the originator for consistent with TILA’s purpose of
increases the transaction’s loan-to-value that transaction. Direct compensation promoting the informed use of
consumer credit.65 See TILA Section year record retention period is adequate above. In considering interest rates,
102(a), 15 U.S.C. 1601(a). for purposes of the rules governing loan consumers may view the economic
Proposed § 226.36(d)(2) would originator compensation. trade-off between rates and points
prohibit only payments to an originator The current record retention differently depending on their
that are made in connection with the requirements in § 226.25 apply only to individual financial circumstances or
particular credit transaction, such as a creditors. Although loan originator the amount of time they expect to hold
commission for delivering the loan. The compensation has historically been paid the loan. Moreover, consumers evaluate
rule is not intended to prohibit payment by creditors, the prohibitions in other factors in deciding whether a loan
of a salary to a loan originator who also § 226.36(d) apply more broadly to any is in their best interest even if it is not
receives direct compensation from a person to prevent evasion by represented as the lowest cost option
consumer in connection with that restructuring of payments through non- among the possible loan offers available
consumer’s transaction. This guidance creditors. Accordingly, the Board through the originator. Thus, some
is contained in proposed comment expects that payments to loan consumers may reasonably determine
36(d)(2)–1. originators will continue to be made that the financial risk created by a loan’s
Record retention requirements. largely by creditors. The Board seeks prepayment penalty is acceptable in
Creditors are required by § 226.25(a) to comment on whether there is a need to light of the loan’s lower interest rate,
retain evidence of compliance with adopt requirements for retaining records while other consumers may prefer to
Regulation Z for two years. Proposed concerning originator compensation that accept a higher rate to avoid the risk.
staff comment 25(a)–5 would be added would apply to persons other than Consumers and loan originators also
to clarify that, to demonstrate creditors, including the relative costs may consider factors other than loan
compliance with § 226.36(d)(1), a and benefits of that approach. cost, such as the creditor’s rate lock-in
creditor must retain at least two types of policies, or the creditor’s reputation for
records. 36(e) Prohibition on Steering
delivering loans within the promised
First, a creditor must have a record of Optional Proposal on Steering by Loan time-frame, especially for home-
the compensation agreement with the Originators purchase loans.
loan originator that was in effect on the
date the transaction’s rate was set. The The Board is also soliciting comment The Board believes, however, that
Board believes this date is most likely on whether it should adopt a rule that there is benefit in attempting to craft a
when a loan originator’s compensation seeks to prohibit loan originators from rule that prohibits and deters the most
was determined for a given transaction. directing or ‘‘steering’’ consumers to egregious practices, even if such a rule
The Board seeks comment, however, on loans based on the fact that the cannot ensure that consumers always
whether some other time would be more originator will receive additional obtain the lowest cost loan. Under the
appropriate, in light of the purposes of compensation, when that loan may not proposal, a loan originator would have
the proposed rule. Proposed comment be in the consumer’s best interest. a duty not to steer a consumer to higher
25(a)–5 would clarify that the rules in Under proposed § 226.36(d)(1), a loan cost loans that pay more to the
§ 226.35(a) would govern in determining originator would receive the same originator when the loan is not in the
when a transaction’s rate is set. compensation from a particular creditor consumer’s interest. Originators would
Second, proposed comment 25(a)–5 regardless of the transaction’s rate or violate the rule, for example, if they
would state that a creditor must retain terms. That provision, however, would directed the consumer to a fixed-rate
a record of the actual amount of not prohibit a loan originator from loan option from a creditor that
compensation it paid to a loan directing a consumer to transactions maximizes the originator’s
originator in connection with each from a single creditor that offers greater compensation without providing the
covered transaction. The proposed compensation to the originator, while consumer with an opportunity to choose
comment would clarify that, in the case ignoring possible transactions having from other available loans that have
of mortgage brokers, the HUD–1 lower interest rates that are available lower fixed interest rates with the
settlement statement required under from other creditors. equivalent amount in origination and
RESPA would be an example of such a Attempting to address this issue discount points.
record because it itemizes the presents difficulties. Determining The Board is publishing a proposal,
compensation received by a mortgage whether a loan originator was warranted designated as proposed § 226.36(e)(1), to
broker. The Board solicits comment on in directing a consumer to a loan that reflect this optional approach.
whether any comparable record exists resulted in greater compensation for the Specifically, the rule would prohibit
for loan officer compensation that originator also involves a determination loan originators from directing or
should be referenced in proposed of whether that loan was in the ‘‘steering’’ a consumer to consummate a
comment 25(a)–5. To facilitate consumer’s best interest compared to transaction secured by real property or
compliance, a cross reference to the other available loan products. There is, a dwelling that is not in the consumer’s
record retention requirement would be however, no uniform method for making interest, based on the fact that the
included in proposed comment that evaluation. Consumers and loan originator will receive greater
36(d)(1)–9. originators may choose from among compensation from the creditor in that
The Board solicits comment on possible loan offers for a variety of transaction than in other transactions
whether there are other records that reasons. The annual percentage rate the originator offered or could have
should be subject to the retention (APR) is a tool that facilitates offered to the consumer. The proposed
requirements. The Board also seeks comparison shopping among different rule seeks to preserve consumer choice
comment on whether the existing two- loans, but it is imperfect for reasons that by ensuring that consumers have
are well documented, including the fact appropriate loan options that reflect
65 See, e.g., Woodward, Susan E., A Study of that the APR is calculated by amortizing considerations other than the maximum
Closing Costs for FHA Mortgages at 70–73 (Urban origination fees over the full loan term amount of compensation that will be
Institute and U.S. Department of Housing and
Urban Development 2008), available at http://
rather than the expected life of the loan. paid to the originator. Proposed
www.urban.org/UploadedPDF/ See the 1998 Joint Report to the comments 36(e)(1)–1 through –3 would
411682_fha_mortgages.pdf. Congress by the Board and HUD, cited provide additional guidance on the rule.
Proposed § 226.36(e) would not must have a good faith belief that these many of the same opportunities and
require a loan originator to direct a are loans for which the consumer likely incentives that underlie the abuses
consumer to the transaction that will qualifies. If the originator presents more addressed by § 226.36 for closed-end
result in the least amount of than three loans to the consumer, the mortgages may well exist for HELOCs.
compensation being paid to the originator must highlight the three loans Reasons therefore exist for positing that
originator by the creditor. However, if that satisfy the lowest rate and points such unfair practices either may or may
the loan originator reviews possible loan criteria in the rule. Proposed comments not occur with HELOCs, but the Board
offers available from a significant 36(e)(2)–1 and 36(e)(3)–1 though –4 lacks concrete evidence as to which is
number of the creditors with which the would provide guidance on the the case.
originator regularly does business and application of the rule. The Board requests comment on
the originator directs the consumer to Comment is expressly solicited on whether any or all of the protections in
the transaction that will result in the whether the proposed rule in § 226.36(e) § 226.36 should apply to HELOCs.
least amount of creditor-paid and the accompanying commentary Specifically, what evidence exists that
compensation, the requirements of would be effective in achieving the shows whether loan originators unfairly
§ 226.36(e) would be deemed to be stated purpose. Comment is also manipulate HELOC terms and
satisfied. See proposed comment solicited on the feasibility and conditions to receive greater
36(e)(1)–2(ii). practicality of such a rule, its compensation, injuring consumers as a
Loan originators employed by the enforceability, and any unintended result? What evidence is there as to
creditor in a transaction would be adverse effects the rule might have. whether appraisals obtained for
prohibited under § 226.36(d)(1) from HELOCs have been influenced toward
36(f)
receiving compensation based on the misstating property values? To what
terms or conditions of the loan. Thus, The Board proposes to redesignate extent do creditors contract out HELOC
when originating loans for the existing § 226.36(d) as § 226.36(f). servicing to third parties, thus
employer, the originator could not steer Existing § 226.36(d) provides that undermining the Board’s premise
the consumer to a particular loan to § 226.36 does not apply to home-equity regarding aligned interests between
increase compensation. Accordingly, in lines of credit (HELOCs). The servicers and consumers? Whether third
those cases, their compliance with redesignation would accommodate parties or the original creditors
§ 226.36(d)(1) would be deemed to proposed new § 226.36(d) and (e), primarily service HELOCs, what
satisfy the requirements of proposed discussed above. evidence shows whether they engage in
§ 226.36(e). See proposed comment The Board proposed as part of the the abusive servicing practices
36(e)(1)–2(ii). A creditor’s employee, 2008 HOEPA proposal to exclude addressed by § 226.36(c)?
however, occasionally might act as a HELOCs from the coverage of § 226.36
because of two considerations, which Section 226.37 Special Disclosure
broker in forwarding a consumer’s
suggested that the protections may be Requirements for Closed-End Mortgages
application to a creditor other than the
originator’s employer, such as when the unnecessary for such transactions. First, Section 226.17(a), which implements
employer does not offer any loan the Board understood that most Sections 122(a) and 128(b)(1) of TILA,
products for which the consumer would originators of HELOCs hold them in addresses format and other disclosure
qualify. If the originator is compensated portfolio rather than sell them, which standards for all closed-end credit. 15
for arranging the loan with the other aligns these originators’ interests in loan U.S.C. 1632(a), 1638(b)(1). For closed-
creditor, the originator would not be an performance more closely with their end credit, creditors must provide
employee of the creditor in that borrowers’ interests. Second, the Board disclosures in writing in a form that the
transaction and would be subject to understood that HELOCs are consumer may keep, grouped together
proposed § 226.36(e). concentrated in the banking and thrift and segregated from other information.
The Board is also publishing industries, where the federal banking In addition, the loan’s ‘‘finance charge’’
provisions that would facilitate agencies can use their supervisory and ‘‘annual percentage rate,’’ using
compliance with the prohibition in authority to protect consumers. The those terms, must be more conspicuous
proposed § 226.36(e)(1). Under Board sought comment on whether than other required disclosures.
proposed § 226.36(e)(2) and (3), a safe these considerations were valid or The Board proposes special rules in
harbor would be created, and there whether any or all of the protections in new § 226.37 to govern the format of
would be no violation if the loan was § 226.36 should apply to HELOCs. required disclosures under TILA for
chosen by the consumer from at least Although mortgage lenders and other transactions secured by real property or
three loan options for each type of industry representatives commented in a dwelling. These new rules would be
transaction (fixed-rate or adjustable-rate support of the proposed exclusion and in addition to the rules in § 226.17. The
loan) in which the consumer expressed consumer advocates commented in proposed format rules are intended to
an interest, provided the following opposition, neither group provided the (1) improve consumers’ ability to
conditions are met. The loan originator Board with substantial evidence as to identify disclosed loan terms more
must obtain loan options from a whether the kinds of problems § 226.36 readily; (2) emphasize information that
significant number of creditors with addresses exist in the HELOC market. is most important to the consumer in
which the originator regularly does In the July 2008 HOEPA Final Rule, the decision-making process; and (3)
business. For each type of transaction in the Board limited the scope of § 226.36 simplify the organization and structure
which the consumer expressed an to closed-end mortgages. In the absence of required disclosures to reduce
interest, the originator must present and of clear evidence of abuse, the Board complexity and ‘‘information overload.’’
permit the consumer to choose from at continued to believe the protections Proposed § 226.37 would establish
least three loans that include: the loan may be unnecessary for the reasons special format rules for disclosures
with the lowest interest rate, the loan discussed above. Nevertheless, the required by proposed §§ 226.38 and
with the second lowest interest rate, and Board remains aware of concerns that 226.20(d), and existing §§ 226.19(b) and
the loan with the lowest total dollar creditors may structure transactions as 226.20(c).
amount for origination points or fees HELOCs solely to evade the protections The Board is proposing § 226.37 and
and discount points. The loan originator of § 226.36. The Board also is aware that associated commentary to address the
duty to provide ‘‘clear and consumer testing of the current TILA proposed §§ 226.20(c) and 226.20(d),
conspicuous’’ disclosures that are model form indicated that participants may be made on more than one page, on
grouped together and segregated from viewed both the interest rate and the front or back side of a page, and
other information, and to require that monthly payment as important. continued from one page to the next.
certain information be highlighted in Although participants generally Consumer testing suggests that
table form or in a graph. Proposed understood that the interest rate on their consumers may not read information
§ 226.37 would also require creditors to loan could change, several arrived at carefully if it is excessive in length, and
use consistent terminology for all this conclusion because of the payment if unable to identify relevant
disclosures. The Board is proposing to schedule disclosure, which showed information quickly are likely to become
revise the requirement that certain terms different monthly payment amounts, not frustrated and not read the disclosures.
be used or disclosed more because they understood the loan had a The Board believes that allowing
conspicuously, for transactions secured variable rate feature that would affect creditors to combine disclosures with
by real property or a dwelling. The their monthly payments. In addition to other information may increase the
general disclosure standards under testing the current TILA model form, the likelihood that consumers will not read
§ 226.17(a)(1) and associated Board also tested variations of that form, the disclosures.
commentary continue to apply including a form it developed in 1998
transactions secured by real property or with HUD (‘‘Joint Form’’) that was 37(a)(2) Grouped Together and
a dwelling but, under the proposal submitted to Congress in the 1998 Joint Segregated
creditors would also be required to meet Report.67 Participants who reviewed the
the higher standards under proposed Joint Form also generally understood Section 128(b)(1) of TILA and
§ 226.37. the loan had an adjustable rate, but less § 226.17(a)(1) currently require that,
than half understood the rate was fixed except for certain information, the
37(a) Form of Disclosures only for the first three years and could disclosures required for closed-end
37(a)(1) Clear and Conspicuous vary only after that time period. credit must be grouped together,
However, when the Board consumer segregated from everything else, and not
Section 122(a) of TILA and contain any information not directly
tested information about interest rates
§ 226.17(a)(1) require that all closed-end and monthly payments in a tabular related to the required disclosures. 15
credit disclosures be made clearly and form, participants could identify more U.S.C. 1638(b)(1). Comment 17(a)(1)–2
conspicuously. 15 U.S.C. 1632(a). readily that the loan had an adjustable states that creditors can satisfy the
Currently, under comment 17(a)(1)–1, rate feature, and comprehension of grouped together and segregation
the Board interprets the clear and when interest rates would adjust and requirement in a variety of ways,
conspicuous standard to mean that the impact that rate adjustments had on including combining segregated
disclosures must be in a ‘‘reasonably their monthly payments improved. disclosures with other information as
understandable’’ form. This standard For these reasons, the Board proposes long as they are set off by a certain
does not require any mathematical to require that creditors make format type. Comment 17(a)(1)–2 further
progression or format, or that disclosures for transactions secured by provides that the segregation
disclosures be provided in a particular real property or a dwelling clearly and requirement does not apply to
type size, although disclosures must be conspicuously, by highlighting certain disclosures for variable rate transactions
legible whether typewritten, information in accordance with the required under current §§ 226.19(b) and
handwritten, or printed by computer. requirements in proposed §§ 226.38, 226.20(c). Comment 17(a)(1)–7 clarifies
Comment 17(a)(1)–3 provides that the 226.19(b), § 226.20(c), and § 226.20(d). that balloon-payment financing with
standard does not require disclosures to Proposed comment 37(a)(1)–1 would leasing characteristics is subject to the
be located in a particular place. clarify that to meet the clear and grouped together and segregation
Consumer testing conducted by the conspicuous standard, disclosures must requirement.
Board showed that information be in a reasonably understandable form
presented without any highlighting or Consumer testing conducted by the
and readily noticeable to the consumer.
other emphasis, and the use of small Board indicated that participants
Proposed comment 37(a)(1)–2 provides
print led many participants to miss or generally are overwhelmed by the
that to meet the readily noticeable
disregard key information about the amount of information presented for
standard, the disclosures under
loan transaction. As discussed more loan transactions, and as a result, do not
proposed §§ 226.38, 226.19(b),
fully under the following sections, 226.20(c), and 226.20(d) generally must read their mortgage disclosures
consumer testing indicates that when be provided in a minimum 10-point carefully. Consumer testing showed that
certain information is presented and font. The approach of requiring a emphasizing terms and costs consumers
highlighted in a specific way consumers minimum of 10-point font for certain find important, and separating out less
are able to identify and use key terms disclosures is consistent with the useful information, is critical to
more easily: proposed § 226.38 for approach taken by the Board in revising improving consumers’ ability to identify
disclosures required on transactions disclosures required under TILA for and use key information in their
secured by real property or a dwelling, certain open-end credit. 74 FR 5244; decision-making process.68 Consumer
§ 226.19(b) for ARM loan program Jan. 29, 2009. testing also demonstrated that grouping
disclosures, § 226.20(c) for ARM New comment 37(a)(1)–3 would related concepts and figures together,
adjustment notices, and § 226.20(d) for clarify that disclosures under proposed and presenting them in a particular
periodic statements on loans that are §§ 226.38 and 226.19(b) must be format or structure can improve
negatively amortizing.66 For example, provided on a document separate from
68 See also Improving Consumer Mortgage
other information, although these
66 See also Improving Consumer Mortgage Disclosure at 69 (consumer testing results showed
Disclosures (finding that incorporating white space,
disclosures, as well as disclosures under that current mortgage disclosure forms failed to
using clear headings, and using certain formatting convey key cost disclosures, but that prototype
and organization create a ‘‘less intimidating will both want to read the form and be able to use disclosures, which removed less useful information,
appearance than many consumer financial it productively in their decisions.’’). significantly improved consumers’ recognition of
disclosures, making it more likely that consumers 67 See the 1998 Joint Report, App.A–6. key mortgage costs).
consumers’ ability to identify, required disclosures, such as the late fees; unsecured interest; demand
comprehend, or use disclosed terms. consumer’s name, address, and account features; instructions on multi-purpose
For these reasons, the Board proposes number. Footnote 38, which forms; minimum finance charge
to require that certain disclosures be implements TILA Section 128(b)(1), 15 statement; negative amortization; due-
grouped together and segregated in the U.S.C. 1638(b)(1), allows creditors to on-sale clauses; prepayment of interest
manner discussed below, pursuant to its exclude certain required disclosures statement; the hypothetical example
authority under TILA Section 105(a). 15 from the grouped-together and disclosure required by current
U.S.C. 1604(a). Section 105(a) segregation requirement, such as the § 226.18(f)(1)(iv); the variable rate
authorizes the Board to make exceptions creditor’s identity under § 226.18(a), the transaction disclosure required by
and adjustments to TILA to effectuate variable-rate example under current § 226.18(f)(1); assumption; and
the statute’s purposes, which include § 226.18(f)(1)(iv), insurance or debt the late-payment fee disclosure for
facilitating consumers’ ability to cancellation disclosures under single-payment loans.
compare credit terms and helping § 226.18(n), or certain security-interest The Board also proposes to require
consumers avoid the uninformed use of charges under § 226.18(o). Comment that the disclosure of the creditor’s
credit. 15 U.S.C. 1601(a), 1604(a). 17(a)(1)–4 clarifies that creditors have identity be grouped together and
Grouping and segregating information flexibility in grouping the disclosures segregated from other information, for
which is most useful and relevant to the listed in footnotes 37 and 38 either all closed-end credit. The Board
loan transaction would facilitate together with or separately from proposes to make this change pursuant
consumers’ ability to evaluate a loan segregated disclosures, and comment to its authority under TILA Section
offer. 17(a)(1)–5 addresses what is considered 105(a). 15 U.S.C. 1604(a). Section 105(a)
Segregation of disclosures. Proposed directly related to the segregated authorizes the Board to make exceptions
§ 226.37(a)(2) would implement TILA disclosures. and adjustments to TILA to effectuate
Section 128(b)(1) of TILA, in part, for Proposed § 226.37(a)(2)(i) and (ii) the statute’s purposes, which include
transactions secured by real property or would provide exceptions to the facilitating consumers’ ability to
a dwelling. 15 U.S.C. 1604(a), grouped-together and segregation compare credit terms, and avoiding the
1638(b)(1). Proposed § 226.37(a)(2) requirement, and implement TILA uninformed use of credit. 15 U.S.C.
would require that disclosures for such Section 128(b)(1) for transactions 1601(a). The Board believes that the
transactions be grouped together in secured by real property or a dwelling. creditor’s identity should be included
accordance with the requirements under 15 U.S.C. 1638(b)(1). Proposed with the grouped-together and
proposed § 226.38(a) through (j), § 226.37(a)(2)(i) replicates the content in segregated disclosures so that
segregated from other information, and current footnote 37 and would allow the consumers can more easily identify the
not contain any information not directly following disclosures to be made appropriate entity. Thus, current
related to the segregated disclosures. together with the segregated disclosures: footnote 38 would be revised, and
Based on consumer testing, the Board the date of the transaction, and the proposed § 226.37(a)(2) would
also is proposing to require that ARM consumer’s name, address and account implement this aspect of the proposal
loan program disclosures under number. Proposed § 226.37(a)(2)(ii) for transactions secured by real property
proposed § 226.19(b), ARM adjustment generally replicates the substance in or a dwelling.
notices under proposed § 226.20(c), and current footnote 38, except that the In technical revisions, the Board
periodic notices for payment option Board proposes to remove the reference proposes to move the substance of
loans that are negatively amortizing to the variable-rate example under footnotes 37 and 38 to the regulatory
under proposed § 226.20(d), be subject § 226.18(f)(iv), which would be text of § 226.17(a)(1). Current comment
to a grouped-together and segregation eliminated for mortgage loans as 17(a)(1)–7 would be revised to address
requirement. Thus, the reference to discussed under proposed § 226.19(b). disclosures for transactions secured by
§§ 226.19(b) and 226.20(c) would be Under proposed § 226.37(a)(2)(ii), real property or a dwelling that have
deleted from comment 17(a)(1)–2. creditors also would have flexibility to balloon payment financing with leasing
Proposed comment 37(a)(2)–1 would make the tax deductibility disclosure, as characteristics; a cross-reference to
clarify that to be segregated, disclosures discussed under proposed § 226.38(f)(4), comment 17(a)(1)–7 is proposed in new
must be set off from other information. together with or separately from other comment 37(a)(2)–4.
Based on consumer testing, the Board is required disclosures. The Board seeks comment on whether
concerned that allowing creditors to Proposed comment 37(a)(2)–2 clarifies it should continue to permit creditors to
combine disclosures with other that creditors may add or delete the make the insurance or debt cancellation
information, in any format, will disclosures listed in proposed disclosures under proposed § 226.4(d)
diminish the clarity of key disclosures, § 226.37(a)(2)(i) and (ii) in any together with or separately from other
potentially cause ‘‘information combination together with or separate required disclosures. Consumer testing
overload,’’ and increase the likelihood from the segregated disclosures. showed that many participants found
that consumers may not read the Proposed comment 37(a)(2)–3 provides these disclosures too long and complex,
disclosures. Proposed comment guidance on the type of information that and as a result they do not read or only
37(a)(2)–1 also would provide guidance would be considered directly related skim the disclosures. The Board is
on how creditors can group together and and that may be included with the concerned that adding the insurance
segregate the disclosures in accordance segregated disclosures for transactions information to the information about
with proposed § 226.38(a)–(j), such as secured by real property or a dwelling. loan terms required by proposed
by using bold print dividing lines. Information described in comments § 226.38 will result in ‘‘information
Content of segregated disclosures; 17(a)(1)–5(i) through (xv) are not overload.’’
directly related information. Footnotes included in proposed comment Multi-purpose forms. Comment
37 and 38 currently provide exceptions 37(a)(2)–3 because they are not 17(a)(1)–6 currently permits creditors to
to the grouped-together and segregation applicable to transactions secured by design multi-purpose forms for TILA-
requirement under § 226.17(a)(1). real property or a dwelling, or are required closed-end credit disclosures
Footnote 37 allows creditors to include unnecessary as a result of other as long as the clear and conspicuous
information not directly related to the proposed disclosures: grace periods for requirement is met. The Board proposes
to require that disclosures for participants stated they were already include facilitating consumers’ ability to
transactions secured by real property or aware of this fact and therefore this compare credit terms and helping
a dwelling be made only as applicable, information was not useful. Regarding consumers avoid the uninformed use of
as discussed more fully under proposed rebates, consumers understood that credit. 15 U.S.C. 1601(a), 1604(a). In this
§ 226.38. As noted, consumer testing early payoff of the loan could result in case, the Board believes an exception
indicates that consumers may not read a refund of interest and fees, and from TILA’s grouped together and
information if it is excessive in length, generally expressed interest in knowing segregation requirement is necessary to
and if unable to identify relevant this information. However, most also effectuate the Act’s purposes for
information quickly are likely to become indicated that information about rebates transactions secured by real property or
frustrated and not read the disclosures. would not have an impact on whether a dwelling. As noted above, many
The Board believes that allowing they accepted a loan and therefore, it consumers may not read information if
creditors to combine disclosures with was not as important or useful to the it is excessive in length, and if unable
other information that is not applicable decision-making process as other to identify relevant information quickly
to the transaction may contribute to information, such as interest rate or are likely to become frustrated and not
‘‘information overload,’’ and increase closing costs. read the disclosures. The Board is
the likelihood that consumers will not With respect to the contract reference, concerned that allowing creditors to
read the disclosures. almost all participants understood combine the information in proposed
For these reasons, under the proposal already that they could read their § 226.38(j) with other required
creditors would not be permitted to use contract to learn what could happen if information could contribute to
forms for more than one type of they stopped making payments, ‘‘information overload,’’ distract from
mortgage transaction (i.e., multi-purpose defaulted, paid off or refinanced their
other important disclosures, such as the
forms). The Board believes technology loan early. In addition, other proposed
APR or monthly payments, and may
and form design software will allow disclosures, such as the prepayment
increase the likelihood that consumers
creditors to prepare transaction-specific, penalty under proposed § 226.38(a)(5) or
will not read the disclosures. Thus, the
customized disclosure forms at minimal demand feature under proposed
cost. The Board seeks comment, § 226.38(d)(2)(iv), would make the Board believes that requiring these
however, on whether creditors already contract reference disclosure less disclosures to be separate from the other
provide consumers with customized important because such information required disclosures will serve TILA’s
disclosures forms for mortgage loans in would already be disclosed directly on purpose to avoid the uninformed use of
the regular course of business, or the the disclosure statement itself. credit. 15 U.S.C. 1601(a).
extent to which creditors rely on multi- Moreover, because creditors must 37(c) Terminology
purpose forms. The Board seeks provide disclosures within three
comment on potential operational business days after application for 37(c)(1) Consistent Terminology
changes, difficulties, or costs that would transactions secured by real property or
Currently, there is no requirement
be incurred to implement the a consumer’s dwelling, consumers will
that TILA disclosures for closed-end
requirement to have transaction-specific not have a contract to reference at this
credit use consistent terminology.
disclosures for transactions secured by point in time.
For these reasons, the Board proposes Consumer testing showed that some
real property or a dwelling.
to require that certain information be participants were confused when
37(b) Separate Disclosures disclosed separately from the grouped different terms are used for the same
Existing § 226.17(a)(1) requires certain together and segregation information, to information. For example, when the
disclosures to be provided separately improve consumers’ ability to focus on terms loan amount, principal, and loan
from the segregated information, such as the terms that are most important for balance were used, some participants
the itemization of amount financed shopping and decision-making.69 New attributed different meaning to each
required by § 226.18(c)(1) and TILA § 226.37(b) would require that creditors term used. Based on these findings, the
Section 128(a)(2)(A). 15 U.S.C. provide the following disclosures Board proposes § 226.37(c)(1) to require
1638(a)(2)(A). The Board is proposing to separately from other information for the use of consistent terminology for the
expand the list of disclosures that must transactions secured by real-property or disclosures under proposed §§ 226.38,
be provided separately from the a dwelling: Itemization of amount 226.19(b), 226.20(c) and 226.20(d). The
segregated information, based on financed under proposed § 226.38(j)(1); Board believes that using consistent
consumer testing. rebates under proposed § 226.38(j)(2); terminology will enhance a consumers’
Consumer testing showed that certain late payment under proposed ability to identify, review, and
disclosures, such as disclosures about § 226.38(j)(3); property insurance under comprehend disclosed terms across all
assumption or property insurance, were proposed § 226.38(j)(4); contract disclosures and therefore, avoid the
confusing to participants, or were reference under proposed § 226.38(j)(5); uninformed use of credit. Proposed
generally not as useful in the and assumption under proposed comment 37(c)(1)–1 clarifies that terms
participants’ decision-making process as § 226.38(j)(6). do not need to be identical, unless
other information. For example, with The Board proposes this approach otherwise specified, but must be close
respect to assumption, few participants pursuant to its authority under TILA enough in meaning to enable the
understood the current assumption Section 105(a). 15 U.S.C. 1604(a). consumer to relate the disclosures to
policy model clause in Model Clause H– Section 105(a) authorizes the Board to one another. Proposed comment
6 in Appendix H to Regulation Z; almost make exceptions and adjustments to 37(c)(1)–2 provides guidance on
no one stated that the assumption was TILA for any class of transactions to combining terms for transactions
important information when applying effectuate the statute’s purposes, which secured by real property or a dwelling
for and obtaining a loan. With respect to when more than one numerical
property insurance, most participants 69 See also Improving Consumer Mortgage
disclosure would be the same, and
understood that the borrower can obtain Disclosures at 37–38, 59–60 (finding that provides an example relating to the total
streamlining disclosures improved consumer ability
property insurance from anyone that is to identify and understand key terms of the loan payments and amount financed
acceptable to the lender, but transaction disclosed). disclosures required under proposed
§§ 226.38(e)(5)(i) and 226.38(e)(5)(iii), settlement charges,’’ not as the ‘‘finance disclosure. 15 U.S.C. 1632(a). The Board
respectively. charge’’ as required by TILA Section is proposing to revise the description of
128(a)(3). 15 U.S.C. 1638(a)(3). Second, the APR and require that creditors
37(c)(2) Terms Required To Be More
the disclosure of interest and settlement provide context for the APR by
Conspicuous
charges would not have to be more disclosing it on a scaled graph with
Currently TILA Section 122(a) and conspicuous than other terms, as explanatory text, as discussed more
§ 226.17(a)(2) require creditors to required by TILA Section 122(a). 15 fully under proposed §§ 226.38(b). In
disclose the terms ‘‘finance charge’’ and U.S.C. 1632(a). addition, the Board is proposing
‘‘annual percentage rate,’’ together with The exception to TILA’s requirements § 226.37(c)(2) to implement TILA
a corresponding dollar amount and that the finance charge be disclosed as Section 122(a) for transactions secured
percentage rate, more conspicuously the ‘‘finance charge’’ and that it be more by real property or a dwelling. 15 U.S.C.
than any other disclosure, except the conspicuous than other information is 1632(a). Section 226.37(c)(2) would
creditor’s identity under § 226.18(a). 15 proposed pursuant to TILA Section require that creditors disclose the APR
U.S.C. 1632(a). Under TILA Section 105(a). 15 U.S.C. 1604(a). The Board has in a 16-point font, in a prominent
103(u), the finance charge and the authority under TILA Section 105(a) to location, and in close proximity to the
annual percentage rate are material adopt ‘‘such adjustments and exceptions scaled graph and explanations proposed
disclosures; failure to disclose either for any class of transactions as in the under § 226.38(b)(2) through (4).
term extends the right of rescission judgment of the Board are necessary or As discussed under proposed
under TILA Section 125, and can result proper to effectuate the purposes of this § 226.38(b), the APR is one of the most
in actual and statutory damages under title, to prevent circumvention or important terms disclosed about the
TILA Section 130(a). 15 U.S.C. 1602(u); evasion thereof, or to facilitate loan; it is the only single, unified
15 U.S.C. 1635, 1640(a). compliance therewith.’’ 15 U.S.C. number available to help consumers
Finance charge: interest and 1601(a), 1604(a). The class of understand the overall cost of a loan. To
settlement charges. Section 226.18(d), transactions that would be affected is this end, the Board believes it is
which implements TILA Sections closed-end transactions secured by real essential that consumers be able to
128(a)(3) and (a)(8), requires creditors to property or a dwelling. The Board identify the APR easily. Consumer
disclose the ‘‘finance charge,’’ using that believes an exception from TILA’s testing and basic document design
term, and a brief description such as requirements is necessary and proper to principles show that participants
‘‘the dollar amount the credit will cost effectuate TILA’s purposes to assure generally pay greater attention to
you’’ for closed-end credit. 15 U.S.C. meaningful disclosure and informed figures, such as numbers, percentages
1638(a)(3), (a)(8). Consumer testing credit use. Consumer testing showed and dollar signs, than to terminology
showed that participants could not that disclosing the finance charge as that may accompany, describe or label
correctly explain what the finance ‘‘interest and settlement charges’’ any disclosed figure. However, the TILA
charge represented. Many consumers improved participants’ understanding of disclosure contains many numerical
recognized that the finance charge the information, even though the figure figures that consumers must identify
included all of the interest they would may not include all interest and and review. Given that the Board is
pay over the loan’s term, but did not settlement charges applicable to the proposing to require a minimum 10-
know that it also included fees. Most transaction. (See discussion under point font for disclosure of other terms
participants did not find the finance proposed § 226.4 regarding content and on the TILA (see discussion under
charge to be useful in evaluating a loan calculation of the interest and proposed comment 37(a)(1)–2), and
offer. However, some participants settlement charges.) Moreover, based on document design principles,
expressed a general interest in knowing consumer testing showed that the Board consumer tested disclosing
the information. participants did not find the interest the APR figure in a larger font and in
Based on these results, the Board and settlement charges as useful, when bold text to make it more readily
tested a form with the finance charge choosing or evaluating a loan product, noticeable as compared to other
disclosed as ‘‘interest and settlement as other information, such as whether disclosed terms. When tested in this
charges,’’ to more closely represent the the loan has an adjustable rate or the manner, participants were able to easily
components of the finance charge. monthly payment amount. identify the APR. Based on consumer
Participants generally understood the In addition, and for the reasons testing, the Board believes that a 16-
term, but still stated that they did not discussed more fully under proposed point font requirement for the APR is
find the term very useful, particularly § 226.38(e)(5)(ii) regarding interest and sufficient to highlight the APR. The
when compared to other information settlement charges, the proposal would Board also notes that the approach of
such as the interest rate or monthly group the interest and settlement requiring at least a 16-point font for the
payments. Consumer testing suggests charges disclosure with other APR disclosure is consistent with the
that highlighting terms that are not disclosures relating to the total cost of approach taken by the Board in revising
useful in the decision-making process the loan offered, such as the total of the purchase APR disclosure required
may generally diminish consumers’ payments and the amount financed. under TILA for open-end credit. 74 FR
ability to understand other key terms. Consumer testing conducted by the 5244; Jan. 29, 2009.
For these reasons, and as discussed Board, as well as basic document design Proposed comment 37(c)–3(i) through
more fully in the discussion of proposed principles, shows that grouping related (iii) would provide further guidance on
§ 226.38(e)(5)(ii), the Board proposes to concepts and figures makes it easier for the more conspicuous requirement and
exercise its authority under TILA consumers to identify, comprehend, or would clarify that the APR must be
Section 105(a) to make certain use disclosed terms. more conspicuous only in relation to
exceptions to the disclosure of the Annual percentage rate. TILA Section other required disclosures under
finance charge under TILA Section 122(a) and § 226.17(a)(1) require that the proposed § 226.38, and only as required
128(a)(3) and TILA Section 122(a). 15 term ‘‘annual percentage rate,’’ when under proposed § 226.37(c)(2) and
U.S.C. 1604(a); 1632(a); 1638(a)(3). First, disclosed with the corresponding § 226.38(b). Proposed comment 37(c)–4
creditors would be required to disclose percentage rate, be disclosed more would provide guidance on how
the finance charge as ‘‘interest and conspicuously than any other required creditors can comply with the more
conspicuous requirement for would be unlikely to read it because it key information, such as the loan term,
transactions secured by real property or was too long. amount, type, and settlement charges,
a dwelling. In addition, as noted previously, before other required disclosures and in
The Board seeks comment on whether consumer testing suggests that a tabular format improved participants’
the APR should be made more or less consumers may not read information ability to quickly and accurately
prominent using a larger or smaller font- carefully if it is excessive in length, and identify key loan terms. In another
size, and whether different graphs or if unable to identify relevant example, participants’ ability to identify
visuals could be used to provide better information quickly are likely to become the frequency of rate adjustments after
context for the APR. The Board also frustrated and not read the disclosures. an introductory period expired also
seeks comment on the relative As discussed more fully under proposed improved when this information was
advantages and disadvantages of a § 226.37(a) through (c), this suggests included both in the loan summary
graphic-based versus text-based highlighting and structuring disclosures section at the top of the revised TILA
approach to disclosing the APR, and the in a particular manner to improve model form, and then again below in the
potential operational changes, clarity, identification and interest rate and payment summary
difficulties, or costs that would be comprehension of disclosed terms. section.
incurred to implement the graphic- To address the problems with the Based on consumer testing results,
based APR disclosure requirement for current TILA form and ARM loan basic document design principles, and
transactions secured by real property or program disclosures, the Board used for the reasons discussed more fully
a dwelling. various formats to present key loan under each of the following subsections,
information, such as tabular forms and the Board is proposing to establish
37(d) Specific Formats question and answer format. Consumer special format rules for: disclosures
Currently, § 226.17(a)(1) does not testing suggests that using tabular forms under proposed § 226.38 for
impose special format design or location improved participants’ ability to readily transactions secured by real property or
requirements on disclosures for closed- identify and understand key a dwelling; ARM loan program
end credit. However, as discussed more information, as discussed under disclosures under proposed § 226.19(b)
fully under proposed § 226.38, proposed §§ 226.19(b) and 226.38(c). for adjustable rate transactions; ARM
consumer testing showed that the For example, current ARM loan program adjustment notices under proposed
current TILA form did not present key disclosures provide information in § 226.20(c); and periodic statements
loan information in a manner that was narrative form, which participants required for payment option loans that
noticeable and easy for consumers to found difficult to read and understand. are negatively amortizing under
understand. For example, the payment However, consumer testing showed that proposed § 226.20(d). The special rules
schedule required under current when information about interest rate, regarding format, structure and location
§ 226.18(g) did not effectively monthly payment and loan features was of disclosures are noted in proposed
demonstrate to participants the presented in tabular format, participants § 226.37(d)(1) through (10). Proposed
relationship between monthly payments found the information easier to locate comments 37(d)–1 and –2 would
and an adjustable interest rate feature. and their comprehension of the
Consumer testing also showed that the provide guidance to creditors on how to
disclosed terms improved. The benefits
current TILA form highlighted terms comply with the special format rules
of disclosing important information in a
that confused many participants. For noted in proposed § 226.37(d)(1)
tabular format are consistent with the
example, most participants incorrectly through (10) regarding prominence and
results of consumer testing conducted
assumed the amount financed was the close proximity of disclosed terms.
by the Board in revising credit card
same as the loan amount, a term not disclosures. 74 FR 5244; Jan. 29, 2009. 37(e) Electronic Disclosures
required on the current TILA form. In Consumer testing also showed that Currently, under § 226.17(a)(1)
other instances, the current TILA form using question and answer format creditors are permitted to provide in
emphasized information that improved participants’ ability to electronic form any TILA disclosure for
participants generally understood, but recognize and understand potentially closed-end credit that is required to be
did not find useful or important, such risky or costly features of a loan, as provided or made available to
as the total of payments. Many discussed under proposed §§ 226.19 and consumers in writing if the consumer
participants also noted that the current 226.38(d). Consumer testing and basic affirmatively consents to receipt of
TILA form failed to include information document design principles suggest that
electronic disclosures in a prescribed
they would find useful when shopping keeping language and design elements
manner. Electronic Signatures in Global
or evaluating a loan offer, such as the consistent between forms improves
and National Commerce Act (the E-Sign
contract interest rate and settlement consumers’ ability to identify and track
Act), 15 U.S.C. 7001 et seq. The Board
charges. changes in the information being
As discussed under proposed proposes § 226.37(e) to allow creditors
disclosed. As a result, the Board also
§ 226.19, consumer testing of the current to provide required disclosures for
integrated the question and answer
ARM loan program disclosure and the transactions covered by proposed
format used on the revised TILA model
CHARM booklet also revealed § 226.38 in electronic form in
form into ARM loan program
ineffective presentation of information accordance with the requirements under
disclosures required under proposed
relating to adjustable rate loan § 226.17(a)(1).
§ 226.19(b).
programs. Many participants found the To present key loan terms more Section 226.38 Content of Disclosures
narrative format and terminology used effectively, the Board also used specific for Credit Secured by Real Property or
in the current ARM loan program location and structure requirements. a Dwelling
disclosure complicated, dense, and Consumer testing suggests that the
difficult to read and understand. With location and order in which information 38(a) Loan Summary
respect to the CHARM booklet, many is presented impacts consumers’ ability To shop for and understand the cost
participants generally indicated that the to find and comprehend the information of credit, consumers must be able to
information it contained was disclosed. For example, as discussed identify and understand the key credit
informative and educational, but they under proposed § 226.38(a), disclosing terms offered to them. As discussed
below, the Board’s consumer testing testing of current model forms additional disclosure if the loan has one
suggested that loan amount, loan term conducted by the Board indicated that or more of the following three features:
and loan type are key terms that some consumers are not able to readily ‘‘negative amortization,’’ ‘‘interest-only
consumers are familiar with and expect identify the loan term from the number payments,’’ or ‘‘step-payments,’’ using
to see on closed-end mortgage of payments disclosed in the current those terms. The related commentary
disclosures, together with settlement disclosures. Although some participants would provide examples for each loan
charges and whether a prepayment could determine the loan term by type and feature.
penalty would apply to their loan. dividing by 12 the number of months
38(a)(3)(i) Loan Type
shown in the payment schedule
The Board’s Proposal As discussed above, consumer testing
disclosed under § 226.18(g), other
The Board proposes to require participants could not readily figure the indicated that the current variable rate
creditors to provide the following key term of the loan offered, particularly for disclosure is not sufficiently clear for
loan features in a loan summary section: loans that have multiple payment levels, many consumers. When presented with
loan amount, loan term, loan type, the such as discounted adjustable-rate a current closed-end model form for an
total settlement charges, whether a mortgages. For these reasons, the Board adjustable-rate mortgage, over half of the
prepayment penalty applies and, the is proposing to require disclosure of the participants understood that the interest
maximum amount of the penalty. The loan term in the summary section for rate would change. However, several
purpose of the proposed disclosures is loans covered by § 226.38, and to define participants inferred this from the
to improve their effectiveness and ‘‘loan term’’ for these purposes as the different monthly payments in the
consumer comprehension. A concise time to repay the obligation in full. For payment schedule, not because the
loan summary would help consumers instance, instead of disclosing the check box on the form indicated that the
compare loan offers; a summary may number of months for each payment loan had a ‘‘variable rate.’’ A few
also help consumers determine whether amount for variable interest rate loans participants indicated that they did not
they can afford the loan they are offered, and requiring the consumer to add up know whether the rate would change.
and whether the disclosure presents the those months to determine the loan Some participants commented that
same loan terms they discussed with term, the proposed disclosure would although the current model form used
their mortgage broker or lender. state ‘‘Loan term: 30 years.’’ Likewise, the term ‘‘variable rate,’’ they were more
The Board conducted consumer for a 10-year loan with a balloon familiar with the term ‘‘adjustable rate.’’
testing of loan summary disclosures. payment due in year 10 and an As a result, the Board tested revised
Participants were able to identify the amortization schedule of 30 years, the disclosures using the term ‘‘adjustable
exact loan amount, what type of a loan proposed disclosure would state ‘‘Loan rate mortgage’’ in the loan summary
they were being offered, how long they term: 10 years.’’ section. All participants who were
would have to pay off their loan, how shown a revised disclosure for a
much they would have to pay in 38(a)(3) Loan Type and Features variable rate transaction using the term
settlement charges, and whether a Regulation Z does not require the ‘‘adjustable-rate mortgage’’ understood
prepayment penalty would apply. A creditor to disclose the type of the loan, that the interest rate and payments
discussion of the items that would be except in the case of loans with variable could change during the loan’s term.
included in the loan summary follows. interest rates. Current § 226.18(f) Proposed § 226.38(a)(3)(i) would
requires a disclosure of a variable rate define an adjustable-rate mortgage as a
38(a)(1) Loan Amount if the annual percentage rate may transaction in which the annual
Currently creditors are not required to increase after consummation. The percentage rate may increase after
disclose the loan amount for closed-end Board’s consumer testing indicates that consummation; a step-rate mortgage as a
mortgages, except for loans subject to the current variable rate disclosures may transaction in which the interest rate
HOEPA. Under § 226.32(c)(5), creditors not clearly convey whether the loan has will change after consummation as
are required to disclose the total amount a fixed or a variable interest rate. The specified in the legal obligation between
borrowed. The Board is proposing to Board believes that a specific disclosure the parties; and a fixed-rate mortgage as
require a similar disclosure of the loan of a loan type offered will assist a transaction that is neither an
amount for all transactions secured by a consumers in better understanding adjustable-rate mortgage nor a step-rate
real property or a dwelling. Proposed whether a loan features a rate that may mortgage. Proposed comment
§ 226.38(a)(1) would require creditors to increase after consummation, so that the 38(a)(3)(i)(A)–2 would offer examples of
disclose ‘‘loan amount,’’ which would consumer may evaluate whether they adjustable-rate mortgages and clarify
be defined as the principal amount the want a loan in which the rate and that some variable-rate transactions
consumer will borrow reflected in the payments can increase. described in comment 17(c)(1)(iii)–4,
note or loan contract. The loan amount The Board is proposing to require a such as certain renewable balloon-
is a core loan term that the consumer disclosure of the loan type in the loan payment, preferred-rate and price-level-
should be able to verify readily on the summary section for loans covered by adjusted loans, would be considered
disclosure. Disclosing the loan amount § 226.38. Proposed § 226.38(a)(3)(i) fixed-rate mortgages for the purposes of
may also alert the consumer to fees that would require that a loan be classified the ‘‘loan type’’ disclosure in the loan
are financed in addition to the principal as one of three types: an ‘‘adjustable-rate summary required by § 226.38(a). This
balance. mortgage (ARM),’’ a ‘‘step-rate follows the current approach in
mortgage,’’ or a ‘‘fixed-rate mortgage’’ comment 17(c)(1)–11 which provide

38(a)(2) Loan Term using those terms. The categories that disclosures for certain variable-rate
Currently, Regulation Z requires proposed in § 226.38(a)(3)(i) apply only transactions should be based on the
creditors to disclose the number of to disclosures requires for closed-end interest rate that applies at
payments but not the term of the loan. transaction secured by real property or consummation.
The Board believes that the loan term is a dwelling, and are different from the Proposed § 226.38(a)(3)(i)(B) would
an important fact about the loan that categories in § 226.18(f) and require the creditor to disclose a loan as
consumers should know when commentary to § 226.17(c)(1). Proposed a ‘‘step-rate mortgage’’ if the interest rate
evaluating a loan offer. Consumer § 226.38(a)(3)(ii) would require an will change after consummation,
provided all such interest rates are consumer to make payments that would only to the total amount of interest they
specified in the legal obligation between cover all interest accrued or all interest would pay if they kept the loan to
the parties. Under existing guidance, accrued and principal; or an interest- maturity, but did not always realize that
such a loan would not be considered a only feature if the legal obligation it also includes the fees and costs
variable rate loan. The Board believes permits or requires the consumer to incurred as part of the credit
that for the purposes of the loan make one or more regular periodic transaction. Most participants did not
summary, which is to alert the payments of interest accrued and no find the finance charge useful in
consumer to the possibility that their principal, and the legal obligation does evaluating a loan offer.
interest rate and payment could increase not require or permit any payments that The disclosure of settlement charges
after consummation, step-rate loans would result in negative amortization. is governed by RESPA, 12 U.S.C. 2601–
should not be identified as fixed or Proposed comment 38(a)(3)(ii)(A)–1 2617, and implemented by HUD under
variable rate loans, even though they would offer an example of a step- Regulation X, 24 CFR part 3500. Under
share certain features with both loan payment feature. For example, if the RESPA and Regulation X, creditors must
types. Proposed comment 38(a)(3)(i)(B)– consumer is offered a fixed-rate provide a GFE of settlement costs within
2 would clarify that certain preferred- mortgage with 24 monthly payments at three business days of application for a
rate loans would not be considered step- $1,000 that will later increase to $1,200 mortgage, which is the same time
rate mortgages for the purposes of the and remain at that level for a specified creditors must provide the early TILA
‘‘loan type’’ disclosures. Proposed period of time, and the loan amortizes disclosure. RESPA and Regulation X
comment 38(a)(3)(i)(C)–1 would offer fully over the loan term, the creditor also require a statement of the final
examples of fixed-rate mortgages and would disclose ‘‘Fixed-Rate Mortgage, settlement costs at loan closing (‘‘HUD–
explain which variable-rate transactions step-payments’’ for the loan type in the 1 or HUD–1A settlement statement’’).
described in comment 17(c)(1)(iii)–4 loan summary. Proposed comment Under the new final rule for Regulation
would be considered fixed-rate 38(a)(3)(ii)(B) and (C)–1 would clarify X, effective January 1, 2010, the GFE is
mortgages for the purposes of the ‘‘loan that a creditor should disclose the loan subject to certain accuracy
type’’ disclosure. feature as either ‘‘payment option’’ or requirements, absent changed
‘‘negative amortization’’ but not both, circumstances. RESPA and Regulation X
38(a)(3)(ii) Loan Features whereas a loan may have both a ‘‘step- do not, however, provide any remedies
The general classification of loans as payment’’ feature and either a ‘‘payment for a violation of the accuracy
fixed rate, adjustable rate and step rate option’’ or a ‘‘negative amortization’’ requirements.
would enable consumers to understand feature. Moreover, for a loan to have a Consumer testing consistently
what loan type they are being offered ‘‘payment option’’ feature, all periodic demonstrated that participants wanted
and to shop for loan products according payment choices must be specified in to see settlement charges on the revised
to consumers’ needs and preferences. the legal obligation and must include a TILA disclosure. Participants stated that
However, these broad categories of loan choice to make payments that may including such a disclosure would help
types are not sufficient to warn result in negative amortization. them confirm information that the loan
consumers about the potential risks that Proposed comment 38(a)(3)(ii)(D)–1 originator told them about the cost of
a specific loan may carry. As discussed would provide that a creditor should the loan during the mortgage
previously, nontraditional mortgage not disclose both an ‘‘interest-only’’ application process. During consumer
products with negatively amortizing or feature and a ‘‘payment option’’ feature testing, participants indicated that they
interest-only payments grew in or ‘‘negative amortization’’ feature in a were often surprised at the closing table
popularity in recent years, subjecting single transaction, whereas a loan may by substantial increases in the
consumers to the risk of payment shock. have both an ‘‘interest-only’’ feature and settlement charges. Despite these
Disclosures should clearly alert a ‘‘step-payment’’ feature. changes, consumers reported that they
consumers to these features before the proceeded with closing because they
consumer becomes obligated on the 38(a)(4) Total Settlement Charges lacked alternatives (especially in the
loan. To alert consumers to potentially Currently, TILA and Regulation Z case of a home purchase loan), or were
risky loan features, the Board is disclose settlement charges through the told that they could easily refinance
proposing to require an additional finance charge. TILA Section 128(a)(3) with better terms in the near future.
disclosure for each loan type in the loan and § 226.18(d) require the creditor to Participants indicated that they would
summary if the loan has step-payments, disclose the finance charge. 15 U.S.C. like an estimate of their settlement
payment option or negative 1638(a)(3). TILA Section 106(a) defines charges as early as possible in the loan
amortization features, or interest-only the ‘‘finance charge’’ as the ‘‘sum of all process, and that it would be helpful to
payments. charges, payable directly or indirectly have the settlement charges displayed in
Proposed § 226.38(a)(3)(ii) would by the person to whom the credit is the context of the other loan terms,
require creditors to disclose whether a extended, and imposed directly or rather than on a separate GFE or HUD–
loan would have one or more of the indirectly by the credit or as an incident 1 or HUD–1A settlement statement.
following features: Step-payments if the to the extension of credit.’’ 15 U.S.C. For these reasons, the Board proposes
legal obligation permits the periodic 1605(a). Section 226.4(a) further defines § 226.38(a)(4) to require creditors to
monthly payment to increase by a set the ‘‘finance charge’’ as ‘‘the cost of disclose the ‘‘total settlement charges,’’
amount for a specified amount of time; consumer credit as a dollar amount.’’ using that term, as those charges are
a payment option feature if the legal The finance charge includes any interest disclosed under Regulation X, 12 CFR
obligation permits the consumer to due under the loan terms as well as part 3500. The proposed rule would
make payments that result in negative other charges incurred in connection further require, as applicable, a
amortization and other types of with the credit transaction. See statement of the amount of the charges
payments; a negative amortization § 226.4(a) and (b). already included in the loan amount.
feature if the legal obligation requires Consumer testing indicated that Finally, the proposed rule would
the consumer to make payments that participants did not understand the require disclosure of a statement, as
result in negative amortization—that is, term ‘‘finance charge.’’ Most applicable, that the total amount does
the legal obligation does not permit the participants believed the term referred not include a down payment, along with
a reference to the GFE or HUD–1 for be changed significantly to determine years after origination.70 Some
more details. several days before closing the precise participants thought that a prepayment
Proposed comment 38(a)(4)–1 would total amount of settlement charges that penalty could be charged only if they
clarify that on the early TILA disclosure the consumer would pay at settlement. paid off their entire loan from their own
required by § 226.19(a)(1)(i), the creditor The Board believes, however, that the funds, such as with money obtained
must disclose the amount of the ‘‘Total cost would be outweighed by the benefit through a sudden financial windfall.71
Estimated Settlement Charges’’ as to consumers of knowing their final The Board developed and tested a
disclosed on the GFE under Regulation total settlement charges three business revised prepayment penalty disclosure.
X, 12 CFR part 3500, Appendix C. For days before consummation. This Participants in the Board’s consumer
the final TILA disclosure required by proposal would enable consumers to testing generally understood that if they
proposed § 226.19(a)(2)(ii), the creditor review and verify cost information in prepaid the loan within the time
would be required to disclose the sum advance of consummation, and contact specified in the disclosure, a penalty
of the final settlement charges. The the creditor with questions or take other could be imposed. Participants also
creditor would be permitted to use the action, as appropriate. understood that the penalty could be
sum of the ‘‘Charges That Cannot imposed if they refinanced or sold the
Increase,’’ ‘‘Charges That In Total 38(a)(5) Prepayment Penalty home during the time the penalty was
Cannot Increase By More Than 10%,’’ Current Disclosure Requirements in effect.
and ‘‘Charges That Can Change’’ as
would be disclosed in the column Under TILA Section 128(a)(11) and The Board’s Proposal
entitled ‘‘HUD–1’’ on page three of the existing § 226.18(k)(1), if an obligation Under proposed § 226.38(a)(5), if the
HUD–1 or on page two of the HUD–1A includes a finance charge computed by legal obligation permits a creditor to
settlement statement under Regulation applying a rate to the unpaid principal impose a prepayment penalty the
X, 12 CFR part 3500, Appendix A. balance (a ‘‘simple-interest obligation’’), creditor must disclose in the ‘‘Loan
Alternatively, the creditor would be creditors must disclose whether or not Summary’’ section the period during
permitted to provide the consumer with a penalty may be imposed if the which the penalty provision applies, the
the final HUD–1 or HUD–1A settlement consumer prepays the obligation in full. maximum possible penalty, and the
statement. For transactions in which a Comment 18(k)(1)–1 states that the term circumstances in which the creditor
GFE, HUD–1 or HUD–1A are not ‘‘penalty’’ refers only to charges that are may impose the penalty. If the legal
required, the proposed comment would assessed because of the prepayment in obligation does not allow the creditor to
clarify that the creditor may look to full of a simple-interest obligation, in impose a prepayment penalty, the
such documents for guidance on how to addition to other amounts. creditor would make no disclosure
comply with the requirements of this The existing model form in Appendix regarding prepayment penalties in the
section. H–2 contains checkboxes for creditors to ‘‘Loan Summary’’ section. (However,
The Board recognizes that creditors indicate whether a consumer ‘‘may’’ or proposed § 226.38(d)(1)(iii) requires the
are not currently required to provide the ‘‘will not’’ have to pay a penalty if the creditor to disclose whether or not the
final settlement charges before consumer prepays the obligation in full. legal obligation permits the creditor to
consummation. Regulation X, 24 CFR The Board adopted these checkbox charge a prepayment penalty in the
3500.10(b), permits the settlement agent options in 1980, in response to concerns ‘‘Key Questions about Risk’’ section.)
to provide the completed HUD–1 or that a statement that a prepayment Maximum penalty amount. The Board
HUD–1A at settlement. However, penalty ‘‘will be imposed’’ would be is proposing to require creditors to
proposed § 226.19(a)(2)(ii) would misleading. The Board noted that many disclose the maximum penalty possible
require the creditor to provide the TILA credit contracts allow a penalty to be under the legal obligation. Prepayment
disclosure required by proposed imposed only if the loan is paid off penalties may be substantial. The
§ 226.38, including the total settlement within a certain time period after existence of a prepayment penalty may
charges disclosed under proposed consummation or under other specific make it difficult to refinance a loan or
§ 226.38(a)(4), so that the consumer circumstances. See 45 FR 80648, 80682; sell a home. This may be particularly
receives it at least three business days Dec. 5, 1980. difficult for consumers who have
before consummation. In addition, adjustable rate loans or other loans that
under proposed § 226.19(a)(2)(iii)– Discussion pose the risk of payment shock, as these
Alternative 1, if anything changes consumers may believe that they can
during the three-business-day waiting Consumer testing of the current
disclosure showed that participants had refinance or sell the home to avoid the
period, including total settlement increased payments. Thus, it is
charges, the creditor would be required difficulty identifying whether a loan
would have a prepayment penalty and important for consumers to know the
to supply another final TILA disclosure maximum penalty amount before they
and three-business-day waiting period in what circumstances it would apply.
For example, in the Board’s consumer are obligated on a loan.
before consummation could occur. Under proposed § 226.38(a)(5) and
Consumers could waive the three-day testing, participants did not understand
that refinancing a loan or paying off the (d)(1)(iii), creditors could not disclose
waiting periods for bona fide personal the method or formula they use to
financial emergencies. loan with proceeds from the sale of the
home securing the loan could trigger a determine the penalty with the
The Board recognizes that proposed disclosures required by § 226.38.
prepayment penalty. Similarly,
§§ 226.19(a)(2)(ii), 226.19(a)(2)(iii)– Although some consumers might benefit

Alternative 1, and 226.38(a)(4) would consumer testing conducted by FTC
staff found that two-thirds of from knowing how a prepayment
require the creditor to disclose final penalty will be determined, the Board is
settlement charge information several participants who looked at a sample of
the existing TILA disclosure showing a concerned that consumers may be
days in advance of consummation. overloaded with information if the
These requirements would impose a loan with a two-year prepayment
cost on creditors, which may be passed penalty did not understand that a 70 Improving Consumer Mortgage Disclosures at
on to consumers. Operational prepayment penalty would be charged if 78.
procedures and systems would need to the consumer refinanced the loan two 71 Id.
calculation method is included with the Definition of prepayment penalty. prepayment as information directly
segregated information. Many Comment 18(k)(1)–1 states that under related to the prepayment penalty
consumers would not read the § 226.18(k)(1) the term ‘‘penalty’’ refers disclosure. Comments 17(a)(1)–5(vii)
prepayment penalty disclosure at all if only to those charges that are assessed and (xi), together with other
it contains mathematical procedures because of the prepayment in full of a commentary in comment 17(a)(1)–5,
and terms. Creditors may, of course, simple-interest obligation, in addition to would not apply to transactions secured
disclose how a prepayment penalty will other amounts. Comment 18(k)(1)–1 by real property or a dwelling, as
be determined, as long as the disclosure clarifies that interest charges for any discussed above.
is not disclosed together with the period after prepayment in full is made Existing comment 18(k)(1)–1 states
segregated disclosures. and minimum finance charges are that loan guarantee fees are examples of
Creditors also could not disclose a examples of prepayment penalties. The charges that are not penalties. The
range of possible prepayment penalties Board is proposing to revise comment Board proposes to retain this example in
or give examples of penalty amounts 18(k)(1)–1 for clarity by substituting comment 38(a)(5)–2. (In a separate
assuming the consumer prepaid at a ‘‘charges determined by treating the rulemaking, the Board proposed to
hypothetical point in time under loan balance as outstanding for a period remove the example of interim interest
proposed § 226.38(a)(5) or (d)(1)(iii). after prepayment in full and applying on a student loan as an example of
The Board believes that it is important the interest rate to such ‘balance’ ’’ for charges that are not penalties. See 74 FR
that prepayment penalty disclosures ‘‘interest charges for any period after 12464, 12469; Mar. 29, 2009.)
simply and clearly convey to consumers prepayment,’’ as discussed above. Disclosed as applicable; disclosure
the potential magnitude of the Proposed comments 38(a)(5)–2(i) and content. Proposed comment 38(a)(5)–4
prepayment penalty. Disclosures based (ii) are consistent with comment clarifies that if no prepayment penalty
on assumptions or averages could 18(k)(1)–1, as it is proposed to be applies, creditors need not disclose that
undermine the impact of the maximum amended. fact in the ‘‘Loan Summary’’ section of
penalty disclosure. Proposed comment 38(a)(5)–2(iii) transaction-specific disclosures.
states that origination or other charges Proposed § 226.38(d)(1)(iii) requires
Additional penalty disclosures.
that a creditor waives on the condition creditors to disclose whether or not the
Consumer testing indicated that some
that the consumer does not prepay the legal obligation permits the creditor to
consumers do not understand that
loan are prepayment penalties, for charge a prepayment penalty in the
paying off the loan with the proceeds of
transactions secured by real property or ‘‘Key Questions about Risk’’ section,
a refinance loan or a home sale can
a dwelling. Fees imposed for a however. Proposed comment 38(a)(5)–5
trigger a prepayment penalty provision,
preparing a payoff statement and clarifies that creditors must disclose the
as discussed above. Therefore, the maximum penalty as a numerical
performing other services when a
proposed rule would require creditors to amount. This is consistent with the
consumer prepays the obligation would
disclose the conditions upon which and general rule of construction of the word
not be considered a prepayment penalty
the period during which they may ‘‘amount’’ required by § 226.2(b)(5).
under the proposed rule, however. Such
impose a prepayment penalty. Basis of disclosure. Proposed
fees are not strictly linked to a
It is important for a consumer to know consumer’s prepaying the obligation, as comment 38(a)(5)–6 explains how
what actions will trigger a prepayment they are charged at the end of a loan’s creditors determine the maximum
penalty provision before obtaining a term as well. The Board solicits penalty amount and contains examples
loan with such a provision. Consumers comment on this distinction. that illustrate how those principles are
likely will not receive the loan For purposes of some State laws, a applied. (Proposed comment
agreement containing the prepayment minimum finance charge is not 38(d)(1)(iii) states that creditors may
penalty provision until consummation considered a prepayment penalty. For rely on proposed comment 38(a)(5)–6 in
and may have little opportunity to purposes of disclosure under TILA, a determining the maximum prepayment
review the agreement before becoming minimum finance charge is considered penalty to be disclosed as one of the
obligated. Moreover, a prepayment a prepayment penalty. Existing ‘‘Key Questions about Risk’’
penalty is but one of many loan terms comment 18(k)(1)–1 and proposed disclosures.) Proposed comment
for consumers to consider at closing. comment 38(a)(5)–2 are designed to 38(a)(5)–6 states that in all cases, the
The Board believes that including key promote clear, consistent disclosure of creditor should assume that the
information about a prepayment penalty charges creditors may impose when a consumer prepays at a time when the
provision in transaction-specific consumer prepays the obligation in full. prepayment penalty may be charged.
disclosures would help consumers The proposed rule would not preempt The comment also states that if more
avoid the uninformed use of credit. State laws unless State law disclosure than one type of prepayment penalty
Coverage. Comment 226.18(k)(1)–1 requirements are inconsistent with the applies (for example, if the loan
clarifies that § 226.18(k)(1) applies to rule, and then only to the extent of any includes a minimum finance charge and
transactions in which interest inconsistency. the creditor may collect interest after
calculations take into account all Existing comment 17(a)(1)–5(vii) prepayment), the creditor should
scheduled reductions in principal, allows creditors to disclose that the include the maximum amount of each
whether interest calculations are made borrower may pay a minimum finance type of prepayment penalty in
daily or at some other interval. Proposed charge as information directly related to determining the maximum penalty
comment 38(a)(5)–1 is consistent with the penalty disclosure. Further, if a possible.

comment 18(k)(1)–1. Proposed § 38(j)(2) State or federal law prohibits creditors Existing comment 18(k)(1)–1 clarifies
reflects existing § 226.18(k)(2) on rebate from charging a prepayment penalty but that interest charges for any period after
disclosures, as discussed below. permits the charging of interest for some a consumer prepays in full and a
Existing comment 18(k)–2 discusses period after the consumer prepays from minimum finance charge in a simple
cases where a single transaction that prohibition, existing comment interest transaction are deemed to be
involves both a rebate and a penalty. 17(a)(1)–5(xi) permits creditors to prepayment penalties. Proposed
Proposed comment 38(a)(5)–8 reflects disclose that a consumer may have to comment 38(a)(5)–6(i) and (ii) clarifies
this existing commentary. pay interest for some period after that the amount of such charges must be
counted in determining the maximum select their own assumptions about Current Rules
penalty. when consumers are likely to prepay For closed-end credit, TILA Section
Proposed comment 38(a)(5)–6(iii) would result in inconsistencies among 128(a)(4) and (a)(8) require creditors to
provides examples of how creditors may the disclosures given by different disclose the ‘‘annual percentage rate,’’
calculate a maximum prepayment creditors. The Board considered other using that term, together with a brief
penalty where the creditor determines approaches, such as requiring creditors description such as ‘‘the cost of your
the penalty by applying a constant rate to disclose the maximum prepayment credit as a yearly rate.’’ 15 U.S.C.
to the loan balance at the time of penalty based on a single hypothetical 1638(a)(4), (a)(8). Section 226.18(e)
prepayment. In such cases, the
point in time (for example, one year implements these requirements. As
prepayment penalty amount is largest
after origination). However, this discussed in proposed § 226.37, TILA
when the balance is as high as possible.
approach would understate the amount Section 122 and § 226.17(a) require the
Proposed comment 38(a)(5)–6(iv)
consumers who prepay earlier would APR, with the finance charge, to be
illustrates a method creditors could use
have to pay. more conspicuous than other
to approximate the maximum penalty
disclosures except the disclosure of the
where the penalty amount depends on Timely payment assumed. Proposed
creditor’s identity. Changes to the
both the loan balance and the time at comment 38(a)(5)–7 states that creditors
requirements of § 226.17(a) are
which the consumer prepays (for may assume that the consumer makes
example, where a prepayment penalty discussed under § 226.37.
payments on time and may disregard
on an adjustable-rate loan equals six any possible inaccuracies resulting from Discussion
months’ interest payments). If the consumers’ payment patterns. This is The APR is the only single, unified
penalty amount depends on both the consistent with existing comment number available to help consumers
loan balance and the time at which the 17(c)(2)(i)–3 and proposed clarifications understand the overall cost of a loan.73
consumer prepays, under the proposed in comment 17(c)(1)–1. Proposed 15 U.S.C. 1638(a)(4). Before enactment
rule creditors would disclose the greater comment 38(a)(5)–7 further clarifies that of TILA in 1968, creditors could
of (1) the penalty charged when the advertise a 6 percent loan rate, but were
where the payment required by a legal
balance is the highest possible and (2) allowed to calculate the interest charged
obligation’s terms is not a fully
the penalty charged when the penalty
amortizing payment, the creditor must to the consumer by using a simple
rate is the highest possible (two-stage
base disclosures on the required interest, an add-on, or a discount rate
penalty calculation).
The two-stage penalty calculation periodic payment and may not assume method.74 Although the advertised loan
produces an amount that approximates, that the consumer will make payments rate would appear the same, the amount
but does not necessarily equal, the that exceed the required payment. of interest consumers actually would
maximum prepayment penalty. The pay over the loan term would differ
38(b) Annual Percentage Rate greatly under each of these calculation
Board believes, however, that the
amount determined using the two-stage methods.75 In addition, consumers were
The Board proposes to improve the
penalty calculation ordinarily will be forced to evaluate different components
APR’s utility to consumers by making it
sufficiently close to the actual of a loan’s costs, such as interest rate,
a more inclusive measure of the cost of points, and closing costs, when
maximum prepayment penalty that it credit, as discussed under § 226.4, and
would be appropriate for creditors to comparing competing loan offers. The
also by improving the manner in which APR standardizes the interest rate
use the method in complying with the APR is disclosed on the TILA
§ 226.38(a)(5) and (d)(1)(iii). The Board calculation and seeks to capture the
statement. Proposed § 226.38(b)(1) overall cost of the credit offered so that
solicits comment on whether the Board would require the APR to be disclosed,
should permit creditors to use the two- consumers can compare competing loan
using the term ‘‘annual percentage rate’’ more easily than if they had to evaluate
stage penalty calculation where the
and with the description, ‘‘overall cost the relationship and impact of different
penalty rate increases. Will this ‘‘two-
of this loan including interest and loan costs themselves.76
stage penalty calculation’’ method
produce a prepayment penalty amount settlement charges.’’ Proposed Participants in the Board’s consumer
that sufficiently approximates the § 226.38(b)(2) would require creditors to testing generally did not understand the
maximum prepayment penalty possible show the APR plotted on a graph, APR and often mistook it for the loan’s
for a loan? Are there cases where there relative to (1) the ‘‘average prime offer interest rate.77 The Board tested
will be a significant disparity between rate’’ (APOR) for borrowers with alternative descriptive statements and
the maximum penalty determined using excellent credit for a comparable loan formats for the APR, but consumers
the two-stage penalty calculation and type, in the week in which the continued to be confused by the APR.
the actual maximum penalty? disclosure is provided, and (2) the For example, some participants thought
Neither the simple penalty calculation higher-priced loan threshold under the APR reflected future adjustments to
nor the two-stage penalty calculation § 226.35(a).72 Proposed § 226.38(b)(3) the interest rate, or the maximum
will enable the creditor to determine the would require an explanation of the possible interest rate for a variable rate
maximum penalty where the penalty APOR and higher-priced threshold. loan. A few participants recognized that
rate on a negatively amortizing loan Proposed § 226.38(b)(4) would require
73 The 1998 Joint Report at 8; see also Bd. Of
declines. In such a case, the creditor creditors to disclose the average per- Governors of Fed. Res. Sys., 1996 Report to
must determine the maximum period savings from a 1 percentage- Congress: Finance Charges for Consumer Credit
prepayment penalty by determining point reduction in the disclosed APR. under the Truth in Lending Act at (April 1996).
what the penalty would be at each point Certain loans, including construction 74 The 1998 Joint Report at 8.
during the loan term while the penalty loans, would be excluded from
75 Id.
76 Id.
is in effect. proposed § 226.38(b)(2) and (b)(3). 77 See also Improving Consumer Mortgage
Requiring all creditors to base
Disclosures at 35 (finding that most respondents in
maximum penalty disclosures on the 72 The Board issued § 226.35(a) in its 2008 consumer testing did not understand or were
foregoing rules ensures standardization HOEPA Final Rule; compliance with § 226.35(a) is confused by the APR and generally mistook it for
of disclosures. Allowing creditors to mandatory beginning on October 1, 2009. the contract interest rate).
the APR differed from the interest rate, The Board’s testing suggests that with about the rate offered to them and when
but were unable to articulate the reason. little understanding of the APR and no applicable, why it differs from the
In addition, when presented with two ready and appropriate basis for average APR offered to borrowers with
hypothetical loan offers, participants comparison, many consumers ignore the excellent credit histories. The proposed
did not use the APR to compare and APR in favor of information they find APR disclosure would enable
choose between the offers. Instead, more accessible, such as the loan’s consumers to determine whether they
participants chose a loan based on one monthly payment or settlement costs. are being offered a loan that comports
or more of the following pieces of Therefore, the Board is taking two steps with their creditworthiness. A borrower
information: the interest rate, monthly to improve the disclosure of the APR. who knows his or her credit history is
payment, and settlement costs. The first step is designed to draw excellent or very good would be
consumers’ attention to the APR. To do informed that the loan offered is higher-
The Board’s Proposal so, the Board proposes to require priced. Participants in the Board’s
The Board proposes to retain the APR disclosure of the consumer’s APR on a testing stated that if they knew they had
disclosure, with several changes graph to highlight the APR and excellent credit, they would ask the
designed to improve the APR’s utility distinguish it from other numerical lender why they were being offered a
for consumers. These proposed changes disclosures, including the interest rate. higher-priced loan and what they would
would apply only to closed-end Consumers would be more likely to need to do to get a better offer. The
transactions secured by real property or notice the APR plotted on the graph, in Board notes that some participants
a dwelling. First, the Board proposes to a prominent location on the disclosure indicated that the disclosed APR, even
revise the description to use simpler statement. Principles of consumer if higher-priced, was lower than the
terminology. Proposed § 226.38(b)(1) design provide that a graphic device interest rate on their current loan and
would require creditors to disclose the accommodates different learning styles. thus was attractive to them.
APR, expressed as a percentage, together And, consumer research has shown that Nevertheless, while some consumers
with a statement that it represents the use of graphics or similar visual devices may not be prompted by the APR graph
overall cost of the loan, including help consumers attend to or notice to seek information about improved
interest and settlement charges. As important information.78 loan terms, testing suggests others may
discussed under § 226.4, the Board also The Board’s next proposed step is to do so and benefit as a result.
proposes to make the APR more present the APR in a context that is The Board recognizes that not all
inclusive of the cost of credit. Moreover, designed to facilitate understanding of consumers are aware of their credit
under § 226.38(c), the interest rate the APR. The Board believes that history, and thus may not be able to
would be disclosed on the form, which consumers would be more likely to use assess whether the loan offered is
would help some consumers understand the APR if it is shown to them in context consistent with their credit standing.
that the APR does not represent the of other rates, rather than in isolation as The Board anticipates that the APR
interest rate. is presently often the case. Research on graph would cause some consumers to
consumer behavior suggests that investigate their credit reports. If there
Second, the proposed rule also would
consumer choice is affected by whether are errors, these consumers could take
require creditors to disclose the APR
a consumer is presented with a single steps to resolve the errors. If consumers
using a graph that shows the consumer
option for a product or multiple options. in fact have impaired credit, some
how the APR for the loan offered would
Consumers making a choice in the consumers might consider whether to
compare to the average prime offer rate delay seeking a loan until they could
and the threshold for higher-priced presence of more than one option are
more likely to make a selection based on repair their credit standing.
loans under § 226.35(a). This disclosure In some instances the APR graph may
would help consumers understand how the relative merits of the options
presented, rather than on their own be potentially confusing. That is, a loan
the APR on the loan offered to them may be a higher-priced loan for reasons
compares to APRs offered to borrowers existing ‘‘references’’ for the value of the
product.79 Here, the Board believes that other than the borrower’s credit history.
with excellent credit for a similar loan For example, a consumer might have
type, and higher-priced loans which presenting consumers with information
about other rates, current as of the week little home equity, resulting in a high
generally are made to borrowers who loan-to-value ratio and a higher APR.
present higher risk. Such borrowers of the consumer’s application, would
The Board believes that even in such
include those with blemished credit help consumers make more informed
cases, the APR graph nonetheless would
histories, or with high loan-to-value decisions about the loan offered.
Testing suggests that showing the be beneficial to consumers. It would
ratios. prompt the consumer to ask questions,
The Board’s consumer testing shows consumer the APR in context of
information about other APRs would and creditors should be able to explain
that consumers do not understand the to consumers why the APR on a loan is
APR’s utility. Testing the APR with result in consumer benefits. For
example, the APR graph would cause higher-priced. In many cases the
different names and descriptions did explanation may help the consumer
not measurably increase consumers’ consumers to ask the creditor questions
determine whether they could take steps
understanding of the APR. Although the 78 Kozup, John, Elizabeth Howlett, and Michael to get a lower APR. For example, if the
APR was designed in part to facilitate Pagano. 2008. ‘‘The Effects of Summary Information creditor explains that the offered loan is
comparison of competing loan products, on Consumer Perception of Mutual Fund a higher-priced loan because of a low
testing suggests that most consumers do Characteristics.’’ The Journal of Consumer Affairs, down-payment, the borrower would be
not compare competing loans by APR, vol. 42. See also Testimony of John Kozup,
Assistant Professor, Department of Marketing, and
alerted that providing a larger down
probably because they receive only one Director, Center for Marketing and Public Policy, payment would result in a reduced APR
TILA disclosure before they Villanova University; http:// and cost savings.
consummate a loan. If consumers www.federalreserve.gov/events/publichearings/ The Board also notes that certain
comparison shop for a loan, they do so hoepa/2006/20060711/transcript.pdf. loans may be higher-priced loans simply
79 See, e.g., Hsee, Christopher K. and France
before they apply for a loan and likely Leclerc. 1988. ‘‘Will Products Look More Attractive
because of the loan type. For example,
shop based on oral quotes of interest When Presented Separately or Together?’’ Journal of loans that exceed the threshold amount
rates and points. Consumer Research, vol. 25. for eligibility for purchase by Fannie
Mae and Freddie Mac, known as manner. Comment is also sought on complex calculation method. The Board
‘‘nonconforming’’ or ‘‘jumbo loans,’’ whether a different graphical device seeks comment, however, on its
may tend to be higher-priced loans would better draw consumers’ attention proposed method and whether another
because of the method for calculating to the APR and illustrate the APR’s method would achieve the objectives of
the APOR. The APOR is the average utility to consumers. the disclosure without imposing undue
APR for conforming loans offered to compliance burdens.
38(b)(3)
borrowers with excellent credit. In the
To help consumers navigate the 38(b)(5) Exemptions
case of such loans, creditors would have
to explain to consumers why the loan’s information provided by the graph, Proposed section 226.38(b)(5) would
APR is higher-priced. proposed § 226.38(b)(3) would require exempt construction loans, bridge loans,
Third, the proposal would require the an explanation of the average prime and reverse mortgages from the
creditor to disclose the average per- offer rate as defined in § 226.35(a)(2), requirement to show the APR plotted on
period savings from a 1 percentage- and the higher-priced mortgage loan a graph (§ 226.38(b)(2)) and the
point reduction in the disclosed APR. threshold, as defined in § 226.35(a)(1). statement of the APOR and the higher-
The Board believes that showing Participants in the Board’s consumer priced loan threshold (§ 226.38(b)(3)).
consumers the relationship between the testing found this statement helpful in The exempted transactions are also
APR and a concrete dollar figure would understanding the information in the exempt from the definition of a higher-
help make the possible benefits of graph. priced mortgage, under § 226.35(a)(3) in
obtaining better loan terms more the Board’s 2008 HOEPA Final Rule.
38(b)(4)
concrete for consumers. Showing The Board does not publish an average
potential savings that could result from Proposed § 226.38(b)(4) would prime offer rate for construction, bridge,
a lower APR would help encourage provide how creditors must calculate or reverse mortgage loans. Thus, an
consumers to shop and negotiate for the average per-period savings that exemption seems appropriate. The
better loan terms, or as discussed, to would result from a 1 percentage-point Board seeks comment, however, on
increase their downpayment, resolve reduction in the APR. (This discussion whether these transactions should
errors in their credit report, or seek to refers to monthly savings because most nevertheless be subject to § 226.38(b)(2)
improve their credit standing. mortgage loans require monthly and (3).
payments.) Creditors would calculate
38(b)(2) the average per-month savings by 38(c) Interest Rate and Payment
Proposed § 226.38(b)(2) would require reducing the interest rate (or rates in the Summary
a graph indicating the consumer’s APR case of an ARM, as discussed in Proposed § 226.38(c) provides
within a range of APRs beginning with comment 34(b)(4)–1) by 1 percentage requirements for disclosure of the
the average prime offer rate (‘‘APOR’’), point, computing a hypothetical total of contract interest rate and the periodic
as defined in § 226.35(a)(2), including payments reflecting the payment payment for transactions secured by real
the higher-priced mortgage loan schedule at the lower rate or rates. The property or a dwelling. The information
threshold, as defined in § 226.35(a)(1), creditor would divide the difference proposed to be required by this
and terminating four percentage points between (1) the total of payments paragraph must be in the form of a table,
greater than the higher-priced mortgage disclosed under proposed as provided in § 226.38(c)(1),
loan threshold. Proposed § 226.38(b)(3) § 226.38(e)(5)(i), and (2) the substantially similar to Model Forms H–
would require a statement of the APOR hypothetical total of payments by the 19(A), H–19(B), or H–19(C) in Appendix
as defined in § 226.35(a)(2), and the number of payment periods required H. Additional formatting requirements
higher-priced mortgage loan threshold, under the terms of the legal obligation. would be provided in § 226.37. The
as defined in § 226.35(a)(1), current as of The creditor would report the results of rules for disclosing the interest rate and
the week the disclosure is produced. this calculation as the average savings periodic payments for an amortizing
The graphic would contain different each month from a 1 percentage-point loan are provided in proposed
shaded areas using different scales for reduction in the APR. Proposed §§ 226.38(c)(2)(i) and 226.38(c)(3). Rules
the range between the APOR and the comment 38(b)(4)–1 would provide for disclosing the interest rate and
higher-priced mortgage loan threshold, guidance on this method, and would periodic payments for a loan with
and for the range above the higher- include examples for fixed- and negative amortization are in proposed
priced mortgage loan threshold. The adjustable-rate mortgages. §§ 226.38(c)(2)(ii) and 226.38(c)(4).
graphic would also label the range The Board notes that the proposed Special rules for disclosing balloon
above the higher-priced mortgage loan method does not result in an exact 1 payments are found in proposed
threshold as the ‘‘high-cost zone.’’ percentage-point reduction in APR, but § 226.38(c)(5). Additional explanations
Creditors would use the Board’s table is likely to be within a few basis points of introductory rates and negative
of average prime offer rates to find the of a 1 percentage-point reduction. The amortization are contained in proposed
APOR for the loan type that matches the results would be sufficiently accurate to §§ 226.38(c)(2)(iii) and 226.38(c)(6),
loan being disclosed, for the week in show consumers that a lower APR will respectively. Proposed § 226.38(c)(7)
which the creditor provides the yield savings. Methods that might result provides definitions for certain terms
disclosure. Creditors would follow the in an actual 1 percentage-point used in § 226.38(c).
Board’s guidance in commentary to reduction in the APR would likely be
Existing Requirements for Periodic
§ 226.35(a) in determining how to select more complicated and would vary

the appropriate APOR. In the text depending on the terms of the loan, Payments
explaining the APOR, creditors may such as whether the rate is variable and TILA Section 128(a)(6) requires the
include a statement clarifying that the whether the payments amortize the creditor to disclose the number, amount,
APOR is for conforming loans only. loan. The Board believes that any and due dates or period of payments
The Board requests comment on any additional consumer benefit from scheduled to repay the total of
potential operational difficulty in disclosing the precise 1 percentage- payments, for closed-end credit. 15
producing the graph proposed in point APR reduction would not be U.S.C. 1648(a)(6). Currently, § 226.18(g)
§ 226.38(b)(2) in an accurate and timely sufficient to offset the costs of a more implements TILA 128(a)(6). Under
§ 226.18(g), creditors must show the that the payment schedule be labeled real property is likely to be a significant
number, amounts, and timing of ‘‘Payment Schedule: Payments Will asset for most consumers, and
payments scheduled to repay the Vary Based on Interest Rate Changes.’’ consumers should receive the
obligation, except as provided in Section 128(b)(2)(C) requires the Board disclosures required in Section
§ 226.18(g)(2) for certain loans with to conduct consumer testing to 128(b)(2)(C) before they become
varying payments.80 The creditor must determine the appropriate format for obligated on a loan secured by such an
provide these disclosures on the TILA providing the disclosures to consumers asset. The disclosures would alert
statement within three business days of so that the disclosures can be easily consumers to the potential for interest
receiving the consumer’s written understood, including the fact that the rate and payment increases and help
application, as provided in § 226.19(a). initial regular payments are for a them to determine whether these risks
Comment 18(g)–1 provides that the specific time period that will end on a are appropriate to their circumstances.
payment schedule should include all certain date, that payments will adjust The Board proposes this adjustment
components of the finance charge, not afterwards potentially to a higher to TILA Section 128(b)(2)(C) pursuant to
just interest. Thus, if mortgage amount, and that there is no guarantee its authority under TILA Section 105(a).
insurance is required, the payment that the borrower will be able to 15 U.S.C. 1604(a). Section 105(a)
schedule must reflect the consumer’s refinance to a lower amount. 15 U.S.C. authorizes the Board to make exceptions
mortgage insurance payments until the 1638(b)(2)(C). and adjustments to TILA for any class
date on which the creditor must of transactions to effectuate the statute’s
automatically terminate coverage under The Board’s Proposal purposes, which include facilitating
applicable law. See comment 18(g)–5. The Board proposes to add new consumers’ ability to compare credit
Commentary to § 226.17(c) provides that § 226.38(c) to implement TILA Section terms and helping consumers avoid the
for an adjustable-rate loan, creditors 128(a)(6) and Section 128(b)(2)(C) for all uninformed use of credit. 15 U.S.C.
should disclose the payments and other closed-end transactions secured by real 1601(a), 1604(a). The class of
disclosures based only on the initial rate property or a dwelling.81 (For all other transactions that would be affected is
and should not assume that the rate will closed-end credit transactions, transactions secured by real property or
increase. However, the disclosures must § 226.18(g) would continue to provide a dwelling. As discussed, providing
reflect a discounted or premium initial the rules for disclosing payments). examples of increased interest rates and
interest rate for as long as it is charged. Section 226.38(c) would require payments would help consumers
The commentary permits, but does not creditors to disclose the contract interest understand the risks involved in certain
require, creditors to include in the rate, regular periodic payment, and loans. The Board also proposes to revise
payments amounts that are not finance balloon payment if applicable. For the label for the interest rate and
charges or part of the amount financed. adjustable-rate or step-rate amortizing payment information from the statutory
Thus, creditors may, but need not, loans, up to three interest rates and language, ‘‘Payment Schedule:
include insurance premiums excluded corresponding monthly payments Payments Will Vary Based on Interest
from the finance charge under would be required, including the Rate Changes,’’ based on plain language
§ 226.4(d), and ‘‘real estate escrow maximum possible interest rate and principles, to make the disclosure more
amounts such as taxes added to the payment. If payments are scheduled to readily understandable.
payment in mortgage transactions.’’ increase independent of an interest-rate Disclosure of the interest rate.
TILA Section 128(b)(2)(C), as recently adjustment, the increased payment must Currently, TILA does not require
added by the MDIA, requires additional be disclosed. Payments for amortizing disclosure of the contract interest rate
disclosures for loans secured by a loans must include an itemized estimate for closed-end credit. In the consumer
dwelling in which the interest rate or of the amount for taxes and insurance if testing conducted for the Board, when
payments may vary. 15 U.S.C. the creditor will establish an escrow consumers were asked what factors they
1638(b)(2)(C). Specifically, creditors account. If a borrower may make one or considered when looking for a mortgage,
must provide ‘‘examples of adjustments more payments of interest only, all by far the most common answers were
to the regular required payment on the payments disclosed must be itemized to that they wanted to obtain the lowest
extension of credit based on the change show the amount that will be applied to interest rate possible and that they
in the interest rates specified by the interest and the amount that will be wanted the loan with the lowest
contract for such extension of credit. applied to principal. Special rate and possible monthly payment. However, as
Among the examples required * * * is payment disclosures would be required they described their thought process,
an example that reflects the maximum for loans with negative amortization. most consumers were primarily focused
payment amount of the regular required Creditors must provide the information on the initial rate and payment, rather
payments on the extension of credit, about interest rates and payments in the than how those terms might vary over
based on the maximum interest rate form of a table, and creditors would not time. Testing conducted on the current
allowed under the contract. * * *’’ be permitted to include other unrelated transaction-specific TILA disclosures
TILA Section 128(b)(2)(C), 15 U.S.C. information in the table. indicated that consumers would like to
1638(b)(2)(C). Creditors must provide Scope of proposed § 226.38(c). TILA see the interest rate disclosed on the
these disclosures within three business Section 128(b)(2)(C) applies to all form.
days of receipt of the consumer’s transactions secured by a dwelling. The In addition, testing indicated that the
written application, as provided in Board proposes to expand the current TILA payment schedule, which
§ 226.19(a). TILA Section 128(b)(2)(C) requirement in Section 128(b)(2)(C) to does not show the relationship between
provides that these examples must be in include loans secured by real property interest rate and payment, is ineffective
conspicuous type size and format and that do not include a dwelling. As at communicating to consumers what
discussed in § 226.19(a), unimproved could happen to their payments over
80 For a mortgage transaction with rates or fees time on an ARM. Most participants said
that exceed certain thresholds, TILA Section 129 81 TILA Section 128(b)(2)(C) also provides that the
they liked the current presentation of
requires special disclosures regarding payments Board’s testing should ensure that consumers can
three business days before consummation of the understand that there is no guarantee that they will
the payments because it was specific
transaction. See § 226.32(c) (3), (4). The Board is not be able to refinance. Proposed § 226.38(f)(3) and detailed. However, when shown a
proposing revisions to these disclosures. implements this aspect of Section 128(b)(2)(C). payment schedule for an ARM with an
introductory rate, many incorrectly payment amounts for negatively those cases the creditor must show the
assumed that payments shown were in amortizing loans. For such loans in interest rate again, even though it is
fact their future payments, rather than which the consumer may choose redundant, as discussed under
payments based on the fully-indexed between several payment options, the § 226.38(c)(2)(i)(C) below.
rate at consummation. table will show only two: the minimum
Under the Board’s proposal, the Interest Rates for Adjustable-Rate
required payment option, and the fully
interest rate and payment would be Mortgages and Step-Rate Mortgages
amortizing option. Creditors may,
shown together in a table. The Board however, disclose other payment Interest rates at consummation,
believes that highlighting the options to the consumer, outside the maximum possible at first adjustment,
relationship between the interest rate segregated information required by this and maximum possible interest rate. As
and payment will enhance consumers’ section. discussed, TILA Section 128(b)(2)(C)
understanding of loan terms. If the requires creditors to disclose examples
interest rate is adjustable, the table 38(c)(1) Format of payment increases including the
would indicate changes in the Proposed § 226.38(c)(1) would require maximum possible payment, for
adjustable interest rate over time. In the interest rate and payment adjustable-rate mortgages and mortgages
addition, payment changes that are not information to be disclosed in the form where payments may vary. Under
based on adjustments to the interest rate of a table. This would ensure that § 226.38(c)(2)(i), creditors would
would also be indicated in the table. payment examples required by the disclose more than one interest rate and
Highlighting potential changes to the MDIA are in conspicuous format as corresponding monthly payment for
interest rate and payment based on required by TILA Section 128(b)(2)(C). adjustable-rate mortgages and step-rate
maximum interest rate increases, rather The MDIA also requires conspicuous mortgages. Under proposed
than showing a set payment schedule type size for the examples. Under the § 226.38(c)(2)(i)A)(I), the creditor must
based on the assumption that the index proposal, all disclosures must be in a provide the interest rate at
used to calculate a adjustable interest minimum 10 point font, including the consummation, and the period of time
rate will not change, will clarify to table required under § 226.38(c), to until the first adjustment. If the interest
consumers not only that their interest ensure that they are clear and rate at consummation is less than the
rate and payments may change, but also conspicuous. See proposed § 226.37(a). fully-indexed rate (the sum of the index
how the interest rate and payment may The Board’s proposal would prescribe and margin at consummation), the
change over time. Consumers would be the number of interest rates and interest rate must be labeled as
better able to determine if a adjustable payments that could be shown in a ‘‘introductory.’’ Additional explanation
rate or payment loan will be affordable table. The number of columns and rows of discounted introductory rates is
and appropriate for their individual for the table required by this part would required in proposed § 226.38(c)(2)(iii),
circumstances. vary depending on whether the loan is as discussed below.
Definitions for § 226.38(c). Proposed an amortizing loan and whether it has Maximum at first adjustment. The
§ 226.38(c) uses several terms that are adjustable rates. However, tables Board proposes to require disclosure of
defined in proposed § 226.38(c)(7). disclosed under this section would have the maximum rate and payment at first
Under § 226.38(c)(7), the terms no more than 5 columns across, and adjustment, as one of the examples
‘‘adjustable-rate mortgage,’’ ‘‘step-rate creditors would not include information required by TILA Section 128(b)(2)(C).
mortgage,’’ and ‘‘interest-only’’ would in the table that is not required under Proposed § 226.38(c)(2)(i)(B)(1) requires
have the same meanings as in 226.38(c), to avoid information the creditor to provide the maximum
§ 226.38(a)(3). An ‘‘amortizing loan’’ overload. Model and Sample Forms interest rate applicable at the first
would be defined as a loan in which the would be provided in Appendix H. interest rate adjustment, and the
regular periodic payments cannot cause calendar month and year in which the
38(c)(2) Interest Rates
the principal balance to increase; the first scheduled adjustment occurs
term ‘‘negative amortization’’ would 38(c)(2)(i) Amortizing Loans would be required to be disclosed. The
mean a loan in which the regular Proposed § 226.38(c)(2)(i) would creditor would take into account any
periodic payments may cause the provide disclosure of interest rates for limitations on interest rate increases
principal balance to increase. Finally, amortizing loans. For a fixed-rate when determining the interest rate to be
the tern ‘‘fully-indexed rate’’ would mortgage with no scheduled payment disclosed under § 226.38(c)(2)(i)(B)(2). If
mean the interest rate calculated using increases or balloon payments, the the interest rate may reach the
the index value and margin. creditor would disclose only one maximum possible at the first
Proposed § 226.38(c)(2)(i) and (c)(3) interest rate. Fixed-rate loans with adjustment, the creditor should disclose
would require disclosure of interest payment increases would require the the rate as the maximum possible as
rates and payment amounts for creditor to disclose the interest rate with discussed below.
amortizing loans. Proposed each increase. For adjustable-rate The Board proposes to require
§ 226.38(c)(7) defines an amortizing loan mortgages and step-rate mortgages, more disclosure of the maximum interest rate
as one in which the regular periodic than one interest rate must be shown, as at first adjustment because many
payments cannot cause the principal discussed below. consumers may take out adjustable-rate
balance to increase. Thus, loans with mortgages, planning to sell the home or
interest-only payments are amortizing Interest Rates for Fixed-Rate Mortgages refinance the loan before the first
loans. If an escrow account will be For fixed-rate mortgages, proposed interest rate adjustment. It is important
established for an amortizing loan, § 226.38(c)(2)(i)(A) would require for consumers to know how much their
creditors would be required to itemize creditors to disclose the interest rate rate and payment might increase at that
the payment to show amounts to be applicable at consummation. If the point, if they are unable to refinance or
included for taxes and insurance. See transaction does not provide for any sell the home before the first
proposed § 226.38(c)(3)(i)(C). Proposed payment increases, only one interest adjustment. The Board believes that for
§§ 226.38(c)(2)(ii) and 226.38(c)(4) rate would be disclosed. However, some the same reason, the first interest rate
would require a special table for fixed-rate mortgages will have increase should be shown for step-rate
disclosures of interest rates and scheduled payment increases and in mortgages. Although such mortgages do
not present the uncertainty that an requirement to begin repaying loan 38(c)(2)(iii) Introductory Rate Disclosure
adjustable-rate mortgage does, principal and not to an interest-rate for Adjustable-Rate Mortgages
consumers need to be informed of what adjustment. Many adjustable-rate mortgages have
their rate will increase to at the first The same is true for adjustable-rate an introductory or teaser rate, set below
increase. Consumer testing conducted the index and margin used for later
mortgages and step-rate mortgages. For
for the Board shows that most adjustments. Proposed § 226.38(c)(2)(iii)
example, some adjustable-rate
consumers would find this information would require a special disclosure in
useful in determining whether the loan mortgages permit the borrower to make
interest-only payments for a specified the case of an introductory rate. In
is affordable and suitable to their needs. consumer testing conducted for the
Maximum possible interest rate. period, such as the first five years
following consummation. A scheduled Board, many participants did not
Proposed § 226.38(c)(2)(i)(B)(3) would understand the ramifications of an
require creditors to disclose the payment increase may or may not
introductory interest rate. Participants
maximum interest rate that could apply, coincide with a scheduled interest rate
understood that if market interest rates
and the earliest possible year in which adjustment. Under proposed increased, the interest rate and payment
that rate could apply, as required by § 226.38(c)(2)(i)(C), if a scheduled on their loan would increase. However,
TILA Section 128(b)(2)(C). The Board payment increase does not coincide participants did not understand that if
proposes to require this disclosure for with an interest rate adjustment (or rate they had an introductory rate, their
step-rate mortgages as well, because the increase for a step-rate mortgage), interest rate and payment would
rate and payment will increase in such creditors must include a column that increase when the introductory rate
loans. Consumer testing conducted for discloses the interest rate that would expired, even if market interest rates did
the Board suggests that consumers find apply at the time of the increase, the not increase. Several different
this information about the maximum date the increase is scheduled to occur, disclosures designed to show the impact
rate and payment particularly important and an appropriate description such as of an introductory rate were tested in
in evaluating a loan offer for an tabular form, with mixed results.
‘‘first increase’’ or ‘‘first adjustment’’ as
adjustable-rate mortgage. Participants Therefore, the Board proposes to require
appropriate. Proposed comment
indicated that this information is most an explanation of the introductory rate
useful to them in determining whether 38(c)(2)(i)(C)–1 provides clarifying
examples. The Board is not aware of below the table itself. Proposed
such a loan was affordable. If an § 226.38(c)(2)(iii) would require
amortizing adjustable-rate mortgage has step-rate loans with interest-only
features; however, if such a loan is disclosure of the introductory rate, how
intermediate limitation on interest rate
offered, creditors would disclose the long it will last, and that the interest
increases, then the table required by
payment increase in the same manner as rate will increase at the first scheduled
proposed § 226.38(c) would have at least
for an adjustable-rate mortgage. adjustment even if market rates do not
three columns; if the transaction has no
increase. Creditors would also disclose
intermediate limitation on interest rates
38(c)(2)(ii) Negative Amortization Loans the fully indexed rate that otherwise
then the table would have two columns,
would apply at consummation.
one showing the rate at consummation Proposed § 226.38(c)(2)(ii) would Proposed § 226.37(d)(4) would provide
and the other showing the maximum require disclosure of the interest rate that this disclosure must be prominent
possible under the loan’s terms. applicable at consummation. Many
Interest rate applicable at scheduled and placed in a box under the table.
payment option loans do not provide
payment increase. Some mortgages 38(c)(3) Payments for Amortizing Loans
any limitations on interest rate increases
provide for a payment increase that is
(‘‘interest rate caps’’); the only cap is the 38(c)(3)(i) Principal and Interest
not attributable to an interest rate
maximum possible interest rate required Payments
adjustment or increase. For example, a
loan may permit the borrower to make by § 226.30(a.) For payment option Section 226.38(c)(3)(i) would require
payments that cover only accrued loans, the creditor would disclose the disclosure of the principal and interest
interest for some specified period, such interest rate in effect at consummation, payment that corresponds to each
as the first five years following and assume that the interest rate reaches interest rate disclosed under proposed
consummation; at the end of this the maximum at the next adjustment— § 226.38(c)(2)(i). Special itemization of
‘‘interest-only’’ period, the borrower often the second month after the payment is required, however, if the
must begin making larger payments to consummation. The creditor would loan permits the consumer to make any
cover both interest accrued and disclose that rate for the first and second payments that will be applied only to
principal. Proposed § 226.38(c)(2)(i)(C) scheduled payment increases, as interest accrued. Proposed
would provide that, where such an explained more fully in § 226.38(c)(4) § 226.3(c)(3)(ii)(C) would require
increase will not coincide with an below, and in the last column, when the disclosure of an estimate of the amount
interest rate adjustment or increase, the loan has recast and the consumer must of taxes and insurance, including
creditor must include a column that first make a fully amortizing payment. mortgage insurance. Proposed
discloses the interest rate that would The proposed approach to interest rates § 226.3(c)(3)(i)(D) would require
apply at the time the adjustment is for negative amortization loans is disclosure of the estimated total
scheduled to occur, and the date in consistent with the MDIA, which payment including principal, interest,
which the increase would occur. The requires disclosure of the payment at and taxes and insurance.
creditor must include a description such Principal and interest payments.

the maximum possible rate, and other
as ‘‘first increase’’ or ‘‘first adjustment.’’ Proposed § 226.38(c)(3)(i) would require
examples of payment increases.
Thus, for a fixed-rate mortgage, the the disclosure of payment amounts that
creditor would show the same interest Additional proposed rules for correspond to the interest rates
rate twice (and the corresponding disclosing the interest rate on a loan disclosed under § 226.38(c)(2)(i).
payments as discussed in § 226.38(c)(4) with negative amortization are Proposed comment 38(c)(3)–1 would
below). The Board believes this would discussed under 38(c)(6) Special clarify that the interest rate and
help the consumer understand that the Disclosures for Loans with Negative payment amount applicable at
increase in payment is due to the Amortization, below. consummation are required to be
disclosed for all loans. In addition, the disclosed separately, below the table, in The Board believes that in order for
comment would clarify that if a accordance with § 226.38(c)(5). consumers to fully understand the
payment amount is required to be Principal and interest payment monthly amount they actually will be
disclosed under more than one itemization. Under proposed required to pay for a particular loan,
subparagraph, the payment should only § 226.38(c)(3)(i) and (ii), the format of information about payments for taxes
be disclosed once. For example, in an the payment disclosure would vary and insurance is necessary. Escrow
adjustable-rate transaction with a depending on whether all regular information would be included in the
balloon payment, if the balloon payment periodic payment amounts will include table to make it easier for consumers to
will occur at the same time the loan may principal and interest. If all regular identify whether there is an escrow and
reach its maximum interest rate, only periodic payments include principal how much of their payment would
one disclosure of the interest rate and and interest, under § 226.38(c)(3)(i) each apply to the escrow.
payment is required. Proposed comment payment amount would be listed in a Proposed comment 38(c)(3)(i)(C)–1
38(c)(3)–2 provides examples of the single row in the table with a would clarify the types of taxes and
types of loans that trigger additional description such as principal and insurance that would be required to be
payment disclosures. interest (except that a balloon payment included in the estimate. Proposed
Fixed-rate mortgages. Under proposed would be disclosed in accordance with comment 38(c)(i)(C)–2 would provide
§ 226.38(c)(3)(i)(A), for fixed-rate § 226.38(c)(5)). If any regular periodic guidance on how to determine the
transactions where the regular periodic payment amounts will include interest length of time for which mortgage
payment fully amortizes the loan and but not principal, under insurance payments must be included
there are no scheduled payment § 226.38(c)(3)(ii) all payments for the in the estimate. Under the proposed
increases (such as upon the expiration loan must be itemized into principal comment, which is substantially similar
of an interest-only feature), the payment and interest. For a payment that to current comment 18(g)–5, the
amount including both principal and includes no principal, the creditor must payment amount should reflect the
interest would be required to be indicate that none of the payment consumer’s mortgage insurance
disclosed. amount will be applied to principal. payments until the date on which the
Fixed-rate interest-only loans. For The creditor must label the dollar creditor must automatically terminate
fixed-rate transactions in which the amount to be applied to interest coverage under applicable law, even
consumer may make one or more ‘‘Interest Payment.’’ The Board proposes though the consumer may have a right
this itemization and labeling to to request that the insurance be
interest-only payments, proposed
emphasize for consumers the impact of canceled earlier.
§ 226.38(c)(3)(i)(B) would require
making interest-only payments. Many The Board solicits comment on
disclosure of the payment at any whether premiums or other amounts for
participants in the Board’s consumer
scheduled increase in the payment credit life insurance, debt suspension
testing did not clearly understand that
amount and the date on which the and debt cancellation agreements and
an ‘‘interest-only’’ loan was different
increase is scheduled to occur. For other similar products should be
from a loan in which all payments are
example, in a fixed-rate interest-only included or excluded from the
applied to principal and interest
loan a scheduled increase in the disclosure of escrows for taxes and
without this emphasis and the statement
payment amount from an interest-only insurance. Including such amounts in
in the loan summary required in
payment to a fully amortizing payment proposed § 226.38(a)(3). the estimated escrow and monthly
would be required to be disclosed. Balloon payment. Under proposed payment, particularly on the early TILA
Similarly, in a fixed-rate balloon loan, § 226.38(c)(5)(i), if a payment amount is disclosures delivered within three days
the balloon payment must be disclosed, a balloon payment, the payment must be of application, may cause some
but it would be disclosed under the disclosed in the last row of the table consumers to believe these products are
table pursuant to § 226.38(c)(5). rather than in a column, unless it required as part of the loan agreement.
Adjustable-rate and step-rate coincides with an interest rate This may affect consumers’ ability to
transactions. Under proposed adjustment or other payment increase weigh the relative merits of credit
§ 226.38(c)(3)(i), for adjustable-rate and such as the expiration of an interest- insurance and other similar products
step-rate transactions, a payment only option. Section 226.38(c)(5)(i) and determine whether the product is
amount corresponding to each interest would clarify that a payment is a appropriate for their circumstances.
rate in § 226.38(c)(2) would be required balloon payment if it is more than twice Total periodic payments. Proposed
to be disclosed. the amount of other payments. This is § 226.38(c)(3)(i)(D) would require
Adjustable-rate interest-only and consistent with how balloon payments disclosure of the total estimated
balloon loans. For adjustable-rate are defined for purposes of restrictions monthly payment. The total estimated
transactions in which the consumer may on balloon payments for higher-priced monthly payment is the sum of the
make interest-only payments, proposed and HOEPA loans. principal and interest payments and the
§ 226.38(c)(3)(ii) would require Escrows; mortgage insurance estimated taxes and insurance payments
additional disclosures. Section premiums. Proposed § 226.38(c)(3)(i)(C) required to be disclosed in
226.38(c)(3)(i)(B) would require would provide that if an escrow account § 226.38(c)(3)(i)(C).
disclosure of the payment amount at will be established, the creditor must
any scheduled payment increase that disclose the estimated payment amount 38(c)(4) Periodic Payments for Loans
With Negative Amortization
does not coincide with an interest rate for taxes and insurance, including
adjustment, and the date on which the mortgage insurance. For transactions For each interest rate disclosed under
increase is scheduled to occur. In secured by real property or a dwelling, § 226.38(c)(2)(ii), the creditor would
addition, for an adjustable-rate balloon creditors would no longer have the disclose a corresponding payment. One
loan, if the balloon payment will not flexibility provided in existing 226.18(g) row of the table would show the fully
coincide with either the first interest to exclude escrow amounts. Consumer amortizing payment for each interest
rate adjustment or the time when the testing conducted for the Board shows rate; for purposes of calculating these
interest rate reaches its maximum, the that many consumers compare loans payments the creditor would assume the
balloon payment is required to be based on the monthly payment amount. interest rate reaches the maximum at the
earliest date, and that the consumer amortizing payment, a disclosure of one 38(c)(6) Special Disclosures for Loans
makes only fully amortizing payments. additional minimum payment With Negative Amortization
The other row of the table would show adjustment would be required. Some mortgage transactions permit
the minimum required payment for each Fully amortizing payment amount. the borrower to make payments that are
rate, until the recast point. At the recast Proposed § 226.38(c)(4)(iii) would insufficient to cover all of the interest
point, the minimum payment row require disclosure of the amount of the accrued, and the unpaid interest is
would show the fully amortizing fully amortizing payment, assuming that added to the loan’s balance. Thus,
payment. For purposes of the minimum the consumer makes only fully although the borrower is making
payment row, creditors must assume the amortizing payments beginning at payments, the loan balance is increasing
interest rate reaches the maximum at the consummation. The fully amortizing instead of decreasing. Negative
earliest date, and that the consumer payment row must be filled in for each amortization could occur on a fixed-rate
makes only the minimum required interest rate required to be disclosed mortgage or an adjustable-rate mortgage.
payment for as long as permitted under under § 226.38(c)(4)(ii) and (iv). The Mortgages with negative amortization
the terms of the legal obligation. Board believes that contrasting the fully were relatively rare until the early part
Minimum payment amounts. amortizing payment with the minimum of this decade, when the ‘‘payment
Proposed § 226.38(c)(4)(i)(A) would required payment will help consumers option’’ loan began to grow in
require disclosure of the minimum to understand the implications of popularity.82 Payment option loans
required payment at consummation. making the fully amortizing payment have adjustable rates, and allow the
The proposal would require a disclosure and the minimum payment. In borrower to choose among up to five
of the amount of the minimum payment consumer testing, participants monthly payment options, including a
applicable for each interest rate required understood from the table that if they minimum payment that would result in
to be disclosed under § 226.38(c)(2)(ii), made the fully amortizing payment each negative amortization. Other options
and the date. Under proposed month they would pay their loan off, would include an interest-only option, a
§ 226.38(c)(4)(i)(C), the creditor must and that if they instead made the fully amortizing option, and the option
provide a statement that the minimum minimum payment they would not pay to make extra payments of principal and
payment will cover only some of the the loan off and in fact would increase pay the loan off early. Typically,
interest accrued and none of the the amount that they owe. payment option loans permit consumers
principal, and will cause the principal to make minimum payments for a
Statement of balance increase and
balance to increase. The Board proposes limited time, such as for the first five
other information. Proposed
this required statement to ensure that years following consummation or until
§ 226.38(c)(4)(vi) would require a
consumers are informed about the the loan’s principal balance reaches 115
statement of the amount of the increase
consequences of making minimum percent of the original balance,
in the loan’s principal balance if the
payments. As stated above, participants whichever occurs first. Upon either
consumer makes only minimum
in the Board’s consumer testing were event, the consumer must begin to make
payments and the earliest month and
unfamiliar with the concept of negative fully amortizing payments.
amortization and struggled to year in which the minimum payment
will recast to a fully amortizing payment Payment option loans and other
understand why a loan’s balance would nontraditional mortgages can result in
increase when payments were made. under the terms of the legal obligation,
assuming that the interest-rate reaches significant ‘‘payment shock’’ for
Payment increases. As noted above, borrowers, particularly when the loan
many payment option loans do not have its maximum at the earliest possible
time. As noted, participants in testing ‘‘recasts’’ and a fully amortizing
interest rate caps, and thus the interest
expressed confusion about negative payment must be made. Concerns about
rate may reach its maximum possible
amortization; the Board believes this payment shock led the Board, OCC,
amount at the first interest rate
disclosure and the other required OTS, FDIC and NCUA to propose
adjustment. However, such loans may
disclosures in the table should help supervisory guidance on nontraditional
have limits on the amount that the
consumers understand the risks of mortgages in 2005, and issue final
minimum payment may increase
making minimum payments. guidance in October 2006.83 The
following an interest rate adjustment.
In addition, the explanation preceding guidance emphasizes that institutions
For example, a minimum payment
increase may be limited by a certain the table would provide the consumer’s should use prudence in underwriting
percentage, such as 7.5% greater than option to make fully amortizing nontraditional mortgages, and should
the previous minimum payment. (Such payments or to make minimum provide accurate and balanced
limits are generally subject to conditions payments, the maximum possible information to consumers before the
and will not apply either at a specific interest rate, the earliest number of consumer is obligated on such a
time, such as at the fifth year of the loan, months or years in which the interest mortgage. The agencies published
or when the loan balance reaches a rate could reach its maximum, and the illustrations to assist financial
certain maximum.) Under proposed amount of estimated taxes and institutions in providing information
§ 226.38(c)(2)(ii)(D), if adjustments in insurance included in each payment that would help consumers understand
the minimum payment amount are disclosed. If the maximum interest rate the risks involved in nontraditional
limited such that the payment will not may be reached in less than a year the mortgages.84 Those illustrations were
fully amortize the loan even after the statement would be required to provide not consumer tested.
The Board’s consumer testing
interest rate has reached the maximum, the number of months after
a disclosure of the minimum payment consummation in which the interest rate indicates that the unusual and complex
amount at the first and second payment may reach its maximum, otherwise the nature of negative amortization loans
adjustments would be required. That is, statement would provide the number of requires a different approach to the
in cases where the first interest rate years. In addition, the creditor would 82 Interagency Guidance on Nontraditional
adjustment will be the only interest rate disclose whether an escrow account will Mortgage Product Risks, 71 FR 58609; October 4,
adjustment, but payment adjustments be established and if so, an estimate of 2006.
will continue to occur before the the amount for taxes and insurance 83 Id.
minimum payment recasts to a fully included in each periodic payment. 84 72 FR 31825, 318231; Jun. 8, 2007
disclosure of interest rates and which the consumer applied. Proposed the creditor would be required to
payments than for amortizing loans. § 226.38(d)(1) would require the creditor disclose the dates on which the full and
Nearly all participants in the Board’s to disclose information about the minimum payments may increase.
consumer testing were unfamiliar with following three terms: (1) Rate increases, Proposed comment 38(d)(1)–1 would
the concept of negative amortization, (2) payment increases, and (3) clarify that disclosing the date means
and technical explanations of negative prepayment penalties. Proposed that the creditor must disclose the
amortization proved challenging for § 226.38(d)(2) would require the creditor calendar month and year.
them. The Board believes that selected to disclose information about the Prepayment penalty. As currently
information about payment option loans following six terms, but only if they are required under TILA Section 128(a)(11),
may be more effective in conveying the applicable to the loan program: (1) 15 U.S.C. 1638(a)(11), and
risks of such mortgages than extensive interest-only payments, (2) negative § 226.18(k)(1), if the obligation includes
text explaining negative amortization amortization, (3) balloon payment, (4) a finance charge computed from time to
and its impact. demand feature, (5) no-documentation time by application of a rate to the
Accordingly, the Board developed or low-documentation loans, and (6) unpaid principal balance, proposed
and tested an interest rate and payment shared-equity or shared-appreciation. § 226.38(d)(1)(iii) would require the
summary table designed to inform The ‘‘Key Questions about Risk’’ creditor to indicate whether or not a
consumers about the risks of a payment disclosure would be subject to special penalty will be imposed if the obligation
option loan. The proposed rules would format requirements, including a tabular is prepaid in full. If the creditor may
also require disclosure of the interest format and a question and answer impose a prepayment penalty, the
rate and payment for a loan with format, as described under proposed creditor would disclose the
negative amortization that is not an § 226.38(d)(3). circumstances under which and period
adjustable rate mortgage. However, the in which the creditor would impose the
Board found no examples of such loans 38(d)(1) Required Disclosures penalty and the amount of the
in the marketplace, and seeks comment As noted above, proposed maximum penalty. Because of the
on whether such loans are offered and § 226.38(d)(1) would require the creditor importance of prepayment penalties, the
if so, whether proposed § 226.38(c) to disclose information about the proposed rule would also require
provides sufficient guidance on following three terms: (1) Rate increases, disclosure of prepayment penalties, if
disclosing such loans. (2) payment increases, and (3) applicable, under proposed
The interest rate and payment prepayment penalties. The Board § 226.38(a)(5). To avoid duplication,
summary would display only two believes that these three factors should proposed comments 38(d)(1)(iii)–1 to –3
payment options, even if the terms of always be disclosed. Rate and payment would cross-reference proposed
the legal obligation provide for others, increases pose the most direct risk of comments 38(a)(5)–1 to –3 for
such as an option to make interest-only payment shock. In addition, consumer information about whether there is a
payments. The table would show only testing consistently showed that interest prepayment penalty, and examples of
the option to make minimum payments rate and monthly payment were the two charges that are or are not prepayment
that would result in negative most common terms that participants penalties. In addition, proposed
amortization, and the option to make used to shop for a mortgage. The Board comment 38(d)(1)(iii)–4 would cross-
fully amortizing payments. The Board also believes that the prepayment reference comment 38(a)(5)–6 to
believes that displaying all of the penalty is a key risk factor because it is determine the maximum prepayment
options in the table would have the critical to the consumer’s ability to sell penalty. Proposed comment
unintended consequence of confusion the home or refinance the loan to obtain 38(d)(1)(iii)–5 would cross-reference
and information overload for a lower rate and payments. While the comment 38(a)(5)–7 for information
consumers. Creditors would be free to other risk factors are important if about any differences resulting from the
provide information on options not contained in the loan program, the consumer’s payment patterns and
displayed in the table, outside the Board believes it appropriate to include basing disclosures on the required
segregated information required under those factors only as applicable to avoid payment for a negative amortization
this subsection. information overload. loan. Although under proposed
In addition, to help consumers Rate increases. Proposed § 226.38(a)(5) the disclosure of the
navigate the information in the table, § 226.38(d)(1)(i) would require the prepayment penalty would appear on
proposed § 226.38(c)(6) would require a creditor to indicate whether or not the the first page of the transaction-specific
statement directly above the interest rate interest rate on the loan may increase. TILA disclosure only if this feature were
and payment summary table explaining If the interest rate on the loan may present in the loan, the disclosure
that the loan offers payment options. A increase, then the creditor would would always appear on the second
disclosure of the maximum possible indicate the frequency with which the page in the ‘‘Key Questions’’ disclosure
balance would also be required, directly interest rate may increase and the date in order for the consumer to verify
below the table, to help ensure that on which the first interest rate increase whether or not there is a prepayment
consumers understand the nature and may occur. Proposed comment 38(d)(1)– penalty associated with the loan.
risks involved in loans with negative 1 would clarify that disclosing the date
means that the creditor must disclose 38(d)(2) Additional Disclosures
amortization.
the calendar month and year. As noted above, proposed
38(d) Key Questions About Risk
Payment increases. Proposed § 226.38(d)(2) would require the creditor

Based on consumer testing, as § 226.38(d)(1)(ii) would require the to disclose information about the
discussed in greater detail in creditor to indicate whether or not the following six terms, as applicable: (1)
§ 226.19(b)(2) above, the Board proposes periodic payment on the loan may Interest-only payments, (2) negative
to require creditors to disclose certain increase. If the periodic payment on the amortization, (3) balloon payment, (4)
information grouped together under the loan may increase, then the creditor demand feature, (5) no-documentation
heading ‘‘Key Questions about Risk,’’ would be required to indicate the date or low-documentation loans, and (6)
using that term. This disclosure would on which the first payment increase shared-equity or shared-appreciation.
be specific to the loan program for may occur. For payment option loans, Proposed comment 38(d)(2)–1 would
clarify that ‘‘as applicable’’ means that creditor is required to give the consumer under § 226.38(d)(2)(iii), prepayment
any disclosure not relevant to a before the creditor exercises such right. penalties under § 226.38(d)(1)(iiii),
particular loan may be omitted. Proposed comment 38(d)(2)(iv)–1 would demand feature under § 226.38(d)(2)(iv),
Although consumer testing showed that clarify that this requirement would no-documentation or low-
some participants felt reassured by apply not only to transactions payable documentation loans under
seeing all of the risk factors whether the on demand from the outset, but also to § 226.38(d)(2)(v), and shared-equity or
factors were a feature of the loan or not, transactions that convert to a demand shared-appreciation under
the Board is concerned about the status after a stated period. Proposed § 226.38(d)(2)(vi). This order would
potential for information overload if the comment 38(d)(2)(iv)–2 would cross- ensure that consumers receive critical
entire list is included. reference comment 18(i)–2 regarding information about their payments first.
Interest-only payments. Proposed covered demand features.
§ 226.38(d)(2)(i) would require the No-documentation or low- 38(e) Information About Payments
creditor to disclose that periodic documentation loans. Proposed Proposed § 226.38(e) would require
payments will be applied only toward § 226.38(d)(2)(v) would require the disclosure of additional information
interest on the loan. The creditor would creditor to disclose that the consumer’s about interest rates and payments,
also disclose any limitation on the loan will have a higher rate or fees including disclosure of the amount
number of periodic payments that will because the consumer did not document financed, the ‘‘interest and settlement
be applied only toward interest on the employment, income, or other assets. In charges,’’ (currently the ‘‘finance
loan, that such payments will cover the addition, the creditor would disclose charge’’), the total of payments, and the
interest owed each month, but none of that if the consumer provides more number of payments. Proposed
the principal, and that making these documentation, the consumer could § 226.38(e) would also require
periodic payments means the loan decrease the interest rate or fees. disclosure of whether or not an escrow
amount will stay the same and the Shared-equity or shared-appreciation. account for taxes and insurance is
consumer will be not have paid any of Proposed § 226.38(d)(2)(vi) would required, a disclosure about private
the loan amount. For payment option require the creditor to disclose a mortgage insurance, if applicable, and
loans, the creditor would disclose that statement that any future equity or information about limitations on rate
the loan gives the consumer the choice appreciation in the real property or and payment changes. In the consumer
to make periodic payments that cover dwelling that secures the loan must be testing conducted by the Board,
the interest owed each month, but none shared, along with a statement of the consumers did not find certain terms
of the principal, and that making these events that may trigger such obligation. that are prominently disclosed on the
periodic payments means the loan current transaction-specific TILA form
38(d)(3) Format Requirements
amount will stay the same and the to be useful. Specifically, the amount
consumer will not have paid any of the Based on consumer testing, as financed, the total of payments, and the
loan amount. discussed more fully in §§ 226.19(b)(2) finance charge were less useful to
Negative amortization. Proposed and 226.37, proposed § 226.38(d)(3) consumers than other information such
§ 226.38(d)(2)(ii) would require the would require the creditor to disclose as information about the loan amount,
creditor to disclose that the loan balance the ‘‘Key Questions about Risk’’ using a interest rates, and monthly payments.
may increase even if the consumer special format. Proposed The Board believes that it would
makes the periodic payments. In § 226.38(d)(3)(i) would require the enhance consumers’ overall
addition, the creditor would be required creditor to provide the disclosures understanding of the disclosures if these
to disclose that the minimum payment required in § 226.38(d)(1) and (d)(2), as items were placed less prominently on
covers only a part of the interest the applicable, in the form of a table with the form. In addition, by placing these
consumer owes each period and none of headings, content and format terms in the context of a larger
the principal, that the unpaid interest substantially similar to Model Forms H– explanatory statement, some consumers
will be added to the consumer’s loan 19(A), H–19(B), or H–19(C) in Appendix may better be able to understand these
amount, and that over time this will H. Only the information required or terms. At the same time, consumer
increase the total amount the consumer permitted by § 226.38(d)(1) and (2) testing conducted for the Board has
is borrowing and cause the consumer to would be permitted in this table. In shown that there is other information
lose equity in the home. addition, under § 226.38(d)(3)(ii), the about the loan terms that consumers
Balloon payment. Proposed disclosures would be required to be find beneficial that is not currently
§ 226.38(d)(2)(iii) would require the grouped together and presented in the disclosed on the transaction-specific
creditor to disclose that the consumer format of a question and answer in a form. Specifically, the Board believes
will owe a balloon payment, along with manner substantially similar to Model that consumers would find it beneficial
a statement of the amount that will be Form H–19(A), H–19(B), or H–19(C) in to have explanations of how the interest
due and the date on which it will be Appendix H. Proposed rate or payment amounts can change
due. Proposed comment 38(d)(2)(iii)–1 § 226.38(d)(3)(iii) would further require and whether there are limits on those
would clarify that the creditor must the creditor to disclose each affirmative changes, and notification of whether an
make this disclosure if the loan program answer in bold text and in all escrow account or private mortgage
includes a payment schedule with capitalized letters, but negative answers insurance are required.
regular periodic payments that when would be disclosed in nonbold text.
38(e)(1) and (2) Rate Calculation; Rate
aggregated do not fully amortize the Finally, proposed 226.38(d)(3)(iv)

outstanding principal balance. would require the creditor to make the and Payment Change Limits
Demand feature. As currently disclosures, as applicable, in the Proposed §§ 226.38(e)(1) and
required under § 226.18(i), proposed following order: rate increases under 226.38(e)(2) would require disclosures
§ 226.38(d)(2)(iv) would require the § 226.38(d)(1)(i), payment increases of how the consumer’s variable interest
creditor to disclose a statement that the under § 226.38(d)(1)(ii), interest-only rate is calculated, of any limitations on
creditor may demand full repayment of payments under § 226.38(d)(2)(i), adjustments to the interest rate, and of
the loan, along with a statement of the negative amortization under any limitations on payment adjustments
timing of any advance notice the § 226.38(d)(2)(ii), balloon payments in negatively amortizing loans. The
requirements under proposed (for example, the creditor’s prime rate), substantially similar to the following:
§§ 226.38(e)(1) and 226.38(e)(2) to the creditor would be permitted to ‘‘Private Mortgage Insurance (PMI) is
provide disclosures of how the rate is comply with the disclosure requirement required for this loan. It is included in
calculated and any limitations on by providing either a brief description of your escrow.’’ If other mortgage
adjustments to the interest rate are that index or a statement that any insurance is required, such as insurance
similar to the requirements of current increase is in the discretion of the or guaranty obtained from a government
§§ 226.18(f)(1)(i) and 226.18(f)(1)(ii) for creditor. An external index, however, agency, the creditor would be required
transactions not secured by the would be required to be identified. to omit the word ‘‘private’’ from the
consumer’s principal dwelling or Proposed § 226.38(e)(2) would require description.
secured by the consumer’s principal a statement of any limitations on the
increase in the interest rate in a 38(e)(5) Total Payments
dwelling with a term of one year or less.
Currently, for transactions secured by variable-rate transaction, and, for 38(e)(5)(i) Total Payments
the consumer’s principal dwelling with negatively amortizing loans, a statement Section 226.18(h), which implements
a term greater than one year, of any limitations on the increase in the TILA Section 128(a)(5) and (8), requires
§ 226.19(b)(2) requires information minimum payment amount and the creditors to disclose the total of
about the variable interest rate to be circumstances under which the payments, using that term, together with
disclosed at the time an application minimum payment required may recast a descriptive statement that the
form is provided to the consumer, or to a fully amortizing payment. Proposed disclosed amount reflects the sum of all
before the consumer pays a comment 38(e)(2)–1, covering variable- scheduled payments disclosed under
nonrefundable fee, whichever is earlier. rate transactions, would be similar to § 226.18(g).85 15 U.S.C. 1638(a)(5),
However, under current § 226.18(f)(2), current comment 18(f)(1)(ii)–1 and (a)(8). Current comment 18(h)–1 allows
in the transaction-specific disclosures would clarify that the disclosure of creditors to revise the total of payments
provided before consummation, only a limitations on adjustments to the descriptive statement for variable rate
statement that the transaction contains a interest rate must provide any transactions to convey that the disclosed
variable-rate feature, and a statement maximum imposed on the amount of an amount is based on the annual
that variable-rate disclosures have been increase in the rate at any time, as well percentage rate and may change. In
provided earlier, are required. The as any maximum on the total increase addition, current comments 18(h)–3 and
Board believes that providing over the transaction’s term to maturity. –4 permit creditors to omit the total of
information about how the interest rate Proposed comment 38(e)(2)–2, payments disclosure in certain single-
is calculated and about limitations on covering negatively amortizing loans, payment transactions and for demand
interest rate adjustments along with would clarify that any limit imposed on obligations that have no alternate
other transaction-specific disclosures the change of a minimum payment maturity date.
would provide consumers with amount, whether or not the change Consumer testing conducted by the
meaningful information about their follows an adjustment to the interest Board showed that participants did not
particular interest rate in the context of rate, would be required to be disclosed. find the total of payments to be helpful
the entire transaction being disclosed. In addition, any conditions to the in evaluating a loan offer. Most
For adjustable-rate mortgages, proposed limitation on payment increases would participants understood that the total of
§ 226.38(e)(1) would require a statement also be required to be disclosed. For payments generally represented the sum
of how the interest rate is calculated. In example, some loan programs provide of scheduled payments and charges,
addition, if the interest rate at that the minimum payment will not including interest; several suggested
consummation is not based on the index increase by more than a certain that an explanation of how the total of
and margin that will be used to make percentage, regardless of the payments is calculated would facilitate
later interest rate adjustments, the corresponding increase in the interest comprehension of the term. Some
statement would be required to include rate. However, there may be exceptions participants expressed interest in
the time period when the initial interest to the limitation on the payment knowing the total of payments required
rate expires. increase, such as if the consumer’s to pay off the loan obligation, but
principal balance reaches a certain regarded this information as marginally
Proposed comment 38(e)(1)–1 is threshold, or if the legal obligation sets
similar to current comment 18(f)(1)(i)–1 useful to their shopping and decision-
out a scheduled time when payment making process. On the other hand,
for credit not secured by the consumer’s increases will not be limited.
principal dwelling, or secured by the some participants commented that
consumer’s principal dwelling with a 38(e)(3) Escrow information about the total of payments
term of one year or less. The proposed was unnecessary and therefore, could be
Proposed § 226.38(e)(3) would
comment would clarify that if the removed from the form entirely.
require, if applicable, a statement
interest rate is calculated based on the As part of consumer testing, the Board
substantially similar to the following:
addition of a margin to an index the shortened the term ‘‘total of payments’’
‘‘An escrow account is required for
statement would have to identify the to ‘‘total payments’’ because it is a more
property taxes and insurance (such as
index to which the rate is tied and the homeowner’s insurance). Your escrow 85 Section 128(a)(5) of TILA states that the total
margin that will be added to the index, payment is an estimate and can change of payments should be disclosed as the sum of the
as well as any conditions or events on at any time. See your Good Faith amount financed and finance charge. 15 U.S.C.
which the increase is contingent. When Estimate or HUD–1 form for more 1638(a)(5). Since 1969, the Board has required that
no specific index is used, the factors the total of payments equal the sum of payments
details.’’ If no escrow is required, the disclosed in the payment schedule under TILA
used to determine whether to increase creditor would be required to state that Section 128(a)(6) and § 226.18(g), which can
the rate would be required to be fact and that the consumer must pay include amounts beyond the amount financed and
disclosed. When the increase in the rate property taxes and insurance directly. the finance charge. 15 U.S.C. 1638(a)(6). Thus, if a
is discretionary, the fact that any creditor includes escrowed taxes and insurance in
increase is within the creditor’s 38(e)(4) Mortgage Insurance its disclosure of scheduled payments under
§ 226.18(g), it must also include those amounts in
discretion would be required to be Proposed § 226.38(e)(4) would the total of payments disclosed under § 226.18(h).
disclosed. When the index is internal require, if applicable, a statement 34 FR 02002; Feb. 11, 1969.
direct and simple term to communicate payments amount and the number of fully under § 226.4 of this proposal. 15
to consumers what the dollar amount payments. As discussed more fully U.S.C. 1605.
represented. In addition, an explanation under proposed § 226.38(c), the Board is Consumer testing conducted by the
of the assumptions underlying the total proposing to require creditors to provide Board indicated that many participants
payments calculation was added with interest rate and monthly payment could not correctly explain the term
an explicit reference to whether the disclosures in a tabular format for ‘‘finance charge.’’86 Most participants
amount included escrowed amounts. transactions secured by real property or thought that the finance charge
The total payment amount was a dwelling. As a result, creditors would represented the amount of interest the
disclosed with a statement explaining not be subject to the disclosure borrower would pay over the life of the
that a portion of it goes towards interest requirements for payment schedules loan, but did not realize that it also
and settlement charges. This approach under current § 226.18(g). However, included fees until directed to read a
enhanced consumer comprehension of proposed comment 38(e)(5)(i)–1 would statement that explained fees were
the total payments and, as discussed clarify that creditors should continue to included. Consumer testing showed that
more fully below, the interest and follow the rules in § 226.18(g) and comprehension of the finance charge
settlement charges disclosure. associated commentary, and comments improved when it was renamed to
The Board proposes to rename ‘‘total 17(c)(1)–8 and –10 for adjustable rate reflect the costs it actually
of payments’’ as ‘‘total payments,’’ and transactions, to calculate the total represented—the interest and settlement
require that it be disclosed with a payments for transactions secured by charges paid over the life of the loan.
descriptive statement, for transactions real property or a dwelling. New However, even when participants
secured by real property or a dwelling. comment 38(e)(5)(i)–2 would cross- understood what the finance charge
The Board proposes to make this reference to comment 18(g)–3, which signified they tended to disregard it,
adjustment pursuant to its exception the Board proposes to revise to require often because it was such a large dollar
authority under TILA Section 105(a). 15 creditors to disclose the total number of amount. Several participants
U.S.C. 1604(a). Section 105(a) payments for all payment levels as a commented that it is helpful to know
authorizes the Board to make exceptions single figure for transactions secured by the total amount of interest and fees that
and adjustments to TILA to effectuate real property or a dwelling. Proposed would be paid, but that they could not
the statute’s purposes, which include comment 38(e)(5)(i)–3 would provide otherwise purchase a home, or refinance
facilitating consumers’ ability to guidance regarding demand obligations. an existing obligation, in cash and
compare credit terms and helping In technical revisions, the text from therefore, already understood they
consumers avoid the uninformed use of current footnote 44 would be moved to would pay a significant amount in
credit. 15 U.S.C. 1601(a), 1604(a). The the regulation text in § 226.18(h); interest and fees when repaying the
Board believes that proposing the however, this text is not included in loan. Still, participants expressed an
exception is appropriate. Consumer proposed § 226.38(e)(5)(ii) because it is interest in knowing the total amount of
testing indicates that ‘‘total payments’’ not applicable to transactions secured interest and other charges they would
is more understandable to consumers by real property or a dwelling. pay over the full term of the loan.
than ‘‘total of payments.’’ As discussed more fully under The Board proposes to exercise its
The Board proposes to add new proposed § 226.38(e)(5)(ii) for interest authority under TILA Section 105(a) to
§ 226.38(e)(5)(i), which would and settlement charges (formerly rename ‘‘finance charge’’ as ‘‘interest
implement TILA Sections 128(a)(5), ‘‘finance charge’’), creditors would be and settlement charges,’’ except it from
128(a)(6), in part, and 128(a)(8) for required to group the total payments the requirement under TILA Section
transactions secured by real property or disclosure together with the interest and 122(a) that it be disclosed more
a dwelling. 15 U.S.C. 1638(a)(5), (a)(6), settlement charges and amount financed conspicuously, and require that it be
and (a)(8). Proposed § 226.38(e)(5)(i) disclosures under proposed disclosed with a descriptive statement.
would require creditors to disclose for § 226.38(e)(5)(ii) and (iii), respectively. 15 U.S.C. 1632(a); 1604(a), (f). Section
transactions secured by real property or 105(a) authorizes the Board to make
a dwelling, the number and total 38(e)(5)(ii) Finance Charge: Interest and
Charges exceptions or adjustments to TILA for
amount of payments that the consumer any class of transactions to effectuate
would make over the full term of the Section 226.18(d), which implements the statute’s purposes, which include
loan. The Board proposes that this TILA Sections 128(a)(3) and (a)(8), facilitating consumers’ ability to
disclosure be made together with a brief requires creditors to disclose the compare credit terms and helping
statement that the amount is calculated ‘‘finance charge,’’ using that term, and a consumers avoid the uninformed use of
assuming market rates will not change, brief description such as ‘‘the dollar credit. 15 U.S.C. 1601(a), 1604(a). In this
and that the consumer will make all amount the credit will cost you.’’ 15 case, the Board believes an exception
payments as scheduled for the full term U.S.C. 1638(a)(3), (a)(8). Current from TILA’s requirements are necessary
of the loan. The Board believes that comment 18(d)–1 allows creditors to to effectuate the Act’s purposes for
although the total payments disclosure modify this description for variable rate transactions secured by real property or
is not critical to the shopping or transactions with a phrase that the a dwelling. Although some consumers
decision-making process for many disclosed amount is subject to change. expressed interest in the finance charge
consumers, it provides information In addition, § 226.17(a)(2), which when evaluating a loan offer, consumer
about the total cost of the loan that implements TILA Section 122(a), testing showed that for most consumers
provides context for, and increases requires creditors to disclose the finance it is not as useful in the shopping or
understanding of, other required charge, and the annual percentage rate, decision-making process as other terms,
disclosures, such as interest and more conspicuously than any other and therefore, should be de-emphasized
settlement charges (formerly finance required disclosure, except the relative to other disclosed terms.
charge) and amount financed. creditor’s identity. 15 U.S.C. 1633(a). Consumer testing also showed that
Proposed comments 38(e)(5)(i)–1 The rules addressing which charges
through –3 would be added to provide must be included in the finance charge 86 See also Improving Consumer Mortgage
guidance to creditors on how to are set forth under TILA Section 106 Disclosures (stating that a number of respondents
calculate and disclose the total and § 226.4, and are discussed more misinterpreted the finance charge).
participants had a better understanding 38(e)(5)(iii) Amount Financed to disclose the amount financed with a
of the finance charge when it was Disclosure of amount financed. brief statement that the amount
disclosed as a portion of the total Section 226.18(b), which implements financed, plus the interest and
payments amount, accompanied by a TILA Section 128(a)(2)(A) and (a)(8), settlement charges, is the amount used
statement that explained the finance requires creditors to disclose the to calculate the annual percentage rate.
charge amount plus the amount amount financed, using that term, As noted above, creditors would be
financed is used to calculate the APR. together with a brief description that it required to disclose the amount
Thus, based on consumer testing, the represents the amount of credit of which financed grouped together with the total
Board believes that consumers will find the consumer has actual use. 15 U.S.C. payments and interest and settlement
the finance charge disclosure more 1638(a)(2)(A), (a)(8). Section 226.18(b) charges required under proposed
meaningful when described in a manner delineates how creditors should § 226.38(e)(5)(i) and (ii).
consistent with consumers’ general calculate the amount financed so that it The Board proposes this approach
understanding, and disclosed in context reflects the net amount of credit being pursuant to its authority under TILA
with other information that relate to extended. Section 105(a). 15 U.S.C. 1604(a).
loan payments, such as the total In consumer testing conducted for the Section 105(a) authorizes the Board to
payments. Board, virtually no participant prescribe regulations to effectuate the
The Board proposes to add new understood the disclosure of the amount statute’s purposes, which include
§ 226.38(e)(5)(ii), which would financed.87 The Board tested several facilitating consumers’ ability to
implement TILA Section 128(a)(3) and versions of the amount financed compare credit terms and helping
(8) for closed-end mortgage loans disclosure, with alternative formatting consumers avoid the uninformed use of
covered by § 226.38. 15 U.S.C. and descriptions, to explain briefly that credit. 15 U.S.C. 1601(a), 1604(a). Based
1638(a)(3), (8). Section 226.38(e)(5)(ii) it represents the amount of credit of on consumer testing, the Board believes
would require creditors to disclose the which the consumer has actual use to this proposal is appropriate to help
‘‘interest and settlement charges,’’ using purchase a home or refinance an serve TILA’s purpose of assuring a
that term, together with a brief existing loan. However, these changes meaningful disclosure of credit terms.
statement that the disclosed amount made no difference in participants’ The Board believes that requiring
represents part of the total payments understanding of the term. In addition, creditors to disclose the amount
amount disclosed. Creditors would also consumer testing showed that the financed in the loan summary with
be required to disclose the ‘‘interest and amount financed disclosure actually other key loan terms would add
settlement charges’’ grouped together detracted from consumers’ unnecessary complexity and result in
with the ‘‘total payments’’ and ‘‘amount understanding of other disclosures. ‘‘information overload.’’ Consumer
financed’’ disclosures under proposed Many consumers mistook the amount testing showed that when the amount
§ 226.38(e)(5)(i) and (iii), respectively, financed for the loan amount. Some of financed was disclosed with the total
under the subheading ‘‘Total these consumers were confused, payments and interest and settlement
Payments,’’ using that term. Based on however, because the amount financed charges, that consumer comprehension
consumer testing, the Board believes was slightly lower than the amount of the term improved slightly, and
this approach is appropriate to help borrowed in the hypothetical loan offer. confusion over other key loan terms,
serve TILA’s purpose of assuring a Consumers offered various explanations such as the loan amount, was
meaningful disclosure of credit terms. regarding the difference in the disclosed
Consumer testing suggests that eliminated. The Board believes that
amounts, including that the amount disclosing the amount financed as one
providing the disclosure of ‘‘interest and financed was the cost of purchasing a
settlement charges’’ in context of the component in the APR calculation
home less a down payment. Other provided consumers with a better
total payments improves consumers’ participants stated that the amount
ability to understand that this disclosure understanding of its significance to the
financed represented escrowed loan transaction. The Board also
represents the cost (i.e., interest and amounts. Sample disclosures were used
fees) of borrowing the loan amount. proposes new comment 38(e)(5)(iii)–3 to
to try to explain that the difference provide guidance regarding disclosure
The Board also proposes comment between the loan amount and amount
38(e)(5)(ii)–1 to provide guidance on of the ‘‘amount financed.’’
financed is attributable to prepaid Calculation of amount financed. The
how creditors must calculate and finance charges, but this explanation
disclose the interest and settlement Board proposes to simplify the
did not appear to improve consumer calculation of the amount financed for
charges. However, the proposed rule comprehension. Consumer testing also
would not allow creditors to modify the transactions subject to the disclosure
indicated that participants would not requirements of proposed § 226.38,
description that accompanies the consider the amount financed when
disclosure for variable-rate transactions. pursuant to the Board’s authority under
shopping for a mortgage or evaluating
The Board proposes this restriction TILA Section 105(a). The Board believes
competing loan offers.
under TILA Section 105(a) to help serve For these reasons, the Board proposes that the proposed simplification would
TILA’s purpose of meaningful to add new § 226.38(e)(5)(iii), which improve understanding of the rules and
disclosure of credit terms so that would implement TILA Section facilitate compliance with Regulation Z.
consumers will be able to compare more 128(a)(2)(A) and (a)(8) for transactions Under proposed § 226.38(e)(5)(iii), for a
readily the various credit terms secured by real property or a dwelling. transaction secured by real property or
available, and avoid the uninformed use 15 U.S.C. 1638(a)(2)(A), (a)(8). Section a consumer’s dwelling, the creditor
of credit. 15 U.S.C. 1601(a). Consumer 226.38(e)(5)(iii) would require creditors would determine the amount financed
testing showed that the simple by subtracting all prepaid finance
disclosure aided consumer 87 See also Improving Consumer Mortgage charges from the loan amount as defined
understanding. The Board believes that Disclosures at 35 (finding that most respondents in in proposed § 226.38(a)(1), discussed
adding language that states the consumer testing did not understand the term above. Under existing § 226.18(b) and its
disclosed amount is subject to change ‘‘amount financed,’’ and confused it for the loan staff commentary, creditors may elect
amount, and discussing the risks of falling subject
could dilute the significance of the to predatory lending practices as a result of this from among multiple alternatives in
disclosure. confusion). calculating the amount financed. All of
the permissible methods yield the same charges should be subtracted in step (3) to accept the loan (‘‘the MDIA
mathematical result. only if they were included in step (1) statement’’). 15 U.S.C. 1638(b)(2). The
The Board has received input from would be unnecessary, as such finance MDIA sets forth the following language
bank examiners and others that charges always would be included in for creditors to use in making this
providing multiple approaches to step (1). Proposed § 226.38(e)(5)(iii) disclosure: ‘‘You are not required to
calculation of the amount financed would provide definitively that the complete this agreement merely because
creates unnecessary complication. amount financed is determined simply you have received these disclosures or
Examiners also indicate that, of the by subtracting the prepaid finance signed a loan application.’’ 88 The Board
permissible approaches, mortgage charge from the loan amount. proposes to modify this statutory
lenders generally use the one that is The Board also is proposing comment language to facilitate consumers’ use
simplest and most straightforward. The 38(e)(5)(iii)–2 to clarify how to treat and understanding of the MDIA
Board is now proposing to require that creditor or third-party premiums and statement pursuant to its authority
approach and to eliminate the buy-downs for purposes of the amount under TILA Section 105(a) to make
alternatives. The Board also is financed calculation. This proposed adjustments that are necessary to
proposing to make a conforming comment is based on existing comment effectuate the purposes of TILA. 15
amendment to the staff commentary 18(b)–2, which relates to rebates and U.S.C. 1604(a). Based on consumer
under § 226.18(b) to reflect the fact that loan premiums. The discussion in testing, the Board believes that using
it would not apply to mortgages. comment 18(b)–2 was primarily plain language principles to revise the
TILA provides that the amount intended to address situations that are statutory language improves consumers’
financed is calculated as follows: more common in non-mortgage ability to understand the disclosure and
(1) Take the principal amount of the transactions, especially credit sales, would help serve TILA’s purpose to
loan (or cash price less downpayment); such as automobile financing. It provide meaningful disclosure of credit
(2) Add any charges that are not part provides that creditor-paid premiums terms.
of the finance charge or of the principal and seller- or manufacturer-paid rebates As part of consumer testing, the Board
amount and that are financed by the may be reflected in the disclosures included the MDIA statement on the
consumer; and under § 226.18 or not, at the creditor’s front page of the TILA, modified to
(3) Subtract any prepaid finance option. Although such premiums and replace legalistic phrasing with more
charge. rebates are less likely to exist in common word usage. On the second
mortgage transactions precisely as they page, the Board included a signature
TILA Section 128(a)(2)(A), 15 U.S.C.
are described in comment 18(b)–2, line and date, as most creditors require
1638(a)(2)(A). Regulation Z provides a
analogous situations can apply to the consumer to sign the disclosure
substantially identical calculation. See
mortgage financing. For example, real form to establish compliance with TILA.
§ 226.18(b). Neither the statute nor
estate developers may offer to pay some Most participants did not notice the
Regulation Z defines ‘‘principal amount
or all closing costs or to buy down the MDIA statement, but indicated that they
of the loan.’’ As a result, more than one
consumer’s interest rate, and creditors understood they were under no
understanding of that term is possible,
may agree to pay certain closing costs in obligation to accept the loan;
and Regulation Z seeks to address
return for a particular interest rate. participants who did notice the text
several of those understandings rather
Rather than permit any treatment at the similarly understood they were under
than to define principal amount
creditor’s option, however, proposed no obligation to accept the loan.
definitively.
comment 38(e)(5)(iii)–2 would reflect However, upon seeing the signature
Current Regulation Z permits non-
the Board’s belief that such situations line, some participants believed they
finance charges and prepaid finance
are analogous to buydowns. Like would be obligated to accept the loan if
charges that are financed to be included
buydowns, such premiums and rebates they signed or initialized the disclosure.
in the principal loan amount under step
may or may not be funded by the Based on consumer testing, the Board is
(1) or not, at the creditor’s option. The
creditor and reduce costs otherwise concerned that although consumers may
creditor then must add in under step (2)
borne by the consumer. Accordingly, initially understand they are not
any financed non-finance charges that
their impact on the amount financed, obligated to accept a loan, this belief
were not included under step (1). See
like that of buydowns, properly depends may be altered by creditors’ practice of
comment 18(b)(2)–1. Similarly, the
on whether they are part of the legal requiring consumers to sign or initial
creditor must subtract under step (3)
obligation. See comments 17(c)(1)–1 receipt of the disclosures. This may
any financed prepaid finance charges
through –5. Proposed comment further discourage negotiation and
only if they were included under step
38(e)(5)(iii)–2 would clarify that the shopping among loan products and
(1). See comment 18(b)(3)–1. Proposed
disclosures, including the amount lenders.
§ 226.38(e)(5)(iii) effectively would
financed, must reflect loan premiums To implement the new disclosure
define ‘‘principal loan amount’’ as the
and rebates regardless of their source, required by the MDIA, the Board
loan amount, as that is defined in
but only if they are part of the terms of proposes to add new § 226.38(f)(1) for
proposed § 226.38(a)(1), which would
the legal obligation between the creditor all transactions secured by real property
mean the principal amount the
and the consumer. As noted above, the or a dwelling. Proposed § 226.38(f)(1)
consumer will borrow reflected in the
Board also is proposing similar would require a statement that a
loan contract. Under that definition, all
revisions to existing comment 18(b)–2. consumer is not obligated to accept the
amounts that are financed necessarily

loan because he or she has signed the
would be included in step (1), whether 38(f) Additional Disclosures disclosure. In addition, the Board
they are finance charges or not.
38(f)(1) No Obligation Statement proposes that if a creditor provides
Consequently, no amount ever would be
space for the consumer to sign or initial
added under step (2). The new The MDIA amended Section 128(b)(2)
the TILA disclosures, then the creditor
provision therefore would streamline of TILA to require creditors to disclose,
the calculation to eliminate that step. in conspicuous type size and format, 88 Housing and Economic Recovery Act, Public
Similarly, the current commentary that receiving and signing a TILA Law 110–289, 122 Stat. 2655, § 2502(a)(6) (July 30,
providing that financed prepaid finance disclosure does not obligate a consumer 2008).
must place the statement in close warning’’).89 15 U.S.C. 1638(b)(2). To statement that the consumer should
proximity to the space provided for the implement the disclosure required by consult a tax advisor for further
consumer’s signature or initials. The the MDIA, the Board proposes to add information on tax deductibility.
statement must also specify that a § 226.38(f)(3) to require that creditors The Board stated its intent to
signature only confirms receipt of the disclose that there is no guarantee that implement the Bankruptcy Act
disclosure statement. the consumer will be able to refinance amendments in an ANPR published in
the loan to obtain a lower interest rate October 2005 as part of the Board’s
The Board proposes this approach
and payment. The Board believes that ongoing review of Regulation Z (October
pursuant to its authority under TILA
including such a statement on the TILA 2005 ANPR). 70 FR 60235; Oct. 17,
Section 105(a) to effectuate the statute’s
disclosure form will alert consumers to 2005. The Board received approximately
purposes, which include facilitating 50 comment letters: forty-five letters
consider the impact of future rate
consumers’ ability to compare credit were submitted by financial institutions
adjustments and increased monthly
terms and helping consumers avoid the and their trade groups, and five letters
payments
uninformed use of credit. 15 U.S.C. Although the MDIA requires this were submitted by consumer groups. In
1601(a), 1604(a). The Board believes refinancing warning only for variable general, creditors asked for flexibility in
that this proposal is necessary to rate transactions secured by a dwelling, providing the disclosure regarding the
encourage consumers to shop among the Board proposes to expand the scope tax implications for home-secured credit
available credit alternatives. The Board of the requirement to also include fixed- that may exceed the dwelling’s fair
tested the disclosure as proposed under rate transactions secured by a dwelling, market value, either by permitting the
§ 226.38(f)(1). Most participants as well as transactions secured by real notice to be provided to all mortgage
understood they were not obligated to property without a dwelling. The Board applicants, or to be provided later in the
accept the loan and could refuse to proposes this approach pursuant to its approval process after creditors have
accept the loan offer even after signing. authority under TILA Section 105(a) to determined whether the disclosure is
As a result, the Board believes the effectuate the statute’s purposes, which triggered. Creditor commenters asked
disclosure proposed by new include facilitating consumers’ ability to for guidance on loan-to-value
§ 226.38(f)(1) is necessary to ensure that compare credit terms and helping calculations and safe harbors for how
consumers are not discouraged from consumers avoid the uninformed use of creditors should determine property
shopping or negotiating with the lender. credit. 15 U.S.C. 1601(a), 1604(a). The values. Consumer advocates favored
38(f)(2) Security Interest Board is concerned that some triggering the disclosure when negative
consumers may accept loan terms that amortization could occur. A number of
TILA Section 128(a)(9), 15 U.S.C. could present refinancing concerns commenters stated that in order for the
1638(a)(9), and § 226.18(m) require the similar to variable rate transactions, disclosure to be effective and useful to
creditor to disclose whether it has a such as a three-year fixed-rate mortgage the borrower, it should be given when
security interest in the property with a balloon payment. Based on the new extension of credit, combined
securing the transaction. During consumer testing, the Board believes all with existing credit secured by the
consumer testing of the current TILA consumers, regardless of transaction- dwelling (if any), may exceed the fair
disclosure, participants were shown the type, would benefit from a statement market value of the dwelling. A few
following language: ‘‘Security: You are that encourages consideration of future industry comments took the opposite
giving a security interest in the real possible market rate increases. view that the disclosure should be
property, and fixtures and rents if limited only to when a new extension
38(f)(4) Tax Deductibility
indicated in the rider mortgage.’’ Very of credit itself exceeds fair market value,
few participants understood the current The Board is also proposing changes citing the difficulty in determining how
language regarding a security interest. to the closed-end disclosures to much debt is already secured by the
The Board is concerned that consumers implement provisions of the Bankruptcy dwelling at the time of application.
might not understand that the creditor Abuse Prevention and Consumer The Board implemented section 1302
can take the consumer’s home if the Protection Act of 2005 (the ‘‘Bankruptcy with regard to advertisements in its
consumer defaults on the loan Act’’) which requires disclosure of the 2008 HOEPA Final Rule. See 73 FR
agreement. To clarify the significance of tax implications for home-secured credit 44522, 44600; July 30, 2008. In the
the security interest disclosure to that may exceed the dwelling’s fair supplementary information to that rule,
consumers, the Board proposes market value. See Public Law 109–8, the Board stated that it intends to
§ 226.38(f)(2) to require the creditor to 119 Stat. 23. The Bankruptcy Act implement the application disclosure
state that the consumer could lose the primarily amended the federal portion of the Bankruptcy Act during its
home if the consumer is unable to make bankruptcy code, but also contained forthcoming review of closed-end and
the payments on the loan. This would several provisions amending TILA. HELOC disclosures under TILA.
provide a clearer disclosure regarding Section 1302 of the Bankruptcy Act Proposed § 226.38(f)(4) would
the effect of the lender taking a security amendments requires that implement provisions of the Bankruptcy
interest in the home. advertisements and applications for Act by requiring creditors to include the
credit (either open-end or closed-end) disclosure of the tax implications for a
38(f)(3) No Guarantee to Refinance that may exceed the fair market value of loan secured by a dwelling, if extension
Statement the dwelling include a statement that of credit may, by its terms, exceed the
the interest on the portion of the credit fair market value of the dwelling. The
The MDIA also amended Section extension that exceeds the fair market text of the proposed disclosure is based
128(b)(2) of TILA to require creditors to value is not tax-deductible and a on the Board’s consumer testing of
disclose for variable rate transactions, in model HELOC disclosure forms. The
conspicuous type size and format, that 89 Specifically, the MDIA requires that the Board
disclosure would be segregated and
there is no guarantee that the consumer use consumer testing to develop disclosures for located directly below the table.
will be able to refinance the transaction variable rate transactions, including the fact that
‘‘there is no guarantee that the borrower will be able
The Board recognizes that creditors
to lower the interest rate or monthly to refinance to a lower amount.’’ Public Law 109– may not be able to determine whether
payments (‘‘MDIA refinancing 8, 119 Stat. 23, § 2502(a)(6). the amount of credit extended exceeds
the fair market value of the dwelling, the Federal Reserve Board and disclose current footnote 38 to remove the
especially three days after application a reference to that Web site. The Board reference to the creditor’s identity
when they are required to provide an will enhance its Web site to further disclosure required under § 226.18(a),
early transaction-specific disclosures. assist consumers in shopping for a thereby making it subject to the
The creditor may not be able to verify mortgage. Although it is hard to predict grouped-together and segregation
the value on the property until later in from the results of the consumer testing requirement for all non-mortgage
the loan underwriting process. The how many consumers might use the closed-end credit. Similarly,
Board has considered whether the Board’s Web site, and recognizing that § 226.37(a)(2) would require the
disclosure should be provided later in not all consumers have access to the disclosure of the creditor’s identity to be
the approval process after the creditor Internet, the Board believes that this subject to the grouped-together and
has determined that the disclosure is Web site may be helpful to some segregation requirement for closed-end
triggered, for instance, after receiving consumers as they shop for a mortgage. credit transactions secured by real
the appraisal report or completing the The Board seeks comment on the property or a dwelling.
underwriting process. However, such content for the Web site. The Board proposes to make this
late timing of the disclosure would not adjustment pursuant to its authority
satisfy the requirements of the 38(f)(6) Format under TILA Section 105(a). 15 U.S.C.
Bankruptcy Act which requires that the The Board is proposing to specify 1604(a). Section 105(a) authorizes the
disclosures be provided at the time of precise formatting requirements for the Board to make exceptions and
application. See 15 U.S.C. 1638(a)(15). disclosures required by § 226.38(f)(1) adjustments to TILA to effectuate the
The Board also considered whether through (5). Proposed § 226.38(f)(6)(i) statute’s purposes, which include
the disclosure should be provided to all would set forth location requirements, facilitating consumers’ ability to
mortgage applicants, regardless of providing that the no obligation and compare credit terms, and avoid the
whether the amount of credit extended confirmation of receipt statements must uninformed use of credit. 15 U.S.C.
exceeds the fair market value of the be disclosed together, the security 1604(a), 15 U.S.C. 1601(a). The Board
dwelling. To address the situations in interest and no guarantee to refinance believes it is important to disclose the
which the creditor is not certain statements must be disclosed together, creditor’s identity so that consumers can
whether the credit extended may exceed and the recommendation to ask more easily identify the appropriate
the fair market value of the dwelling, questions and statement regarding the entity. Thus, the Board believes this
comment 38(f)(4)–2 permits the Board’s Web site must be disclosed proposal would help serve TILA’s
disclosure to be provided to all together. Proposed § 226.38(f)(6)(ii) purpose to provide meaningful
mortgage applicants at creditors’ would set forth highlighting disclosure of credit terms.
discretion and provides model language. requirements, providing that the no
The Board recognizes that the scope 38(g)(2) Loan Originator
obligation and security interest
of the proposed § 226.38(f)(4) is limited On July 30, 2008, the Secure and Fair
statements, and the advice to ask
to dwellings whereas proposed § 226.38 Enforcement for Mortgage Licensing Act
questions, must be disclosed in bold
would apply to real property and of 2008 (SAFE Act), 12 U.S.C. 5101–
text.
dwellings. While the Bankruptcy Act 5116, was enacted to create a
amendment specifically references 38(g) Identification of Originator and Nationwide Mortgage Licensing System
‘‘consumer’s dwelling,’’ the Board Creditor and Registry of loan originators to
believes that it would be unnecessarily 38(g)(1) Creditor increase uniformity, reduce fraud and
burdensome to require creditors to regulatory burden, and enhance
create separate disclosures for the Currently, § 226.18(a), which consumer protection. 12 U.S.C. 5102.
transactions secured by real property implements TILA Section 128(a)(1), 15 Under the SAFE Act, a ‘‘loan originator’’
and those secured by a dwelling solely U.S.C. 1638(a)(1), requires the creditor is defined as ‘‘an individual who (I)
for the purposes of the tax implications to disclose the identity of the creditor takes a residential mortgage loan
disclosure. For that reason, a creditor making the disclosure. Proposed application; and (II) offers or negotiates
would be permitted, but not required, to § 226.38(g)(1) would require the same terms of a residential mortgage loan for
provide the disclosures about the tax disclosure. In addition, proposed compensation or gain.’’ 12 U.S.C.
implications in connection with comment 38(g)(1)–1 would parallel 5102(3)(A)(i). Each loan originator is
transactions secured by both real existing comment 18(a)–1 to clarify that required to obtain a unique identifier
property and dwellings. use of the creditor’s name is sufficient, through the Nationwide Mortgage
but the creditor may also include an Licensing System and Registry. 12
38(f)(5) Additional Information and Web address and/or telephone number. In U.S.C. 5103(a)(2). The term ‘‘unique
Site transactions with multiple creditors, identifier’’ is defined as ‘‘a number or
Consumer testing showed that many any one of them may make the other identifier that (i) permanently
participants educated themselves about disclosures, but the one doing so must identifies a loan originator; (ii) is
the mortgage process through informal be identified. The Board solicits assigned by protocols established by the
networking with family, friends, and comment on whether the creditor Nationwide Mortgage Licensing System
colleagues, while others relied on the making the disclosures should be and Registry and the Federal banking
Internet for information. To improve required to disclose its contact agencies to facilitate electronic tracking
consumers’ ability to make informed information, such as its address and/or of loan originators and uniform
decisions about credit, the Board telephone number. identification of, and public access to,
proposes § 226.38(f)(5) to require the Existing footnote 38 to § 226.17(a), the employment history of and the
creditor to disclose that if the consumer which implements TILA Section publicly adjudicated disciplinary and
does not understand any of the 128(b)(1), 15 U.S.C. 1638(b)(1), states enforcement actions against loan
disclosures, then the consumer should that the creditor’s identity may be made originators; and (iii) shall not be used
ask questions. The creditor would also together with or separately from the for purposes other than those set forth
disclose that the consumer may obtain other required disclosures. The Board under this title.’’ 15 U.S.C. 5102(12)(A).
additional information at the Web site of proposes to amend the substance of The system is intended to provide
consumers with easily accessible additional explanatory material may be the creditor would be required to make
information to research a loan included. certain other disclosures. Under
originator’s history of employment and The proposed disclosures seek to proposed § 226.38(h)(5)(ii), the creditor
any disciplinary or enforcement actions address concerns that consumers may would disclose that based on the
against that person. 12 U.S.C. 5101(7). not understand that some products are creditor’s review of the consumer’s age
To facilitate the use of the Nationwide voluntary and not required as a and/or employment status at the time of
Mortgage Licensing System and Registry condition of receiving credit. If the enrollment, the consumer may be
and promote the informed use of credit, product is optional, proposed eligible to receive benefits. Under
the Board proposes § 226.38(g)(2) to § 226.38(h)(1)(i) would require the proposed § 226.38(h)(6), the creditor
require the loan originator to disclose creditor to disclose the term would also disclose that the consumer
his or her unique identifier on the TILA ‘‘OPTIONAL COSTS,’’ in capitalized may not be eligible to receive any
disclosure, as defined by the SAFE Act. and bold letters, along with the name of benefits because of other eligibility
Proposed comment 38(g)(2)–1 would the program in bold letters. If the restrictions.
clarify that in transactions with multiple product is required, then proposed Proposed comment 38(h)(5)–1 would
loan originators, each loan originator’s § 226.38(h)(1)(ii) would require the state that if, based on the creditor’s
unique identifier must be listed on the creditor to disclose only the name of the review of the consumer’s age and/or
disclosure. For example, in a transaction program in bold letters. In addition, if employment status at the time of
where a mortgage broker meets the the product is optional, proposed enrollment in the product, the consumer
SAFE Act definition of a loan originator, § 226.38(h)(2) would require the creditor would not qualify for the benefits of the
the identifiers for the broker and for its to disclose the term ‘‘STOP,’’ in product, then providing the disclosure
employee loan originator meeting that capitalized and bold letters, along with under § 226.38(h)(5) would not comply
definition would be listed on the a statement that the consumer does not with this provision. That is, if the
disclosure. have to buy the product to get the loan. consumer does not meet the age and/or
The term ‘‘not’’ would be in bold letters employment eligibility criteria, then the
The Board notes that the Board, FDIC,
and underlined. creditor cannot state that the consumer
OCC, OTS, NCUA, and Farm Credit Concerns have also been raised that may be eligible to receive benefits and
Administration have published a consumers may not realize that there are cannot comply with this provision. In
proposed rule to implement the SAFE alternatives to the product. Therefore, addition, the proposed comment would
Act. See 74 FR 27386; June 9, 2009. In under proposed § 226.38(h)(3), the clarify that if the creditor offers a
this proposed rule, the federal banking creditor would disclose that if the bundled product (such as credit life
agencies have requested comment on consumer already has insurance, then insurance combined with credit
whether there are mortgage loans for the policy or coverage may not provide involuntary unemployment insurance)
which there may be no mortgage loan the consumer with additional benefits. and the consumer is not eligible for all
originator. For example, the agencies Under proposed § 226.38(h)(4), the of the bundled products, then the
query whether there are situations creditor would disclose that other types disclosure under § 226.38(h)(5) would
where a consumer applies for and is of insurance may give the consumer not comply with this provision. Finally,
offered a loan through an automated similar benefits and are often less the proposed comment would clarify
process without contact with a mortgage expensive. that the disclosure would still satisfy
loan originator. See id. at 27397. The As described more fully in this provision if an event subsequent to
Board solicits comments on the scope of § 226.4(d)(1) and (3), concerns have enrollment, such as the consumer
this problem and its impact on the been raised that consumers are not passing the age limit of the product,
requirements of proposed § 226.38(g)(2). aware that they could incur a cost for a made the consumer ineligible for the
38(h) Credit Insurance and Debt product that may offer no benefit if the product based on the product’s age or
Cancellation and Debt Suspension eligibility criteria are not met at the time employment eligibility restrictions.
Coverage of enrollment. That is, consumers may Proposed comment 38(h)(5)–2 would
not be aware that if they do not meet the clarify that the disclosure under
As discussed more fully in eligibility criteria at the time of § 226.38(h)(5) would be deemed to
§ 226.4(d)(1) and (3), concerns have enrollment, the product would not pay comply with this provision if the
been raised that consumers do not off, cancel, or suspend the credit creditor used reasonably reliable
understand the voluntary nature, costs, obligation. Although the creditor evidence to determine whether the
and eligibility restrictions of credit typically has information about the consumer met the age or employment
insurance and debt cancellation and consumer’s age or employment status, eligibility criteria of the product.
debt suspension coverage. For this some creditors do not use this Reasonably reliable evidence of a
reason, the Board proposes § 226.38(h) information to determine whether the consumer’s age would include using the
to require creditors to provide certain consumer meets the age or employment date of birth on the consumer’s credit
disclosures, which would be grouped eligibility restrictions at the time of application, on the driver’s license or
together and substantially similar in enrollment. Some consumers are later other government-issued identification,
headings, content and format to Model denied benefits based on these or on the credit report. Reasonably
Clause H–17(C) in Appendix H to this eligibility restrictions. reliable evidence of a consumer’s
part. Proposed comment 38(h)–1 would For these reasons, the Board is employment status would include a
clarify that this disclosure may, at the proposing under § 226.38(h)(5)(i) to consumer’s statement on a credit
creditor’s option, appear apart from the require the creditor to disclose a application form, an Internal Revenue
other disclosures. It may appear with statement that based on the creditor’s Service Form W–2, tax returns, payroll
any other information, including the review of the consumer’s age and/or receipts, or other written evidence such
amount financed itemization, any employment status at the time of as a letter or e-mail from the consumer
information prescribed by State law, or enrollment, the consumer would be or the consumer’s employer.
other information. When this eligible to receive benefits. However, if Finally, the disclosure would contain
information is disclosed with the other there are other eligibility restrictions, the debt suspension coverage
segregated disclosures, however, no such as pre-existing health conditions, disclosure, a Web site reference, cost
information, and a space for the that the consumer would still benefit disclosures and focus on the terms that
consumer’s signature and the date. To from a disclosure of the voluntary participants stated were important for
ensure consistency with the debt nature, costs, and eligibility restrictions shopping and for understanding their
suspension coverage provisions of the of credit insurance or debt cancellation loan terms. Currently, TILA and
December 2008 Open-End Final Rule, or debt suspension coverage, and thus Regulation Z mandate that the following
proposed § 226.38(h)(7) would require the proposal would require a disclosures be grouped together with the
the creditor to disclose, as applicable, a substantially similar disclosure. required disclosures and segregated
statement that the obligation to pay loan TILA Section 105(a), 15 U.S.C. from everything else: rebate, late
principal and interest is only 1604(a), authorizes the Board to payment, property insurance, contract
suspended, and that interest will prescribe regulations to carry out the reference, and assumption policy. See
continue to accrue during the period of purposes of the act. TILA’s purpose TILA Sections 128(a)(9), (10), (11), (12),
suspension. To provide more includes promoting ‘‘the informed use (13) and (b) and 106(c); 15 U.S.C.
information to consumers, proposed of credit,’’ which ‘‘results from an §§ 1638(a)(9), (10), (11), (12), (13) and
§ 226.38(h)(8) would require the creditor awareness of the cost thereof by (b) and 1605(c); §§ 226.4(d)(2),
to disclose a statement that the consumers.’’ TILA Section 102(a), 15 226.17(a)(1), and 226.18(k)(2), (l), (n),
consumer may obtain additional U.S.C. 1601(a). A premium or charge for (p), and (q). Consumer testing showed
information about credit insurance or credit insurance or debt cancellation or that these terms were not of primary
debt suspension or debt cancellation debt suspension coverage is a cost importance to consumers in choosing a
coverage at the Web site of the Federal assessed in connection with credit. The mortgage. With respect to assumption,
Reserve Board, and a reference to that credit transaction and the relationship for example, very few participants
Web site. If the product is optional, between the creditor and the consumer understood the language indicating that
proposed § 226.38(h)(9)(i) would require are the reasons the product is offered or the loan was assumable, and even fewer
the creditor to disclose a statement of available. Because the merits of this felt it was important information. With
the consumer’s request to purchase or product have long been debated,90 the respect to property insurance, most
enroll in the optional product and a Board believes that consumers would participants understood the language
statement of the cost of the product benefit from clear and meaningful indicating that the borrower can obtain
expressed as a dollar amount per month disclosures regarding the costs, benefits, property insurance from anyone that is
or per year, as applicable, together with and risks associated with this product. acceptable to the lender, but the
the loan amount and the term of the As discussed more fully in § 226.4(d)(1) participants felt that this was not
product in years. This disclosure and (3), consumer testing showed that important to their decision making.
parallels § 226.4(d)(1) and (3), which without clear disclosures participants TILA Section 105(a) authorizes the
requires cost disclosures in order to were unaware of the voluntary nature, Board to make exceptions to TILA to
exclude from the finance charge the costs, and eligibility restrictions. For effectuate the statute’s purposes, which
credit insurance premium or debt these reasons, the Board believes that includes promoting the informed use of
cancellation or debt suspension this proposed rule would serve to credit. 15 U.S.C. 1601(a), 1604(a). The
coverage charge. If the product is inform consumers of the cost of this Board believes that requiring these
required, proposed § 226.38(h)(9)(ii) credit product. disclosures to appear separately from
would require the creditor to disclose the other required disclosures would
38(i) Required Deposit
that fact, along with a statement of the improve the consumer’s ability to focus
Proposed § 226.38(i) addresses on the terms most useful to evaluating
cost of the product expressed as a dollar disclosure requirements when creditors the proposed credit transaction.
amount per month or per year, as require consumers to maintain deposits TILA Section 105(f) authorizes the
applicable, together with the loan as a condition to the specific Board to exempt any class of
amount and the term of the product in transaction, for transactions secured by transactions from coverage under any
years. The cost, month or year, loan real property or a dwelling. Proposed part of TILA if the Board determines
amount, and term of the product would § 226.38(i) is consistent with § 226.18(r), that coverage under that part does not
be underlined. The provisions regarding which applies to transactions not provide a meaningful benefit to
required products would be applicable secured by real property or a dwelling. consumers in the form of useful
to the extent Regulation Y, 12 CFR part The Board is proposing to revise information or protection. 15 U.S.C.
225, or State or other law would not § 226.18(r) and associated commentary, 1604(f)(1). TILA Section 105(f) directs
prohibit requiring the product. Finally, as discussed above, and proposed the Board to make this determination in
proposed § 226.38(h)(10) would require § 226.38(i) reflects the revised text and light of specific factors. 15 U.S.C.
the creditor to provide a designation for associated commentary. 1604(f)(2). These factors are (1) the
the signature of the consumer and the amount of the loan and whether the
date of the signing. 38(j) Separate Disclosures
disclosure provides a benefit to
The Board proposes to require this Consumer testing indicated that consumers who are parties to the
disclosure using its authority under participants generally felt overwhelmed transaction; (2) the extent to which the
TILA Section 105(a), 15 U.S.C. 1604(a). by the amount of information presented requirement complicates, hinders, or
Because proposed § 226.4(g) would treat throughout the loan process and makes more expensive the credit
a premium or charge for credit especially at consummation. As a result, process for the class of transactions; (3)
the Board seeks to streamline the TILA
insurance or debt cancellation or debt the status of the borrower, including any
suspension as a finance charge for related financial arrangements of the
90 See, e.g., Credit CARD Act of 2009, Public Law
closed-end credit transactions secured borrower, the financial sophistication of
No. 111–24, § 509; 123 Stat. 1734, 1763 (2009)
by real property or a dwelling, the (requiring the General Accounting Office to provide the borrower relative to the type of
creditor would not be required to a report to Congress by December 31, 2010, of the transaction, and the importance to the
provide the disclosure under suitability of credit insurance, debt cancellation borrower of the credit, related
agreements, and debt suspension agreements for
§ 226.4(d)(1) and (3) to exclude the target customers, the ‘‘predatory nature’’ of such
supporting property, and coverage
premium or charge from the finance offers, and the loss rates compared to more under TILA; (4) whether the loan is
charge. The Board believes, however, traditional insurance products). secured by the principal residence of
the consumer; and (5) whether the itemization as currently appear in take advantage of the alternative in
exemption would undermine the goal of § 226.18(c)(1)—the amount of proceeds proposed § 226.38(j)(1)(iii) as widely as
consumer protection. Although a credit distributed directly to the consumer, the they historically have done under
transaction secured by real property or amount credited to the consumer’s § 226.18(c)(1), fn. 40. On the other hand,
a dwelling is important to the borrower, account, amounts paid to other persons the Board notes that a creditor that does
the Board believes that removing these on the consumer’s behalf, and the not avail itself of that alternative must
disclosures from the other segregated prepaid finance charge. Proposed follow one of the other two alternatives.
information would further, rather than § 226.38(j)(1)(ii) similarly would Under proposed §§ 226.19(a) and
undermine, the goal of consumer provide to creditors the alternative 226.38(j)(1)(i), the creditor still must
protection because consumers would under current § 226.18(c)(2) of provide substantially the same
then focus on the terms that are most disclosing the right to receive an information three business days before
important to their decision making itemization and providing it when the consummation. Under proposed
process. The proposed rule would still consumer so requests, instead of §§ 226.19(a) and 226.38(j)(1)(ii), the
require that the information be delivering the itemization routinely. creditor also must do so, at least in
disclosed but would simply no longer Finally, proposed § 226.38(j)(1)(iii) those cases where the consumer
require the disclosures to be provided would provide the alternative of requests the itemization. Further, given
with the segregated information. substituting the RESPA GFE for the the proposed expansion of the finance
itemization. It also would state a charge under § 226.4, discussed above,
38(j)(1) Itemization of Amount Financed
parallel alternative of substituting the all of the information contained in
TILA Section 128(a)(2)(B), 15 U.S.C. HUD–1 settlement statement for the either the good faith estimate or the
1638(a)(2)(B), and § 226.18(c) currently itemization when a creditor provides itemization would have to be firmly
require that the creditor provide the later disclosures pursuant to established by three business days
consumer with a notice that an § 226.19(a)(2), which currently is before consummation so that the
itemization of amount financed is addressed only in the staff commentary creditor can comply with the timing
available on request and to provide it under § 226.18(c). And proposed requirements of proposed § 226.19(a)(2).
when the consumer so requests. § 226.38(j)(1)(iii) would provide that the In any event, the Board believes that
Regulation Z also provides that the good substitution is permissible for any to permit substitution of the HUD–1
faith estimate of settlement costs (GFE) transaction subject to § 226.38, whether settlement statement for the itemization
provided pursuant to RESPA suffices to subject to RESPA or not. without requiring that it be delivered
satisfy the itemization of amount The Board notes that the timing of the three business days before
financed requirement. See HUD–1 settlement statement no longer consummation would be inconsistent
§ 226.18(c)(1), fn. 40. The staff is consistent with the timing of the TILA with the purposes of the MDIA
commentary provides further that the redisclosure under § 226.19(a)(2). amendments. The Board seeks comment
HUD–1 settlement statement provided Regulation X under RESPA requires the on whether creditors would continue to
at settlement under RESPA also may be HUD–1 to be provided at settlement,91 make significant use of this alternative
substituted for the itemization in which generally corresponds with as proposed § 226.38(j)(1)(iii) would
connection with later disclosures made consummation of the transaction under implement it and, if not, whether the
pursuant to § 226.19(a). See comment Regulation Z. Under the MIDA final alternative should be retained. If it
18(c)–4. rule, and the proposed revisions to should be retained, the Board seeks
Proposed § 226.38(j)(1) would mirror § 226.19 under this proposal, the comment on how it might be structured
the rules currently found under redisclosure required under without requiring that the HUD–1
§ 226.l8(c) permitting a creditor to § 226.19(a)(2) must be received by the settlement statement be received by the
provide disclosures pursuant to RESPA consumer at least three business days consumer earlier than RESPA requires
in lieu of the itemization of amount before consummation of the transaction. while also preserving the purposes of
financed. These rules originally were As current comment 18(c)–1 provides, the MDIA.
established by the Board pursuant to its and proposed § 226.38(j)(1) also would
authority under TILA Section 105(a) to 38(j)(2) Through (6) Rebate; Late
require, the itemization must be
make exceptions to facilitate Payment; Property Insurance; Contract
provided at the same time as the
compliance with TILA, and the Board is Reference; Assumption Policy
segregated disclosures. Accordingly,
proposing to permit similar treatment proposed § 226.38(j)(1)(iii) would The Board proposes to use its
under the same authority. Proposed provide that the HUD–1 settlement exception and exemption authorities
§ 226.38(j)(1) would differ from current statement is a permissible substitute for under TILA Section 105(a), 15 U.S.C.
§ 226.18(c), as discussed below, to the itemization of amount financed only 1604(a), to require creditors to provide
reflect recent changes to Regulation Z. if it is received by the consumer at least the following disclosures separately
Under the proposal, the provisions three business days prior to from the other required disclosures:
permitting substitution of RESPA consummation, in accordance with rebate under proposed § 226.38(j)(2),
disclosures for the itemization of § 226.19(a)(2). late payment under proposed
amount financed would be removed The Board realizes that, in general, § 226.38(j)(3), property insurance under
from § 226.18 and included under consumers currently receive a fully proposed § 226.38(j)(4), contract
proposed § 226.38(j)(1). That section completed HUD–1 settlement statement reference under proposed § 226.38(j)(5),
would govern the itemization disclosure only at consummation, in accordance and assumption policy under proposed
contents for mortgage transactions, with RESPA’s requirements. For this § 226.38(j)(6). The Board is not
including all those subject to RESPA. As reason, mortgage creditors might not proposing to change the substantive
noted above, the Board also is proposing content of these disclosures. Proposed
to make certain technical and 91 24 CFR 3500.10(b). The settlement agent must § 226.38(j) would mirror § 226.18,
conforming amendments under provide the borrower with an opportunity to except that the proposed requirement
inspect the HUD–1 during the business day
§ 226.18(c). preceding settlement, but only completed to reflect
would be provided separately from the
Proposed § 226.38(j)(1)(i) would all information known to the settlement agent at the other required disclosures. The
provide the same four categories of the time. Id. 3500.10(a). proposed comments for these
disclosures would also parallel the Permissible Changes mortgage sample). Comment app. H–1
applicable comments under § 226.18. The commentary to appendices G and would be revised to reflect the deletion
In addition, the Board proposes H currently states that creditors may of Samples H–13 through H–15. The
Model Clauses at Appendix H–23 for make certain changes in the format and Board would further amend comment
content of the model forms and clauses, app. H–1 to reflect that, under the
the following non-segregated
and may delete any disclosures that are proposal, new model clauses are added
disclosures: rebate, late payment,
inapplicable to a transaction or a plan regarding credit life insurance, debt
property insurance, contract reference,
without losing the Act’s protection from cancellation, or debt suspension
and assumption policy. The Model disclosures, and creditor-placed
Clauses are based on the Board’s liability. However, certain formatting
changes may not be made with respect property insurance disclosures. See
consumer testing and the Board believes discussion under §§ 226.4(d)(1) and (3),
that model clauses will enhance to certain model and sample forms in
Appendix G. See comment app. G and 226.38(h), and 226.20(e). These deleted
consumer understanding of the samples forms and new model clauses
information, helping consumers to H–1. As discussed above, the Board is
proposing format and content are discussed more fully below.
avoid the uninformed use of credit. Currently, comment app. H–2
requirements with respect to disclosures
Appendices G and H—Open-End and for transactions secured by real property addresses the flexibility given to
creditors in providing the itemization of
Closed-End Model Forms and Clauses or a dwelling, such as a tabular
amount financed disclosure required
requirement for ARM loan program
Appendices G and H set forth model under current § 226.18(c) and illustrated
disclosures and ARM adjustment
forms, model clauses and sample forms by Model Clause H–3. As discussed
notices, and transaction-specific
that creditors may use to comply with above, the Board is proposing new
disclosures required for loans secured
the requirements of Regulation Z. § 226.38(j)(1) regarding disclosure of the
by real property or a dwelling. See
Appendix G contains model forms, itemization of amount financed for
proposed §§ 226.19(b), 226.20(c), and
model clauses and sample forms transactions secured by real property or
226.38(a)–(j). Accordingly, the Board
applicable to open-end plans. Appendix a dwelling. As a result, the Board would
would amend comment app. G and H–
H contains model forms, model clauses amend comment app. H–2 to update
1 to indicate that certain formatting cross-references. In a technical revision,
and sample forms applicable to closed- changes may not be made with respect the Board would amend comment app.
end loans. Although use of the model to certain model forms, model clauses H–3 to clarify that the guidance applies
forms and clauses is not required, and sample forms in Appendix H. In to new Model Clauses H–4(B) and H–
creditors using them properly will be addition, as discussed more fully under 4(C), H–4(H), H–16, H–17(A) and H–
deemed to be in compliance with the § 226.38, the Board proposes to require 17(C), H–18, and H–20 through H–23.
regulation with regard to those creditors to provide disclosures for These new model clauses are discussed
disclosures. As discussed above, the transactions secured by real property or more fully below.
Board proposes to revise or add several a dwelling only as applicable. As a
model forms, model clauses and sample result, the Board would not allow Model Forms, Model Clauses, and
forms to Appendix H for transactions creditors to use multi-purpose forms; Sample Forms for ARM Loan Program
secured by real property or a dwelling. the Board would amend comment app. Disclosures
The revised or new model forms and G and H–1(vi) to clarify that the use of Currently, Appendix H contains
clauses, and sample forms, are multipurpose standard forms is not several model clauses, and a sample
discussed above in the section-by- permitted for transactions secured by form, related to variable-rate loan
section analysis applicable to the real property or a dwelling. See program disclosures required under
regulatory provisions to which the discussion under § 226.37(a)(2). current § 226.18(f)(1), 226.18(f)(2) and
forms or clauses relate. See discussion Debt Cancellation Coverage 226.19(b). Current Model Clause H–4(A)
under §§ 226.19(b), 226.20(c)–(e), and contains model clauses for variable-rate
226.38(a)–(j). In addition, the Board Currently, commentary to appendices disclosures required under § 226.18(f)(1)
G and H states that creditors are not for transactions not secured by a
proposes to add new model clauses and
authorized to characterize debt- principal dwelling, or transactions
a sample form relating to credit
cancellation fees as insurance premiums secured by a dwelling with a term of
insurance, debt cancellation and debt
for purposes of the regulation. The one year or less. Current Model Clause
suspension coverage to both Appendix
Board proposes to amend comment app. H–4(B) contains model clauses for
G and H for open-end and closed-end
G and H–2 to clarify that the variable-rate disclosures for transactions
loans. These model clauses and sample commentary also applies to debt
forms are discussed under proposed that are secured by a principal dwelling
suspension fees. with a term greater than one year.
§ 226.4(d)(1) and (3) and 226.38(h). In
Appendix H, all other existing forms Appendix H—Closed-End Model Forms Current Model Clause H–4(C) contains
and clauses applicable to transactions and Clauses model clauses related to variable-rate
not secured by real property or a loan program disclosures required
Model Forms, Model Clauses, and under § 226.19(b). Current Sample H–14
dwelling have been retained without Sample Forms for Closed-End
revision. is a sample disclosure illustrating
Disclosures required disclosures under current
The Board also proposes to revise or As noted above, the Board proposes a § 226.19(b) of interest rate and monthly
add commentary to the model forms, new disclosure regime under § 226.38 payment changes, as well as an
model clauses and sample forms in for transactions secured by real property historical example, for variable-rate loan
Appendix H, as discussed below. The or a dwelling. As a result, the following programs.
Board solicits comments on the sample forms are rendered unnecessary Under the proposal, the Board would
proposed revisions below, as well as and deleted: Sample H–13 (mortgage require new disclosures under
whether any additional commentary with demand feature sample); Sample § 226.19(b) for adjustable-rate loan
should be added to explain the forms H–14 (variable-rate mortgage sample); programs, and would revise
and clauses contained in Appendix H. and Sample H–15 (graduated-payment § 226.18(f)(1) and delete § 226.18(f)(2) to
reflect such proposed changes to interest rate and payment changes for commentary to current comment app.
§ 226.19(b). Accordingly, the Board adjustable-rate transactions secured by H–17. In a technical revision, the Board
proposes to delete current Model Clause real property or a dwelling. would revise the heading to Mortgage
H–4(B) and add new Model H–4(B) to Accordingly, the Board would add a Sample H–16 to reflect that it contains
illustrate, in the tabular format, the model form and two samples forms to model clauses.
disclosures required under § 226.19(b) illustrate, in the tabular format, the
Model Clause for Credit Insurance,
for adjustable-rate transactions secured disclosures required under proposed
Debt Cancellation, or Debt Suspension
by real property or a dwelling. The § 226.20(c)(2) for ARM adjustment
Board also would delete current Model notices when there is an interest rate Currently, Appendix H contains a
Clause H–4(C) and add new Model and payment change. See proposed model clause and sample form that
Clauses H–4(C) to reflect the proposed Model H–4(G) and Samples H–4(I) and creditors may use to comply with the
changes to § 226.19(b), as discussed H–4(J). In addition, the Board proposes disclosure requirements under current
above, and to provide model clauses to add a model form to illustrate § 226.4(d)(3) for debt suspension. See
regarding interest rate carryover, disclosures required under proposed Model Clause H–17(A) and Sample H–
conversion features, and preferred rates. § 226.20(c)(3) when there is an interest 17(B). As discussed above, the Board
The Board proposes to add Samples H– rate adjustment without any change to proposes new disclosure requirements
4(D) through H–4(F) to provide payment. See proposed Model H–4(K). for credit insurance, debt cancellation
examples of how certain disclosures Current Model Clause H–4(D) would be and debt suspension for all closed-end
under § 226.19(b) may be provided, in deleted and new Model Clauses H–4(H) loans. See proposed §§ 226.4(d)(1),
the tabular format, for adjustable-rate would be added to reflect the proposed (d)(3) and 226.38(h). Accordingly, the
loan programs that contain a hybrid, changes to § 226.20(c), as discussed Board proposes to add Model Clause H–
interest only, or payment option feature, above. The Board also proposes to revise 17(C) and Sample H–17(D) that creditors
respectively. In addition, the heading to current comment app. H–7 to provide may use to comply with the proposed
Model Clause H–4(A) would be revised that disclosures required under requirements under §§ 226.4(d)(1), (d)(3)
to update the cross-reference to § 226.20(c) be provided in the tabular and 226.38(h).
§ 226.18(f), and current Sample H–14 format, as illustrated by new Model H– Model Clause for Creditor-Placed
regarding variable-rate disclosures 4(G), and Samples H–4(I) and H–4(J). Property Insurance
would be deleted and reserved.
The Board also proposes to revise Model Forms, Model Clauses, and Currently, creditors are not required
existing commentary that provides Sample Forms for Periodic Statements to provide any disclosures to the
guidance to creditors on how to use Currently, creditors are not required consumer with respect to creditor-
current Model Clauses H–4(A) through to provide certain disclosures with placed property insurance. As discussed
(C). Currently, comments app. H–4 respect to periodic statements for loans under proposed § 226.20(e), the Board
through H–6 provide guidance regarding that are negatively amortizing. As would require creditors to provide
variable-rate loan program disclosures discussed under proposed § 226.20(d), notice of the cost and coverage of
required under current §§ 226.18(f)(1)– the Board would require creditors to creditor-placed property insurance
(2) and 226.19(b). Under the proposal, disclose periodic payment options on a before charging the consumer for such
the Board would delete guidance monthly basis for transactions secured insurance for transactions secured by
contained in current comment app. H– by real property or a dwelling that offer real property or a dwelling. For all other
5 regarding disclosures under payment options and are negatively closed-end loans, these disclosures
§ 226.18(f)(2) as unnecessary, and amortizing. Accordingly, the Board is would be required if creditors intend to
instead provide that disclosures proposing to add new Model Form H– exclude the creditor-placed property
required under § 226.19(b) for 4(L) that creditors may use to comply insurance fee from the finance charge
adjustable-rate transactions be provided with the requirements in proposed under § 226.4(d). Accordingly, the
in the tabular format, as illustrated by § 226.20(d). Board proposes to add Model Clause H–
Model H–4(B), and Samples H–4(D) 18 that creditors may use to comply
Model Clauses for Section 32 (HOEPA)
through H–4(F). The Board also would with the proposed requirements under
Disclosures
delete guidance currently contained in § 226.20(e).
comment app. H–6 relating to variable- Currently, Appendix H contains
Mortgage Sample H–16, which provides Model Forms, Model Clauses, and
rate disclosures, and instead provide Sample Forms for Transaction-Specific
guidance regarding model clauses on model clauses for disclosures required
under § 226.32(c), such as a notice to the Disclosures for Loans Secured by Real
carryover interest, a conversion feature,
borrower that he or she is not obligated Property or a Dwelling
or a preferred rate. In a technical
revision, the Board would revise to accept the terms of the loan and Currently, Appendix H contains
comment app. H–4 to update the cross- security interest disclosures. As several model forms, model clauses and
reference to § 226.18(f). discussed under proposed samples that creditors may use to
§ 226.32(c)(1), the Board would require comply with the disclosures required
Model Forms, Model Clauses, and creditors to provide plain-language under current § 226.18 for transactions
Sample Forms for ARM Adjustment versions of the ‘‘no obligation’’ and secured by real property or a dwelling.
Notices ‘‘security interest’’ disclosures to better Current Model H–2 illustrates the
Currently, Appendix H contains inform consumers who are considering format and content of disclosures
Model Clause H–4(D), which contains obtaining HOEPA loans. The Board currently required under § 226.18 for
model clauses regarding interest rate would revise Mortgage Sample H–16 mortgages. Current Model Clause H–6
and payment adjustment notices accordingly. In addition, the Board contains a model clause for an
required for variable-rate transactions proposes to revise commentary assumption policy. Current Samples H–
under current § 226.20(c). As discussed currently contained in comment app. 13 and H–15 are sample disclosures
above under proposed§ 226.20(c), the H–20 to clarify that these disclosures are illustrating a mortgage with a demand
Board proposes new timing and required for all HOEPA loans, and as feature and a graduated-payment
disclosure requirements regarding noted below, would move this mortgage, respectively.
As discussed under proposed Under the proposal, the Board would 3. Standard spacing between words
§ 226.38, the Board proposes a new update the cross-references contained in and characters.
disclosure regime for transactions current comment app. H–12 to clarify 4. Sufficient white space around the
secured by real property or a dwelling. that the commentary applies to text of the information in each row, by
Accordingly, the Board proposes to add proposed Sample H–4(D) through-4(F) providing sufficient margins above,
new Model Forms, Model Clauses, and for ARM loan program disclosures below and to the sides of the text.
Sample Forms H–19 through H–23 that required under proposed § 226.19(b); 5. Sufficient contrast between the text
creditors may use to comply with the Samples H–4(I) and H–4(J) for ARM and the background. Black text was
requirements in proposed § 226.38(a) adjustment notice disclosures required used on white paper.
through (j). The Board proposes to add under § 226.20(c); Sample H–17(D) for Although the Board is not requiring
Models H–19(A) through H–19(C) to credit insurance, debt cancellation or creditors to use the above formatting
illustrate the format and content of debt suspension disclosures required techniques in presenting information in
disclosures required under proposed under § 226.4(d)(1), (d)(3) and 226.38(h); the table (except for the 10-point and
§ 226.38 for fixed-rate, hybrid and Samples H–19(D) through H–19(I) 16-point font size), the Board
adjustable-rate, and payment option for disclosures required under § 226.38 encourages creditors to consider these
mortgages, respectively. In addition, the for transactions secured by real property techniques when disclosing information
Board would add Model Clauses H–20 or a dwelling. in the tabular format, or scaled graph, to
and H–21 to provide guidance to Current comment app. H–16 provides ensure that the information is presented
creditors on how to disclose a balloon guidance regarding the sample forms in a readable format.
payment or introductory rate feature, that creditors may use to illustrate Under the proposal, commentary
respectively. Model Clause H–22 would required disclosures for mortgages currently contained in comment app.
be added to provide model clauses subject to RESPA and would be updated H–19 regarding the terms of a
relating to key questions about risk to include cross-references to proposed graduated-payment mortgage would be
disclosures required under proposed Samples H–19(D) through H–19(I), and deleted, and would instead indicate the
§ 226.38(d)(2). Model Clause H–23 to the itemization of amount financed terms of the fixed-rate mortgage
would be added to provide model disclosure under proposed illustrated in Sample H–19(D). As noted
clauses for the following disclosures § 226.38(j)(1)(iii). Under the proposal, above, guidance contained in current
required under proposed § 226.38(j)(2)– guidance contained in current comment app.
(6) for transactions secured by real app. H–17 regarding disclosure of a H–20 regarding disclosures required
property or a dwelling: rebate; late mortgage with a demand feature under under § 226.32(c) would be moved to
payment; property insurance; contract § 226.18 would be deleted as comment app. H–17. The Board
reference; and assumption policy. unnecessary. As noted above, proposes to add new commentary to
Under the proposal, current Samples H– commentary regarding disclosures comment app. H–20 to indicate the
13 and H–15 would be rendered required under § 226.32(c) for HOEPA terms of the interest-only, fixed-rate
unnecessary and therefore, are deleted loans would be moved from comment mortgage illustrated in Sample H–19(E).
and reserved. Model Clause H–6, which app. H–20 to comment app. H–17. The Board also proposes to add
contains the current model clause for In addition, under the proposal, comments app. H–21 through –24 to
assumption, would be deleted because current comment app. H–18, which indicate the terms of the following
assumption policies are only applicable contains guidance relating to variable- transaction types, which are illustrated
to transactions secured by real property rate disclosures required under current in Samples H–19(F) through 19(I),
or a dwelling; H–6 would be reserved. § 226.19(b), would be deleted. New respectively: a step-payment mortgage; a
In addition, the Board proposes to add commentary would be added to hybrid ARM; an interest-only ARM; and
several sample forms to provide comment app. H–18 to provide format a payment option ARM. The
examples of how creditors can provide details about proposed sample forms transactions discussed in revised
certain disclosures required under that illustrate the disclosures required comments app. H–19 and H–20, and
proposed § 226.38 in the tabular format for transactions secured by real property new comments app. H–21 through –24,
or scaled graph, as applicable, for or a dwelling under proposed all assume the average prime offer rates
various transaction types secured by § 226.19(b) or 226.38, as applicable. For (APORs) that would be used in
real property or a dwelling. Specifically, example, the commentary indicates that providing the disclosures required
proposed Samples H–19(D) through H– Samples H–4(D) through H–4(F), and H– under proposed § 226.38(b), and are not
19(I) illustrate disclosures required 19(D) through H–19(I) are designed to be representative of the actual APORs for
under proposed § 226.38 for the printed on an 81⁄2x11 inch sheet of the respective weeks.
following transaction-types, paper. In addition, the following Further, the Board proposes to add
respectively: a fixed mortgage with formatting techniques were used in comments app. H–25 through –28
balloon payment; an interest only, fixed presenting the information in the table relating to the following, respectively:
mortgage; a step-payment mortgage; a to ensure that the information was the disclosure required under proposed
hybrid adjustable-rate mortgage; an readable: § 226.38(c) for a balloon payment
interest-only ARM; and a payment 1. A readable font style and font size feature; the disclosure required under
option ARM. (10-point Ariel font style, except for the proposed § 226.38(c)(2)(iii) for
The Board also proposes to add or APR which is shown in 16-point type). transactions that have an initial
revise commentary to provide guidance 2. Sufficient spacing between lines of discounted rate that later adjusts;
to creditors on the purpose of the the text. That is, words were not disclosures required under proposed
sample forms, and how to use Model compressed to appear smaller than 10- § 226.19(d)(2) for key questions about
Forms, Model Clauses, and Sample point type, except for headings used to risk that would be provided only as
Forms H–19 through H–23 for provide interest rate and payment applicable; and disclosures required
transactions secured by real property or summary disclosures required under under proposed § 226.38(j)(2)–(6) that
a dwelling. Current comment app. H–12 proposed § 226.28(c), in the tabular would be provided separately from
provides guidance to creditors regarding format, which are shown in 9-point disclosures required under proposed
the purpose of sample forms generally. type. § 226.38(a)–(j). In a technical revision,
current comments app. H–21 through banks and other creditors supervised by proposed disclosure and timing
–24, which contain guidance relating to the Federal Reserve that engage in requirements of the Board’s separate
forms issued by the U.S. Department of consumer credit activities covered by notice published simultaneously with
Health and Human Services and Regulation Z and, therefore, are this proposal for open-end credit plans
approved for certain student loans, respondents under the PRA. Appendix secured by real property.
would be redesignated as comments I of Regulation Z defines the Federal The Board estimates that 1,138
app. H–29 through –32, respectively; no Reserve-regulated institutions as: State respondents regulated by the Federal
substantive change is intended. member banks, branches and agencies of Reserve would take, on average, 200
foreign banks (other than federal hours (five business weeks) to update
VII. Paperwork Reduction Act
branches, federal agencies, and insured their systems, internal procedure
In accordance with the Paperwork State branches of foreign banks), manuals, and provide training for
Reduction Act (PRA) of 1995 (44 U.S.C. commercial lending companies owned relevant staff to comply with the
3506; 5 CFR part 1320 Appendix A.1), or controlled by foreign banks, and proposed disclosure requirements in
the Board reviewed the proposed rule organizations operating under section §§ 226.38 and 226.20(d), and revisions
under the authority delegated to the 25 or 25A of the Federal Reserve Act. to existing disclosure requirements in
Board by the Office of Management and Other federal agencies account for the §§ 226.19(b) and 226.20(c). This one-
Budget (OMB). The collection of paperwork burden imposed on the time revision would increase the burden
information that is required by this entities for which they have by 227,600 hours. On a continuing basis
proposed rule is found in 12 CFR part administrative enforcement authority. the Board estimates that 1,138
226. The Board may not conduct or The current total annual burden to respondents regulated by the Federal
sponsor, and an organization is not comply with the provisions of Reserve would take, on average, 40
required to respond to, this information Regulation Z is estimated to be 734,127 hours a month to comply with the
collection unless the information hours for the 1,138 Federal Reserve- closed-end disclosure requirements and
collection displays a currently valid regulated institutions that are deemed to would increase the ongoing burden from
OMB control number. The OMB control be respondents for the purposes of the 304,756 hours to 546,240 hours. To ease
number is 7100–0199. PRA. To ease the burden and cost of the burden and cost of complying with
This information collection is complying with Regulation Z the new and proposed requirements
required to provide benefits for (particularly for small entities), the under Regulation Z the Board proposes
consumers and is mandatory (15 U.S.C. Board provides model forms, which are to revise or add several model forms,
1601 et seq.). Since the Board does not appended to the regulation. model clauses and sample forms to
collect any information, no issue of As discussed in the preamble, the
Appendix H.
confidentiality arises. The respondents/ Board proposes changes to format,
recordkeepers are creditors and other timing, and content requirements for the The other federal financial agencies:
entities subject to Regulation Z. four main types of credit disclosures for Office of the Comptroller of the
TILA and Regulation Z are intended closed-end mortgages governed by Currency (OCC), Office of Thrift
to ensure effective disclosure of the Regulation Z: (1) Disclosures at or before Supervision (OTS), the Federal Deposit
costs and terms of credit to consumers. application; (2) disclosures within three Insurance Corporation (FDIC), and the
For open-end credit, creditors are days after application; (3) disclosures National Credit Union Administration
required to, among other things, before consummation; and (4) (NCUA) are responsible for estimating
disclose information about the initial disclosures after consummation. The and reporting to OMB the total
costs and terms and to provide periodic proposed rule would impose a one-time paperwork burden for the domestically
statements of account activity, notice of increase in the total annual burden chartered commercial banks, thrifts, and
changes in terms, and statements of under Regulation Z for all respondents federal credit unions and U.S. branches
rights concerning billing error regulated by the Federal Reserve by and agencies of foreign banks for which
procedures. Regulation Z requires 227,600 hours, from 734,127 to 961,727 they have primary administrative
specific types of disclosures for credit hours. In addition, the Board estimates enforcement jurisdiction under TILA
and charge card accounts and home that, on a continuing basis, the proposed Section 108(a), 15. U.S.C. 1607(a). These
equity plans. For closed-end loans, such revisions to the rules would increase the agencies are permitted, but are not
as mortgage and installment loans, cost total annual burden on a continuing required, to use the Board’s burden
disclosures are required to be provided basis from 734,127 to 1,280,367 hours. estimation methodology. Using the
prior to consummation. Special The total estimated burden increase, Board’s method, the total current
disclosures are required in connection as well as the estimates of the burden estimated annual burden for the
with certain products, such as reverse increase associated with each major approximately 17,200 domestically
mortgages, certain variable-rate loans, section of the proposed rule as set forth chartered commercial banks, thrifts, and
and certain mortgages with rates and below, represents averages for all federal credit unions and U.S. branches
fees above specified thresholds. TILA respondents regulated by the Federal and agencies of foreign banks
and Regulation Z also contain rules Reserve. The Board expects that the supervised by the Federal Reserve, OCC,
concerning credit advertising. Creditors amount of time required to implement OTS, FDIC, and NCUA under TILA
are required to retain evidence of each of the proposed changes for a given would be approximately 13,568,725
compliance for two years, § 226.25, but institution may vary based on the size hours. The proposed rule would impose
Regulation Z identifies only a few and complexity of the respondent. a one-time increase in the estimated
specific types of records that must be Furthermore, the burden estimate for annual burden for such institutions by
retained.92 this rulemaking does not include the 3,440,000 hours to 17,765,525 hours. On
Under the PRA, the Board accounts burden of complying with proposed a continuing basis the proposed rule
for the paperwork burden associated disclosure and timing requirements that would impose an increase in the
with Regulation Z for the State member apply to private educational lenders estimated annual burden by 8,256,000
making private education loans as to 21,824,725 hours. The above
92 See comments 25(a)–3 and –4 and proposed announced in a separate proposed estimates represent an average across all
comment 25(a)–5. rulemaking (Docket No. R–1353) or the respondents; the Board expects
variations between institutions based on consumer credit providers would be proposed pursuant to the Board’s
their size, complexity, and practices. strengthened by the informed use of statutory responsibility to prohibit
Comments are invited on: (1) Whether credit resulting from consumers’ unfair and deceptive acts and practices
the proposed collection of information awareness of the cost of credit. One of in connection with mortgage loans.
is necessary for the proper performance the stated purposes of TILA is to
of the Board’s functions; including B. Statement of Objectives and Legal
provide a meaningful disclosure of
whether the information has practical Basis
credit terms to enable consumers to
utility; (2) the accuracy of the Board’s compare credit terms available in the The SUPPLEMENTARY INFORMATION
estimate of the burden of the proposed marketplace more readily and avoid the contains this information. In summary,
information collection, including the uninformed use of credit. In this regard, the proposed amendments to Regulation
cost of compliance; (3) ways to enhance the goal of the proposed amendments to Z are designed to achieve three goals: (1)
the quality, utility, and clarity of the Regulation Z is to improve the Revise the disclosures required for
information to be collected; and (4) effectiveness of the disclosures that closed-end mortgage loans; (2) restrict
ways to minimize the burden of creditors provide to consumers certain loan originator compensation
information collection on respondents, beginning before application and practices for mortgage loans; and (3)
including through the use of automated throughout the life of a closed-end require disclosures for closed-end
collection techniques or other forms of mortgage transaction. Accordingly, the mortgage loans to be provided earlier in
information technology. Comments on Board is proposing changes to format, the transaction and additional post-
the collection of information should be timing, and content requirements for consummation disclosures for certain
sent to Cynthia Ayouch, Acting Federal closed-end disclosures required by changes in terms.
Reserve Board Clearance Officer, Regulation Z: (1) Program and other The legal basis for the proposed rule
Division of Research and Statistics, Mail educational information provided before is in Sections 105(a), 105(f), and
Stop 95–A, Board of Governors of the application; (2) transaction-specific 129(l)(2) of TILA. 15 U.S.C. 1604(a),
Federal Reserve System, Washington, disclosures provided at or shortly after 1604(f), and 1639(l)(2). A more detailed
DC 20551, with copies of such application; (3) transaction-specific discussion of the Board’s rulemaking
comments sent to the Office of disclosures provided at or three authority is set forth in part IV of the
Management and Budget, Paperwork business days before consummation; SUPPLEMENTARY INFORMATION.
Reduction Project (7100–0199), and notices of changes to the C. Description of Small Entities to
Washington, DC 20503. transaction’s terms and regarding Which the Proposed Rule Would Apply
certain payment options provided
VIII. Initial Regulatory Flexibility The proposed regulations would
during the life of the credit.
Analysis Congress enacted HOEPA in 1994 as apply to all institutions and entities that
In accordance with section 3(a) of the an amendment to TILA. TILA is engage in originating or extending
Regulatory Flexibility Act (RFA), 5 implemented by the Board’s Regulation closed-end, home-secured credit. The
U.S.C. 601–612, the Board is publishing Z. HOEPA imposed additional Board is not aware of a reliable source
an initial regulatory flexibility analysis substantive protections on certain high- for the total number of small entities
for the proposed amendments to cost mortgage transactions. HOEPA also likely to be affected by the proposal, and
Regulation Z. The RFA requires an charged the Board with prohibiting acts the credit provisions of TILA and
agency either to provide an initial or practices in connection with Regulation Z have broad applicability to
regulatory flexibility analysis with a mortgage loans that are unfair, individuals and businesses that
proposed rule or to certify that the deceptive, or designed to evade the originate, extend and service even small
proposed rule will not have a significant purposes of HOEPA, and acts or numbers of home-secured credit. See
economic impact on a substantial practices in connection with refinancing § 226.1(c)(1).94 All small entities that
number of small entities. Under of mortgage loans that are associated originate, extend, or service closed-end
regulations issued by the Small with abusive lending or are otherwise loans secured by real property or a
Business Administration, an entity is not in the interest of borrowers. dwelling potentially could be subject to
considered ‘‘small’’ if it has $175 The proposed regulations would at least some aspects of the proposed
million or less in assets for banks and revise and enhance many of the closed- rule.
end disclosure requirements of The Board can, however, identify
other depository institutions; and $7
Regulation Z for transactions secured by through data from Reports of Condition
million or less in revenues for non-bank
real property or a dwelling. The Board’s and Income (‘‘call reports’’) approximate
mortgage lenders and mortgage
proposal also would require TILA numbers of small depository institutions
brokers.93
Based on its analysis and for the disclosures for closed-end mortgages to that would be subject to the proposed
reasons stated below, the Board believes be provided to the consumer earlier in rules. Based on December 2008 call
that this proposed rule will have a the loan process and would expand on report data, approximately 9,418 small
significant economic impact on a the post-consummation notification institutions would be subject to the
substantial number of small entities. A requirements concerning changes in proposed rule. Approximately 16,345
final regulatory flexibility analysis will mortgage terms. These amendments are depository institutions in the United
be conducted after consideration of proposed in furtherance of the Board’s States filed call report data,
comments received during the public responsibility to prescribe regulations to approximately 11,907 of which had total
comment period. The Board requests carry out the purposes of TILA,
94 Regulation Z generally applies to ‘‘each
public comment in the following areas. including promoting consumers’
individual or business that offers or extends credit
awareness of the cost of credit and their when four conditions are met: (i) The credit is
A. Reasons for the Proposed Rule informed use thereof. Finally, the offered or extended to consumers; (ii) the offering
Congress enacted TILA based on proposal would restrict certain loan or extension of credit is done regularly, (iii) the
findings that economic stability would originator compensation practices for credit is subject to a finance charge or is payable
by a written agreement in more than four
be enhanced and competition among closed-end mortgage loans to address installments, and (iv) the credit is primarily for
problems that have been observed in the personal, family, or household purposes.’’
93 13 CFR 121.201. mortgage market. These restrictions are § 226.1(c)(1).
domestic assets of $175 million or less brokers’’ in the United States at that Overlap With RESPA
and thus were considered small entities time.98 Certain terms defined in the proposed
for purposes of the Regulatory rule, such as ‘‘total settlement charges’’
D. Projected Reporting, Recordkeeping,
Flexibility Act. Of 4,231 banks, 565 cross-reference definitions under the
and Other Compliance Requirements
thrifts and 7,111 credit unions that filed U.S. Department of Housing and Urban
call report data and were considered The compliance requirements of the Development’s (HUD’s) Regulation X
small entities, 4,091 banks, 530 thrifts, proposed rules are described in parts V under the Real Estate Settlement
and 4,797 credit unions, totaling 9,418 and VI of the SUPPLEMENTARY Procedures Act (RESPA). The proposed
institutions, extended mortgage credit. INFORMATION. The effect of the proposed rule also would modify the existing
For purposes of this analysis, thrifts revisions to Regulation Z on small prerequisites for use of the RESPA good
include savings banks, savings and loan entities is unknown. Some small entities faith estimate of settlement costs and
entities, co-operative banks and would be required, among other things, HUD–1 settlement statement in lieu of
industrial banks. to modify their home-secured credit the itemization of the amount financed
The Board cannot identify with disclosures and processes for delivery under Regulation Z.
certainty the number of small non- thereof to comply with the revised rules.
depository institutions that would be The precise costs to small entities of Overlap With HUD’s Guidance
subject to the proposed rule. Home updating their systems and disclosures The Board recognizes that HUD has
Mortgage Disclosure Act (HMDA) 95 data are difficult to predict. These costs will issued policy statements regarding
indicate that 1,752 non-depository depend on a number of unknown creditor payments to mortgage brokers
institutions filed HMDA reports in factors, including, among other things, under RESPA and guidance as to
2007.96 Based on the small volume of the specifications of the current systems disclosure of such payments on the
lending activity reported by these used by such entities to prepare and Good Faith Estimate and HUD–1
institutions, most are likely to be small. provide disclosures and to administer Settlement Statement. HUD also has
The proposal’s restrictions on and maintain accounts, the complexity published revised disclosures for broker
compensation of loan originators would of the terms of credit products that they compensation under RESPA to become
apply to mortgage brokers. Loan offer, and the range of such product effective January 1, 2010. The Board
originators other than mortgage brokers offerings. intends that its proposal would
that would be affected by the proposal Additionally, the proposed rules complement HUD’s final rule. The
are employees of creditors (or of could affect how loan originators are proposed provision regarding creditor
brokers) and, as such, are not business compensated and would impose certain payments to loan originators is intended
entities in their own right. In its 2008 related recordkeeping requirements on to be consistent with HUD’s existing
proposed rule under HOEPA, 73 FR creditors. The precise costs that the guidance regarding broker
1672, 1720; Jan. 9, 2008, the Board proposed rule would impose on compensation under Section 8 of
noted that, according to the National mortgage creditors and loan originators RESPA. The proposed provision
Association of Mortgage Brokers are also difficult to ascertain. regarding record retention to evidence
(NAMB), in 2004 there were 53,000 Nevertheless, the Board believes that compliance with the provision
mortgage brokerage companies that these costs will have a significant regarding creditor payments to loan
employed an estimated 418,700 economic effect on small entities, originators would cross-reference the
people.97 The Board estimated that most including small mortgage creditors and HUD–1 settlement statement as an
of these companies are small entities. brokers. The Board seeks information acceptable record of such compensation
On the other hand, the U.S. Census and comment on any costs, compliance paid in a given transaction.
Bureau’s 2002 Economic Census requirements, or changes in operating
F. Identification of Duplicative,
indicates that there were only 17,041 procedures arising from the application
Overlapping, or Conflicting State Laws
‘‘mortgage and nonmortgage loan of the proposed rule to small businesses.
State Laws Regulating Creditor
E. Identification of Duplicative,
95 The 8,610 lenders (both depository institutions Payments to Loan Originators
Overlapping, or Conflicting Federal
and mortgage companies) covered by HMDA in The Board is aware that many states
2007 accounted for an estimated 80% of all home Rules
lending in the United States (2008 HMDA data are regulate loan originators, especially
not yet available). Under HMDA, lenders use a
Other Federal Rules mortgage brokers, and their
‘‘loan/application register’’ (HMDA/LAR) to report The Board has not identified any compensation in various respects.
information annually to their Federal supervisory Under TILA Section 111, the proposed
agencies for each application and loan acted on federal rules that conflict with the
during the calendar year. Lenders must make their proposed revisions to Regulation Z. rule would not preempt such State laws
HMDA/LARs available to the public by March 31 except to the extent they are
following the year to which the data relate, and they Overlap With SAFE Act inconsistent with the proposal’s
must remove the two date-related fields to help requirements. 15 U.S.C. 1610.
preserve applicants’ privacy. Only lenders that have The proposed rule’s required
offices (or, for non-depository institutions, are disclosure contents for closed-end State Equivalents to TILA and HOEPA
deemed to have offices) in metropolitan areas are mortgage transactions would overlap
required to report under HMDA. However, if a with the Secure and Fair Enforcement Many states regulate consumer credit
lender is required to report, it must report
for Mortgage Licensing Act of 2008 through statutory disclosure schemes
information on all of its home loan applications and similar to TILA. Similarly to State laws
loans in all locations, including non-metropolitan (SAFE Act) by requiring that the
areas. disclosure include the loan originator’s regulating loan originator compensation,
96 The 2007 HMDA Data, http://
unique identifier, as defined by that Act, such state disclosure laws would be
www.federalreserve.gov/pubs/bulletin/2008/
if applicable. preempted only to the extent they are
articles/hmda/default.htm. inconsistent with the proposal’s
97 http://www.namb.org/namb/
requirements. Id.
Industry_Facts.asp?SnID=719224934. This page of 98 http://www.census.gov/prod/ec02/
the NAMB Web site, however, no longer provides ec0252a1us.pdf (NAICS code 522310). Data on this
The Board also is aware that many
an estimate of the number of mortgage brokerage industry sector are not yet available from the 2007 states regulate ‘‘high-cost’’ or ‘‘high-
companies. Economic Census. priced’’ mortgage loans, under laws that
resemble HOEPA. Many such State laws (b) Purpose. The purpose of this and imposed directly or indirectly by
set their coverage tests in part on the regulation is to promote the informed the creditor as an incident to or a
APR of the transaction. The proposed use of consumer credit by requiring condition of the extension of credit. It
rule would overlap with these laws disclosures about its terms and cost. The does not include any charge of a type
indirectly by virtue of the proposal to regulation also gives consumers the payable in a comparable cash
modify the definition of the finance right to cancel certain credit transaction.
charge for closed-end mortgage transactions that involve a lien on a (1) Charges by third parties. The
transactions, which would result in consumer’s principal dwelling, finance charge includes fees and
APRs being higher generally and regulates certain credit card practices, amounts charged by someone other than
potentially more loans being covered and provides a means for fair and timely the creditor, unless otherwise excluded
under such State laws. resolution of credit billing disputes. The under this section, if the creditor:
The Board seeks comment regarding regulation does not govern charges for (i) Requires the use of a third party as
any State or local statutes or regulations consumer credit. The regulation a condition of or an incident to the
that would duplicate, overlap, or requires a maximum interest rate to be extension of credit, even if the
conflict with the proposed rule. stated in variable-rate contracts secured consumer can choose the third party; or
by the consumer’s dwelling. It also (ii) Retains a portion of the third-party
G. Discussion of Significant Alternatives
imposes limitations on home-equity charge, to the extent of the portion
The Board considered whether plans that are subject to the retained.
improved disclosures could protect requirements of § 226.5b and mortgages (2) Special rule; closing agent charges.
consumers against unfair loan originator that are subject to the requirements of flExcept as provided in § 226.4(g),
compensation practices for mortgages as § 226.32. The regulation prohibits feesfi [Fees] charged by a third party
well as the proposed rule. While the certain acts or practices in connection that conducts the loan closing (such as
Board is proposing improvements to with credit secured by flreal property a settlement agent, attorney, or escrow
mortgage loan disclosures, it does not orfi a consumer’s [principal] dwelling or title company) are finance charges
appear that better disclosures would flin § 226.36, and credit secured by a only if the creditor:
address loan originator compensation consumer’s principal dwelling in (i) Requires the particular services for
practices adequately. § 226.35.fi which the consumer is charged;
The Board welcomes comments on (ii) Requires the imposition of the
any significant alternatives, consistent * * * * * charge; or
with the requirements of TILA, that (d) * * * (iii) Retains a portion of the third-
would minimize the impact of the (5) Subpart E contains special rules party charge, to the extent of the portion
proposed rule on small entities. for mortgage transactions. Section retained.
226.32 requires certain disclosures and (3) Special rule; mortgage broker fees.
List of Subjects in 12 CFR Part 226 provides limitations for flclosed-endfi Fees charged by a mortgage broker
Advertising, Consumer protection, loans that have rates and fees above (including fees paid by the consumer
Federal Reserve System, Mortgages, specified amounts. Section 226.33 directly to the broker or to the creditor
Reporting and recordkeeping requires disclosures, including the total for delivery to the broker) are finance
requirements, Truth in lending. annual loan cost rate, for reverse charges even if the creditor does not
mortgage transactions. Section 226.34 require the consumer to use a mortgage
Text of Proposed Revisions prohibits specific acts and practices in broker and even if the creditor does not
Certain conventions have been used connection with flclosed-endfi retain any portion of the charge.
to highlight the proposed revisions. mortgage transactions that are subject to (b) Examples of finance charge. The
New language is shown inside bold § 226.32. Section 226.35 prohibits finance charge includes the following
arrows, and language that would be specific acts and practices in connection types of charges, except for charges
deleted is shown inside bold brackets. with flclosed-endfi higher-priced specifically excluded by paragraphs (c)
Authority and Issuance mortgage loans, as defined in through (e) of this section:
§ 226.35(a). Section 226.36 prohibits (1) Interest, time price differential,
For the reasons set forth in the specific acts and practices in connection and any amount payable under an add-
preamble, the Board proposes to amend with flextensions offi credit secured on or discount system of additional
Regulation Z, 12 CFR part 226, as set by flreal property orfi a consumer’s charges.
forth below: [principal] dwelling. flSection 226.37 (2) Service, transaction, activity, and
provides general disclosure carrying charges, including any charge
PART 226—TRUTH IN LENDING
requirements for closed-end extensions imposed on a checking or other
(REGULATION Z)
of credit secured by real property or a transaction account to the extent that
1. The authority citation for part 226 consumer’s dwelling. Section 38 the charge exceeds the charge for a
continues to read as follows: provides the content of disclosures for similar account without a credit feature.
Authority: 12 U.S.C. 3806; 15 U.S.C. 1604, closed-end extensions of credit secured (3) Points, loan fees, assumption fees,
1637(c)(5), and 1639(l); Public Law 111–24 by real property or a consumer’s finder’s fees, and similar charges.
§ 2, 123 Stat. 1734. dwelling.fi (4) Appraisal, investigation, and
* * * * * credit report fees.
Subpart A—General 3. Section 226.4, as amended on (5) Premiums or other charges for any
2. Section 226.1, as amended on January 29, 2009 (74 FR 5399) is revised guarantee or insurance protecting the
January 29, 2009 (74 FR 5397) is to read as follows: creditor against the consumer’s default
amended by revising paragraphs (b) and or other credit loss.
§ 226.4 Finance charge. (6) Charges imposed on a creditor by
(d)(5) to read as follows:
(a) Definition. The finance charge is another person for purchasing or
§ 226.1 Authority, purpose, coverage, the cost of consumer credit as a dollar accepting a consumer’s obligation, if the
organization, enforcement and liability. amount. It includes any charge payable consumer is required to pay the charges
* * * * * directly or indirectly by the consumer in cash, as an addition to the obligation,
or as a deduction from the proceeds of amounts would not otherwise be insurance is less than the term of the
the obligation. included in the finance charge. transaction, the term of insurance shall
(7) Premiums or other charges for (8) Discounts offered to induce also be disclosed. The premium may be
credit life, accident, health, or loss-of- payment for a purchase by cash, check, disclosed on a unit-cost basis only in
income insurance, written in connection or other means, as provided in section open-end credit transactions, closed-end
with a credit transaction. 167(b) of the Act. credit transactions by mail or telephone
(8) Premiums or other charges for (d) Insurance and debt cancellation under § 226.17(g), and certain closed-
insurance against loss of or damage to and debt suspension coverage. (1) end credit transactions involving an
property, or against liability arising out Voluntary credit insurance premiums. insurance plan that limits the total
of the ownership or use of property, flExcept as provided in § 226.4(g), amount of indebtedness subject to
written in connection with a credit premiumsfi [Premiums] for credit life, coverage.
transaction. accident, health, or loss-of-income (3) Voluntary debt cancellation or
(9) Discounts for the purpose of insurance may be excluded from the debt suspension fees. flExcept as
inducing payment by a means other finance charge if the following provided in § 226.4(g), chargesfi
than the use of credit. conditions are met: [Charges] or premiums paid for debt
(10) Charges or premiums paid for (i) The insurance coverage is not cancellation coverage for amounts
debt cancellation or debt suspension required by the creditor, and this fact is exceeding the value of the collateral
coverage written in connection with a disclosed in writing. securing the obligation or for debt
credit transaction, whether or not the (ii) The premium for the initial term cancellation or debt suspension
debt cancellation coverage is insurance of insurance coverage is disclosed in coverage in the event of the loss of life,
under applicable law. writing. If the term of insurance is less health, or income or in case of accident
(c) Charges excluded from the finance than the term of the transaction, the may be excluded from the finance
charge. flExcept as provided in term of insurance also shall be charge, whether or not the coverage is
§ 226.4(g), thefi [The] following charges disclosed. The premium may be insurance, if the following conditions
are not finance charges: disclosed on a unit-cost basis only in are met:
(1) Application fees charged to all open-end credit transactions, closed-end (i) The debt cancellation or debt
applicants for credit, whether or not credit transactions by mail or telephone suspension agreement or coverage is not
credit is actually extended. under § 226.17(g), and certain closed- required by the creditor, and this fact is
(2) Charges for actual unanticipated end credit transactions involving an disclosed in writing.
late payment, for exceeding a credit insurance plan that limits the total (ii) The fee or premium for the initial
limit, or for delinquency, default, or a amount of indebtedness subject to term of coverage is disclosed in writing.
similar occurrence. coverage. If the term of coverage is less than the
(3) Charges imposed by a financial (iii) The consumer signs or initials an term of the credit transaction, the term
institution for paying items that affirmative written request for the of coverage also shall be disclosed. The
overdraw an account, unless the insurance after receiving the disclosures fee or premium may be disclosed on a
payment of such items and the specified in this paragraph, except as unit-cost basis only in open-end credit
imposition of the charge were provided in paragraph (d)(4) of this transactions, closed-end credit
previously agreed upon in writing. section. Any consumer in the transactions by mail or telephone under
(4) Fees charged for participation in a transaction may sign or initial the § 226.17(g), and certain closed-end
credit plan, whether assessed on an request. credit transactions involving a debt
annual or other periodic basis. fl(iv) The creditor determines at the cancellation agreement that limits the
(5) Seller’s points. time of enrollment that the consumer total amount of indebtedness subject to
(6) Interest forfeited as a result of an meets any applicable age or coverage.
interest reduction required by law on a employment eligibility criteria for (iii) The following are disclosed, as
time deposit used as security for an insurance coverage.fi applicable, for debt suspension
extension of credit. (2) Property insurance premiums. coverage: That the obligation to pay loan
(7) Real-estate related fees. The Premiums for insurance against loss of principal and interest is only
following fees in flan open-end credit or damage to property, or against suspended, and that interest will
planfi [a transaction] secured by real liability arising out of the ownership or continue to accrue during the period of
property or in flan open-endfi [a] use of property, including single interest suspension.
residential mortgage transaction, if the insurance if the insurer waives all right (iv) The consumer signs or initials an
fees are bona fide and reasonable in of subrogation against the consumer,5 affirmative written request for coverage
amount: may be excluded from the finance after receiving the disclosures specified
(i) Fees for title examination, abstract charge if the following conditions are in this paragraph, except as provided in
of title, title insurance, property survey, met: paragraph (d)(4) of this section. Any
and similar purposes. (i) The insurance coverage may be consumer in the transaction may sign or
(ii) Fees for preparing loan-related obtained from a person of the initial the request.
documents, such as deeds, mortgages, consumer’s choice,6 and this fact is fl(v) The creditor determines at the
and reconveyance or settlement disclosed. (A creditor may reserve the time of enrollment that the consumer
documents. right to refuse to accept, for reasonable meets any applicable age or
(iii) Notary and credit report fees. cause, an insurer offered by the employment eligibility criteria for the
(iv) Property appraisal fees or fees for consumer.) debt cancellation or debt suspension
inspections to assess the value or (ii) If the coverage is obtained from or agreement or coverage.fi
condition of the property if the service through the creditor, the premium for (4) Telephone purchases. If a
is performed prior to closing, including the initial term of insurance coverage consumer purchases credit insurance or
fees related to pest infestation or flood shall be disclosed. If the term of debt cancellation or debt suspension
hazard determinations. coverage for an open-end [(not home-
(v) Amounts required to be paid into 5 [Reserved]. secured)] plan by telephone, the creditor
escrow or trustee accounts if the 6 [Reserved]. must make the disclosures under
paragraphs (d)(1)(i) and (ii) or (d)(3)(i) applicable provisions of the Electronic disclosure timing requirements for
through (iii) of this section, as Signatures in Global and National adjustable-rate transactions secured by
applicable, orally. In such a case, the Commerce Act (E-Sign Act) (15 U.S.C. real property or a dwelling are set forth
creditor shall: 7001 et seq.). flFor transactions secured in § 226.19(b) and § 226.20(c).fi In
(i) Maintain evidence that the by real property or a dwelling, certain transactions involving mail or
consumer, after being provided the disclosures required by § 226.19(b) or (c) telephone orders or a series of sales, the
disclosures orally, affirmatively elected must be provided in electronic form in timing of disclosures may be delayed in
to purchase the insurance or coverage; specified circumstances.fi The accordance with paragraphs (g) and (h)
and disclosures required by §§ 226.17(g), of this section.
(ii) Mail the disclosures under 226.19(b),fl 226.19(c),fi and 226.24 (c) Basis of disclosures and use of
paragraphs (d)(1)(i) and (ii) or (d)(3)(i) may be provided to the consumer in estimates. (1) flLegal obligation.fi The
through (iii) of this section, as electronic form without regard to the disclosures flrequired by this
applicable, within three business days consumer consent or other provisions of subpartfi shall reflect the terms of the
after the telephone purchase. the E–Sign Act in the circumstances set legal obligation between the parties.
(e) Certain security interest charges. forth in those sections. The disclosures fl(i) Buydowns. The creditor shall
flExcept as provided in § 226.4(g), iffi flrequired by § 226.18 or § 226.38fi disclose an annual percentage rate that
[If] itemized and disclosed, the shall be grouped together, shall be is a composite rate based on the interest
following charges may be excluded from segregated from everything else, and rate in effect during the initial period of
the finance charge: shall not contain any information not the term of the loan and the interest rate
(1) Taxes and fees prescribed by law directly related 37 to the disclosures in effect for the remainder of the term,
that actually are or will be paid to required under § 226.18 38flor § 226.38; if the consumer’s interest rate or
public officials for determining the however, the disclosures may include payments are reduced for all or part of
existence of or for perfecting, releasing, an acknowledgement of receipt, the date the loan term based on payments made
or satisfying a security interest. of the transaction, and the consumer’s by:
(2) The premium for insurance in lieu name, address, and account number. (A) The seller or another third party,
of perfecting a security interest to the The following disclosures may be made if the legal obligation reflects such an
extent that the premium does not together with or separately from other arrangement; or
exceed the fees described in paragraph required disclosures: the variable-rate (B) The consumer.
example under § 226.18(f)(4), insurance, (ii) Wrap-around financing. If a
(e)(1) of this section that otherwise
debt cancellation, or debt suspension transaction involves combining the
would be payable.
under § 226.18(n), and certain security outstanding balance on an existing loan
(3) Taxes on security instruments.
interest charges under § 226.18(o)fi. with additional funds advanced to a
Any tax levied on security instruments
The itemization of the amount financed consumer without paying off the
or on documents evidencing
under § 226.18(c)(1) must be separate outstanding balance, the amount
indebtedness if the payment of such
from the other disclosures under that financed shall equal the sum of the
taxes is a requirement for recording the
section. outstanding balance and the new funds
instrument securing the evidence of
(2)flExcept for transactions secured advanced.
indebtedness. (iii) Variable- or adjustable-rate
(f) Prohibited offsets. Interest, by real property or a dwelling subject to
§ 226.38, tfi[T]he terms finance charge transactions. The creditor shall base
dividends, or other income received or disclosures for a variable- or adjustable-
and annual percentage rate, when
to be received by the consumer on rate transaction on the full term of the
required to be disclosed under
deposits or investments shall not be transaction. Except as otherwise
§ 226.18(d) and (e) together with a
deducted in computing the finance provided in § 226.38(a)(3) and (c) for
corresponding amount or percentage
charge. adjustable-rate mortgage transactions
rate, shall be more conspicuous than
fl(g) Special rule; closed-end secured by real property or a dwelling:
any other disclosure, except the
mortgage transactions. Paragraphs (a)(2) (A) If the initial interest rate for a
creditor’s identity under § 226.18(a).
and (c) through (e) of this section, other (b) Time of disclosures. The creditor transaction with a variable or adjustable
than §§ 226.4(c)(2), 226.4(c)(5) and shall make disclosures before rate is determined using the index or
226.4(d)(2), do not apply to closed-end consummation of the transaction. [In formula used to adjust the interest rate,
transactions secured by real property or certain mortgage transactions, special the disclosures shall reflect the terms in
a dwelling.fi timing requirements are set forth in effect at the time of consummation.
§ 226.19(a). In certain variable-rate (B) If the initial interest rate for a
Subpart C—Closed-End Credit
transactions, special timing transaction with a variable or adjustable
4. Section 226.17 is revised to read as requirements for variable-rate rate is not determined using the index
follows: disclosures are set forth in § 226.19(b) or formula used to adjust the interest
and § 226.20(c).] flSpecial disclosure rate, the disclosures shall reflect a
§ 226.17 General disclosure requirements. timing requirements for transactions composite annual percentage rate based
(a) Form of disclosures. (1) The secured by real property or a dwelling on the initial rate for the time it is in
creditor shall make the disclosures are set forth in § 226.19(a). Additional effect and, for the remainder of the term,
required by this subpart clearly and the rate that would have applied if such
conspicuously in writing, in a form that 37 fl[Reserved]fi[The disclosures may include

index or formula had been used at the
the consumer may keep. flIn addition, an acknowledgment of receipt, the date of the time of consummation.
transaction, and the consumer’s name, address, and
transactions secured by real property or account number.]
(iv) Repayment upon occurrence of
a dwelling are subject to the 38 fl[Reserved]fi[The following disclosures may future event. If disbursements for a
requirements under § 226.37.fi The be made together with or separately from other transaction secured by real property or
disclosures required by this subpart may required disclosures: the creditor’s identity under a dwelling are made during a specified
§ 226.18(a), the variable-rate example under
be provided to the consumer in § 226.18(f)(1)(iv), insurance or debt cancellation
period but repayment is required only
electronic form, subject to compliance under § 226.18(n), and certain security interest upon the occurrence of a future event,
with the consumer-consent and other charges under § 226.18(o).] the creditor shall base disclosures on
the assumption that repayment will secured by real property or a dwelling, that additional timing requirements
occur when disbursements end. or payment summary, in a transaction apply underfi § 226.19(a)(2) and
(v) Tax refund-anticipation loans. For secured by real property or a flalternative timing requirements apply
a tax refund-anticipation loan, the dwelling,fi that results from the underfi § 226.19(a)[(5)]fl(4)fi(iii)): 39
creditor shall estimate the time a tax irregular first period: (1) Any changed term unless the term
refund will be delivered to the (i) For transactions in which the term was based on an estimate in accordance
consumer and shall include in the is less than 1 year, a first period not with § 226.17(c)(2) and was labelled an
finance charge any repayment amount more than 6 days shorter or 13 days estimate;
that exceeds the loan amount that is not longer than a regular period; (2) All changed terms, if the annual
otherwise excluded from the finance (ii) For transactions in which the term percentage rate at the time of
charge under § 226.4. is at least 1 year and less than 10 years, consummation varies from the annual
(vi) Pawn transactions. For a pawn a first period not more than 11 days percentage rate disclosed earlier by
transaction, the creditor shall disclose: shorter or 21 days longer than a regular more than 1⁄8 of 1 percentage point in a
(A) The initial sum paid to the period; and regular transaction, or more than 1⁄4 of
consumer as the amount financed; (iii) For transactions in which the 1 percentage point in an irregular
(B) A finance charge that includes the term is at least 10 years, a first period transaction, as defined in § 226.22(a).
difference between the initial sum paid shorter than or not more than 32 days (g) Mail or telephone orders—delay in
to the consumer and the price at which longer than a regular period. disclosures. flExcept for transactions
the item is pledged or sold; and (5)flDemand obligations.fi If an secured by real property or a dwelling
(C) The annual percentage rate is obligation is payable on demand, the subject to § 226.38, ifi[I]f a creditor
determined using the earliest date on creditor shall make the disclosures receives a purchase order or a request
which the item pledged or sold may be based on an assumed maturity of 1 year. for an extension of credit by mail,
redeemed as the end of the loan term.fi If an alternate maturity date is stated in telephone, or facsimile machine without
(2)flEstimates.fi (i) flReasonably the legal obligation between the parties, face-to-face or direct telephone
available information.fi If any the disclosures shall be based on that solicitation, the creditor may delay the
information necessary for an accurate date. disclosures until the due date of the first
disclosure is unknown to the creditor, (6) Multiple advance loans. payment, if the following information
the creditor shall make the disclosure (i)flSeries of advances.fi A series of for representative amounts or ranges of
based on the best information advances under an agreement to extend credit is made available in written form
reasonably available at the time the credit up to a certain amount may be or in electronic form to the consumer or
disclosure is provided to the considered as one transaction. to the public before the actual purchase
consumer[,] and shall state clearly that (ii)flMultiple-advance construction order or request:
the disclosure is an estimatefl(except loan.fi When a multiple-advance loan (1) The cash price or the principal
that § 226.19(a) limits the circumstances to finance the construction of a dwelling loan amount.
in which creditors may provide may be permanently financed by the (2) The total sale price.
estimated disclosures, for mortgage same creditor, the construction phase (3) The finance charge.
transactions secured by real property or and the permanent phase may be treated (4) The annual percentage rate, and if
a dwelling)fi. as either one transaction or more than the rate may increase after
(ii)flPer-diem interest.fi For a one transaction. consummation, the following
transaction in which a portion of the (d) Multiple creditors; multiple disclosures:
interest is determined on a per-diem consumers. If a transaction involves (i) The circumstances under which
basis and collected at consummation, more than one creditor, only one set of the rate may increase.
any disclosure affected by the per-diem disclosures shall be given and the (ii) Any limitations on the increase.
interest shall be considered accurate if creditors shall agree among themselves (iii) The effect of an increase.
the disclosure is based on the which creditor must comply with the (5) The terms of repayment.
information known to the creditor at the requirements that this regulation (h) Series of sales—delay in
time that the disclosure documents are imposes on any or all of them. If there disclosures. If a credit sale is one of a
prepared for consummation of the is more than one consumer, the series made under an agreement
transaction. disclosures may be made to any providing that subsequent sales may be
(3)flDisregarded effects.fi The consumer who is primarily liable on the added to an outstanding balance, the
creditor may disregard the effects of the obligation. If the transaction is creditor may delay the required
following in making calculations and rescindable under § 226.23, however, disclosures until the due date of the first
disclosures: the disclosures shall be made to each payment for the current sale, if the
(i) That payments must be collected in consumer who has the right to rescind. following two conditions are met:
whole cents. (e) Effect of subsequent events. If a (1) The consumer has approved in
(ii) That dates of scheduled payments disclosure becomes inaccurate because writing the annual percentage rate or
and advances may be changed because of an event that occurs after the creditor rates, the range of balances to which
the scheduled date is not a business delivers the required disclosures, the they apply, and the method of treating
day. inaccuracy is not a violation of this any unearned finance charge on an
(iii) That months have different regulation, although new disclosures existing balance.
numbers of days. may be required under paragraph (f) of (2) The creditor retains no security
(iv) The occurrence of leap year. this section, § 226.19, or § 226.20. interest in any property after the
(4)flDisregarded irregularities.fi In (f) Early disclosures. If disclosures creditor has received payments equal to
making calculations and disclosures, the required by this subpart are given before the cash price and any finance charge
creditor may disregard any irregularity the date of consummation of a attributable to the sale of that property.
in the first period that falls within the transaction and a subsequent event For purposes of this provision, in the
limits described below and any makes them inaccurate, the creditor case of items purchased on different
[payment schedule] irregularity flin the shall disclose before consummation
payment schedule, in a transaction not ([subject to the provisions of]flexcept 39 [Reserved.]
dates, the first purchased is deemed the creditor provides a statement that the [(ii)]fl(2)fi Any limitations on the
first item paid for; in the case of items consumer has the right to receive a increase.
purchased on the same date, the lowest written itemization of the amount [(iii)]fl(3)fi The effect of an increase.
priced is deemed the first item paid for. financed, together with a space for the [(iv)]fl(4)fi An example of the
(i) Interim student credit extensions. consumer to indicate whether it is payment terms that would result from
For each transaction involving an desired, and the consumer does not an increase.
interim credit extension under a student request it. [(2) If the annual percentage rate may
credit program, the creditor need not (d) Finance charge. The finance increase after consummation in a
make the following disclosures: the charge, using that term, and a brief transaction secured by the consumer’s
finance charge under § 226.18(d), the description such as ‘‘the dollar amount principal dwelling with a term greater
payment schedule under § 226.18(g), the the credit will cost you.’’ than one year, a following disclosures:
total of payments under § 226.18(h), or [(1) Mortgage loans. In a transaction (i) The fact that the transaction
the total sale price under § 226.18(j). secured by real property or a dwelling, contains a variable-rate feature.
5. Section 226.18 is revised to read as the disclosed finance charge and other (ii) A statement that variable-rate
follows: disclosures affected by the disclosed disclosure have been provided earlier.]
finance charge (including the amount (g) Payment schedule. The number,
§ 226.18 General disclosure requirements. financed and the annual percentage amounts, and timing of payments
For each transaction, the creditor rate) shall be treated as accurate if the scheduled to repay the obligation.
shall disclose the following information amount disclosed as the finance (1) In a demand obligation with no
as applicablefl, except that for each charge— alternate maturity date, the creditor may
transaction secured by real property or (i) Is understated by no more than comply with this paragraph by
a dwelling, the creditor shall make the $100; or disclosing the due dates or payment
disclosures required by § 226.38fi: (ii) Is greater than the amount periods of any scheduled interest
(a) Creditor. The identity of the required to be disclosed. payments for the first year.
creditor making the disclosures. (2) Other credit. In any other (2) In a transaction in which a series
(b) Amount financed. The amount transaction, the]flThefi amount of payments varies because a finance
financed, using that term, and a brief disclosed as the finance charge shall be charge is applied to the unpaid
description such as the amount of credit treated as accurate if[,]fl: principal balance, the creditor may
provided to you or on your behalf. The (1)fiIn a transaction involving an comply with this paragraph by
amount financed is calculated by: amount financed of $1,000 or less, it is disclosing the following information:
(1) Determining the principal loan not more than $5 above or below the (i) The dollar amounts of the largest
amount or the cash price (subtracting amount required to be disclosed; or[,] and smallest payments in the series.
any downpayment); fl(2)fi In a transaction involving an
(ii) A reference to the variations in the
(2) Adding any other amounts that are amount financed of more than $1,000, it
other payments in the series.
financed by the creditor and are not part is not more than $10 above or below the (h) Total of payments. The ‘‘total of
of the finance charge; and amount required to be disclosed. payments,’’ using that term, and a
(3) Subtracting any prepaid finance (e) Annual percentage rate. The
descriptive explanation such as ‘‘the
charge. annual percentage rate, using that term,
amount you will have paid when you
(c) Itemization of amount financed. and a brief description such as ‘‘the cost
have made all scheduled payments.’’ 44
(1) A separate written itemization of the of your credit as a yearly rate.’’ 42 flFor
flIn any transaction involving a single
amount financed, including: 40 any transaction involving a finance
payment, the creditor need not disclose
(i) The amount of any proceeds charge of $5 or less on an amount
the total of payments.fi
distributed directly to the consumer. financed of $75 or less, or a finance
(i) Demand feature. If the obligation
(ii) The amount credited to the charge of $7.50 or less on an amount
has a demand feature, that fact shall be
consumer’s account with the creditor. financed of more than $75, the creditor
disclosed. When the disclosures are
(iii) Any amounts paid to other need not disclose the annual percentage
based on an assumed maturity of 1 year
persons by the creditor on the rate.fi
(f) Variable-rate loan [with term of as provided in § 226.17(c)(5), that fact
consumer’s behalf. The creditor shall
one year or less]flnot secured by real shall also be disclosed.
identify those personsfl,fi[.]41 (j) Total sale price. In a credit sale, the
flexcept that the following payees may property or a dwellingfi.
[(1)] If the annual percentage rate may total sale price, using that term, and a
be described using generic or other descriptive explanation (including the
general terms and need not be further increase after consummation in a
transaction not secured by [the amount of any downpayment) such as
identified: public officials or ‘‘the total price of your purchase on
government agencies, credit reporting consumer’s principal dwelling or a
transaction secured by the consumer’s credit, including your downpayment of
agencies, appraisers, and insurance $lll.’’ The total sale price is the sum
companies.fi principal dwelling with a term of one
year or less]flreal property or a of the cash price, the items described in
(iv) The prepaid finance charge.
dwellingfi, the following disclosures: 43 paragraph (b)(2), and the finance charge
(2) The creditor need not comply with
[(i)]fl(1)fi The circumstances under disclosed under paragraph (d) of this
paragraph (c)(1) of this section if the
which the interest rate may increase. section.
(k) Prepayment. (1) When an
40 fl[Reserved]fi[Good faith estimates of
settlement costs provided for transactions subject to 42 fl[Reserved]fi [For any transaction involving obligation includes a finance charge
the Real Estate Settlement Procedures Act (12 a finance charge of $5 or less on an amount computed from time to time by
U.S.C. 2601 et seq.) may be substituted for the financed of $75 or less, or a finance charge of $7.50 application of a rate to the unpaid
disclosures required by paragraph (c) of this or less on an amount financed of more than $75,
section.] the creditor need not disclose the annual percentage
principal balance, a statement
41 fl[Reserved]fi[The following payees may be rate.] indicating whether or not a penalty may
described using generic or other general terms and 43 fl[Reserved]fi[Information provided in
need not be further identified: public officials or accordance with Sections 226.18(f)(2) and 44 fl[Reserved]fi [In any transaction involving a
government agencies, credit reporting agencies, 226.19(b), may be substituted for the disclosures single payment, the creditor need not disclose the
appraisers, and insurance companies.] required by paragraph (f)(1) of this section.] total of payments.]
be imposed if the obligation is prepaid 6. Section 226.19 is revised to read as than three business days before
in full. follows: consummation. Only the disclosures
(2) When an obligation includes a required by §§ 226.38(c)(3)(i)(C),
finance charge other than the finance § 226.19 [Certain mortgage and variable- 226.38(c)(3)(ii)(C), 226.38(c)(6)(i) and
rate transactions.]flEarly disclosures and
charge described in paragraph (k)(1) of adjustable-rate disclosures for transactions
226.38(e)(5)(i) may be estimated
this section, a statement indicating secured by real property or a dwelling. disclosures.fi
whether or not the consumer is entitled Alternative 1—Paragraph (a)(2)(iii)
In connection with a closed-end
to a rebate of any finance charge if the
transaction secured by real property or [(ii) If the annual percentage rate
obligation is prepaid in full.
a dwelling, subject to paragraph (a)(4) of disclosed under paragraph (a)(1)(i) of
(l) Late payment. Any dollar or
this section, the following requirements this section becomes inaccurate, as
percentage charge that may be imposed
shall apply:fi defined in § 226.22, the creditor shall
before maturity due to a late payment, (a) Mortgage transactions [subject to
other than a deferral or extension provide corrected disclosures with all
RESPA]—(1)(i) Time of flgood faith changed terms.]fl(iii) Additional three-
charge. estimates offi disclosures. [In a
(m) Security interest. The fact that the business-day waiting period. If a
mortgage transaction subject to the Real subsequent event makes the disclosures
creditor has or will acquire a security Estate Settlement Procedures Act (12
interest in the property purchased as required by paragraph (a)(2)(ii)
U.S.C. 2601 et seq.) that is secured by inaccurate, the creditor shall provide
part of the transaction, or in other the consumer’s dwelling, other than a
property identified by item or type. corrected disclosures, subject to
home equity line of credit subject to paragraph (a)(2)(iv) of this section.fi
(n) Insurancefl,fi [and] debt § 226.5b or mortgage transaction subject
cancellation fl, and debt suspensionfi. The consumer must receive the
to paragraph (a)(5) of this section, corrected disclosures no later than three
The items required by § 226.4(d) in t]flTfihe creditor shall make good
order to exclude certain insurance business days before consummation. fl
faith estimates of the disclosures Only the disclosures required by
premiumsfl,fi and debt-cancellation required by [§ 226.18]fl§ 226.38fi and
flor debt suspensionfi fees from the §§ 226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C),
shall deliver or place them in the mail 226.38(c)(6)(i) and 226.38(e)(5)(i) may
finance charge. not later than the third business day
(o) Certain security interest charges. be estimated disclosures.fi [If the
after the creditor receives the corrected disclosures are mailed to the
The disclosures required by § 226.4(e) in consumer’s written application. consumer or delivered to the consumer
order to exclude from the finance charge (ii) Imposition of fees. Except as by means other than delivery in person,
certain fees prescribed by law or certain provided in paragraph (a)(1)(iii) of this the consumer is deemed to have
premiums for insurance in lieu of section, neither a creditor nor any other received the corrected disclosures three
perfecting a security interest. person may impose a fee on a consumer business days after they are mailed or
(p) Contract reference. A statement in connection with the consumer’s delivered.]
that the consumer should refer to the application for a mortgage transaction
appropriate contract document for subject to paragraph (a)(1)(i) of this Alternative 2—Paragraph (a)(2)(iii)
information about nonpayment, default, section before the consumer has [(ii)]fl(iii) Additional three-business-
the right to accelerate the maturity of received the disclosures required by day waiting period.fi If the annual
the obligation, and prepayment rebates paragraph (a)(1)(i) of this section. If the percentage rate disclosed under
and penalties. At the creditor’s option, disclosures are mailed to the consumer paragraph [(a)(1)(i)]fl(a)(2)(ii)fi of this
the statement may also include a flor delivered to the consumer by section becomes inaccurate, as defined
reference to the contract for further means other than delivery in personfi, in § 226.22, flor a transaction that was
information about security interests and, the consumer is considered to have disclosed as a fixed-rate transaction
in a residential mortgage transaction, received them three business days after becomes an adjustable-rate
about the creditor’s policy regarding they are mailed flor deliveredfi. transaction,fi the creditor shall provide
assumption of the obligation. (iii) Exception to fee restriction. A corrected disclosures with all changed
(q) [Assumption policy. In a creditor or other person may impose a termsfl, subject to paragraph (a)(2)(iv)
residential mortgage transaction, a fee for obtaining the consumer’s credit of this sectionfi. The consumer must
statement whether or not a subsequent history before the consumer has receive the corrected disclosures no
purchaser of the dwelling from the received the disclosures required by later than three business days before
consumer may be permitted to assume paragraph (a)(1)(i) of this section, consummation. fl Only the disclosures
the remaining obligation on its original provided the fee is bona fide and required by §§ 226.38(c)(3)(i)(C),
terms.] fl[Reserved.]fi reasonable in amount. 226.38(c)(3)(ii)(C), 226.38(c)(6)(i) and
(r) Required deposit. If the creditor [(2) Waiting periods for early 226.38(e)(5)(i) may be estimated
requires the consumer to maintain a disclosures and corrected disclosures. disclosures.fi [If the corrected
deposit as a condition of the specific (i)]fl(2)(i) Seven-business-day waiting disclosures are mailed to the consumer
transaction, a statement that the annual period.fi The creditor shall deliver or or delivered to the consumer by means
percentage rate does not reflect the place in the mail the good faith other than delivery in person, the
effect of the required deposit.45 flA estimates required by paragraph (a)(1)(i) consumer is deemed to have received
required deposit need not include: of this section not later than the seventh the corrected disclosures three business
(1) An escrow account for items such
business day before consummation of days after they are mailed or delivered.]
as taxes, insurance or repairs; or the transaction. fl(iv) Annual percentage rate
(2) A deposit that earns not less than fl(ii) Three-business-day waiting accuracy. An annual percentage rate
5 percent per year.fi period. After providing the disclosures disclosed under paragraph (a)(2)(ii) or
required by paragraph (a)(1)(i) of this (a)(2)(iii) shall be considered accurate as
45 fl[Reserved]fi [A required deposit need not
section, the creditor shall provide the provided by § 226.22, except that even
include, for example: (1) An escrow account for
items such as taxes, insurance or repairs; (2) a
disclosures required by § 226.38 before if one of the following subsequent
deposit that earns not less than 5 percent per year; consummation. The consumer must events makes the disclosed annual
or (3) payments under a Morris Plan.] receive the new disclosures no later percentage rate inaccurate under
§ 226.22, the APR shall be considered the consumer’s written application, changes implemented according to the
accurate for purposes of paragraph whichever is earlier; and terms of the loan program disclosure.
(a)(2)(ii) and (a)(2)(iii) of this section: (iii) If the annual percentage rate at The example shall reflect the most
(A) A decrease in the loan’s annual the time of consummation varies from recent 15 years of index values. The
percentage rate due to a discount the the annual percentage rate disclosed example shall reflect all significant loan
creditor gives the consumer to induce under paragraph (a)[(5)]fl(4)fi(ii) of program terms, such as negative
periodic payments by automated debit this section by more than 1⁄8; of 1 amortization, interest rate carryover,
from a consumer’s deposit or other percentage point in a regular transaction interest rate discounts, and interest rate
account. or @ of 1 percentage point in an irregular and payment limitations, that would
(B) A decrease in the loan’s annual transaction, the creditor shall disclose have been affected by the index
percentage rate due to a discount a title all the changed terms no later than movement during the period.
insurer gives the consumer on voluntary consummation or settlement. (B) The maximum interest rate and
owners’ title insurance. [(b) Certain variable-rate payment for a $10,000 loan originated at
(v) Timing of receipt. If the transactions.45a If the annual percentage the initial interest rate (index value plus
disclosures required by paragraph rate may increase after consummation in margin, adjusted by the amount of any
(a)(2)(ii) or paragraph (a)(2)(iii) of this a transaction secured by the consumer’s discount or premium) in effect as of an
section are mailed to the consumer or principal dwelling with a term greater identified month and year for the loan
delivered by means other than delivery than one year, the following disclosures program disclosure assuming the
in person, the consumer is considered to must be provided at the time an maximum periodic increases in rates
have received the disclosures three application form is provided or before and payments under the program; and
business days after they are mailed or the consumer pays a non-refundable fee, the initial interest rate and payment for
delivered.fi whichever is earlier: 45b that loan and a statement that the
(3) Consumer’s waiver of waiting (1) The booklet titled Consumer periodic payment may increase or
period before consummation. If the Handbook on Adjustable Rate decrease substantially depending on
consumer determines that the extension Mortgages published by the Board and changes in the rate.
of credit is needed to meet a bona fide the Federal Home Loan Bank Board, or (ix) An explanation of how the
personal financial emergency, the a suitable substitute. consumer may calculate the payments
consumer may modify or waive the (2) A loan program disclosure for each for the loan amount to be borrowed
seven-business-day waiting period or variable-rate program in which the based on either:
[the]flafi three-business-day waiting consumer expresses an interest. The (A) The most recent payment shown
period required by paragraph (a)(2) of following disclosures, as applicable, in the historical example in paragraph
this section, after receiving the shall be provided: (b)(2)(viii)(A) of this section; or
disclosures required by (i) The fact that the interest rate, (B) The initial interest rate used to
[§ 226.18]fl§ 226.38fi. To modify or payment, or term of the loan can calculate the maximum interest rate and
waive a waiting period, the consumer change. payment in paragraph (b)(2)(viii)(B) of
shall give the creditor a dated written (ii) The index or formula used in this section.
statement that describes the emergency, making adjustments, and a source of (x) The fact that the loan program
specifically modifies or waives the information about the index or formula. contains a demand feature.
waiting period, and bears the signature (iii) An explanation of how the (xi) The type of information that will
of all the consumers who are primarily interest rate and payment will be be provided in notices of adjustments
liable on the legal obligation. Printed determined, including an explanation of and the timing of such notices.
forms for this purpose are prohibited. how the index is adjusted, such as by (xii) A statement that disclosure forms
[(4) Notice. Disclosures made the addition of a margin. are available for the creditor’s other
pursuant to paragraph (a)(1) or (iv) A statement that the consumer variable-rate loan programs.]
paragraph (a)(2) of this section shall should ask about the current margin fl(b) Adjustable-rate loan program
contain the following statement: ‘‘You value and current interest rate. disclosures. For adjustable-rate
are not required to complete this (vii) Any rules relating to changes in mortgages described in § 226.38(a)(3)
agreement merely because you have the index, interest rate, payment secured by real property or a consumer’s
received these disclosures or signed a amount, and outstanding loan balance dwelling, the creditor shall provide to
loan application.’’ The disclosure including, for example, an explanation the consumer an adjustable-rate loan
required by this paragraph shall be of interest rate or payment limitations, program disclosure for each loan
grouped together with the disclosures negative amortization, and interest rate program in which the consumer
required by paragraph (a)(1) or (a)(2) of carryover. expresses an interest. The creditor shall
this section.] (viii) At the option of the creditor, disclose the heading ‘‘Adjustable-Rate
[(5)]fl(4)fi Timeshare plans. In a either of the following: Mortgage’’ or ‘‘ARM’’ in accordance
mortgage transaction [subject to the Real (A) A historical example, based on a with § 226.19(b)(4)(iii). The creditor
Estate Settlement Procedures Act (12 $10,000 loan amount, illustrating how shall provide disclosures under this
U.S.C. 2601 et seq.)] that is secured by payments and the loan balance would paragraph (b) in circumstances where an
a consumer’s interest in a timeshare have been affected by interest rate open-end credit account converts to a
plan described in 11 U.S.C. 101(53(D)): closed-end mortgage transaction under a
45a flReserved.fi[Information provided in

(i) The requirements of paragraphs written agreement with the consumer.
accordance with variable-rate regulations of other
(a)(1) through [(a)(4)]fl(a)(3)fi of this Federal agencies may be substituted for the
The creditor need not provide such
section do not apply; disclosures required by paragraph (b) of this disclosures in circumstances where the
(ii) The creditor shall make good faith section.] consumer assumes an adjustable-rate
estimates of the disclosures required by 45b flReserved.fi[Disclosures may be delivered
mortgage originated to another
[§ 226.18] fl§ 226.38fi before or placed in the mail not later than three business consumer.
days following receipt of a consumer’s application
consummation, or shall deliver or place when the application reaches the creditor by
(1) Interest rate and payment. As
them in the mail not later than three telephone, or through an intermediary agent or applicable, the creditor shall disclose
business days after the creditor receives broker.] the information required in paragraph
(b)(1) of this section, grouped together periodic payment may increase, a consumer provides more
under the heading ‘‘Interest Rate and statement indicating when the first documentation, the consumer could
Payment,’’ using that term: minimum payment may increase. decrease the interest rate or fees.
(i) Introductory period. The time (C) Prepayment penalty. If the (F) Shared-equity or shared-
period for which the interest rate or obligation includes a finance charge appreciation. A statement that any
payment remains fixed, a statement that computed from time to time by future equity or appreciation in the real
the interest rate or payment may application of a rate to the unpaid property or dwelling that secures the
increase after that period, and an principal balance, a statement loan must be shared, along with a
explanation of the effect on the interest indicating whether or not a penalty statement of the percentage of future
rate of having an initial interest rate that could be imposed if the obligation is equity or appreciation to which the
is not determined using the index or prepaid in full. If the creditor could creditor is entitled, and the events that
formula that applies for interest rate impose a prepayment penalty, a may trigger such an obligation.
adjustments. statement of the circumstances under (3) Additional information and Web
(ii) Frequency of rate and payment which and period in which the creditor site. The creditor shall disclose a
change. The frequency of interest rate could impose the penalty. statement that the consumer may obtain
and payment changes permitted under (ii) Additional disclosures. The additional information about adjustable-
the legal obligation. creditor shall disclose the following rate mortgages and a list of licensed
(iii) Index. The index or formula used information as applicable: housing counselors at the Web site of
in making adjustments, a source of (A) Interest-only payments. A the Federal Reserve Board, and a
information about the index or formula, statement that periodic payments will reference to that Web site.
and an explanation of how the interest be applied only toward interest on the (4) Format requirements. (i)
rate will be determined flwhen loan, along with a statement of any Application of § 226.37. Except as
adjustedfi, including an explanation of limitation on the number of periodic otherwise provided by this paragraph
how the index is adjusted, such as by payments that will be applied only (b)(4), the format requirements in
the addition of a margin. toward interest on the loan, that such § 226.37 apply to loan program
(iv) Limit on rate changes. An payments will cover the interest owed disclosures made under this section.
explanation of interest rate or payment each month, but none of the principal, (ii) Prominent location. The
limitations and interest rate carryover. and that making these periodic disclosures required by paragraphs
(v) Conversion feature. An payments means the loan amount will (b)(1) through (b)(3) of this section shall
explanation of any fixed-rate conversion stay the same and the consumer will not be grouped together and placed in a
feature that describes any limitations on have paid any of the loan amount. For prominent location.
the period during which the loan may payment-option loans, a statement that (iii) Disclosure of heading. The
be converted, a statement that the fixed the loan gives the consumer the choice disclosure of the heading required by
interest rate may be higher than the to make periodic payments that cover paragraph (b) of this section shall be
adjustable rate at the time of conversion, the interest owed each month, but none more conspicuous than, and shall
a statement that conversion fees may be of the principal, and that making these precede, the other disclosures required
charged, and any interest rate and periodic payments means the loan by paragraph (b) and shall be located
payment limitations that apply if the amount will stay the same and the outside of the tables required by
consumer exercises the conversion consumer will not have paid any of the paragraph (b)(4)(iv). The creditor may
option. loan amount. make the heading disclosure using the
(vi) Preferred rate. An explanation of (B) Negative amortization. A name of the creditor and the name of the
the events that will cause the interest statement that the loan balance may loan program.
rate on an adjustable rate mortgage with increase even if the consumer makes the (iv) Form of disclosures; tabular
a preferred rate to increase, a statement periodic payments, along with a format. The creditor shall provide the
of the increase in the interest rate, and statement that the minimum payment disclosures required by paragraphs
a statement that fees may be charged if covers only a part of the interest the (b)(1) and (b)(2) of this section in the
one or more of the events occurs. consumer owes each period and none of form of two tables with headings,
(2) Key questions about risk. The the principal, that the unpaid interest content, and format substantially similar
creditor shall disclose the information will be added to the consumer’s loan to Form H–4(B) in Appendix H to this
required in paragraphs (b)(2)(i) and amount, and that over time this will part. The table shall contain only the
(b)(2)(ii) of this section, grouped increase the total amount the consumer information required or permitted by
together under the heading ‘‘Key is borrowing and cause the consumer to paragraphs (b)(1) and (b)(2). The table
Questions About Risk,’’ using that term: lose equity in the home. containing the disclosures required by
(i) Required disclosures. The creditor (C) Balloon payment. A statement that paragraph (b)(1) shall precede the table
shall disclose the following the consumer will owe a balloon containing the disclosures required by
information— payment, along with a statement of paragraph (b)(2).
(A) Rate increases. A statement that when it will be due. (v) Question and answer format. The
the interest rate may increase, along (D) Demand feature. A statement that creditor shall provide the disclosures
with a statement indicating when the the creditor may demand full repayment required by paragraph (b)(2) of this
first interest rate increase may occur and of the loan, along with a statement of section grouped together and presented
the frequency with which the interest the timing of any advance notice the in the format of question and answer, in
rate may increase. creditor will give the consumer before a manner substantially similar to Form
(B) Payment increases. A statement the creditor exercises such right. H–4(B) in Appendix H to this part.
indicating whether or not the periodic (E) No-documentation or low- (vi) Highlighting. Each affirmative
payment on the loan may increase. If the documentation loans. A statement that answer for a feature required to be
periodic payment may increase, a the consumer’s loan could have a higher disclosed under paragraph (b)(2) shall
statement that if the interest rate rate or fees if the consumer does not be disclosed in bold text and in all
increases, the periodic payment will document employment, income or other capitalized letters. Any negative answer
increase. For a pay option loan, if the assets, along with a statement that if the shall be in nonbold text.
(vii) Order of key questions (3) Applications made by telephone or finance charge that is not credited to the
disclosure. The key questions disclosure through intermediary. If the creditor existing obligation. The following shall
shall be provided, as applicable, in the receives the consumer’s application not be treated as a refinancing:
following order: rate increases under through an intermediary agent or broker (1) A renewal of a single payment
§ 226.19(b)(2)(i)(A), payment increases or by telephone, the creditor satisfies obligation with no change in the
under § 226.19(b)(2)(i)(B), interest-only the requirements of paragraph (b) or original terms.
payments under § 226.19(b)(2)(ii)(A), paragraph (c) of this section if the (2) A reduction in the annual
negative amortization under creditor delivers the disclosures and percentage rate with a corresponding
§ 226.19(b)(2)(ii)(B), balloon payment publications or places them in the mail change in the payment schedule.
under § 226.19(b)(2)(ii)(C), prepayment not later than three business days after (3) An agreement involving a court
penalty under § 226.19(b)(2)(i)(C), the creditor receives the consumer’s proceeding.
demand feature under application. (4) A change in the payment schedule
§ 226.19(b)(2)(ii)(D), no-documentation (4) Adjustable-rate feature added after or a change in collateral requirements as
or low-documentation loans under application. If the consumer first a result of the consumer’s default or
§ 226.19(b)(2)(ii)(E), shared-equity or expresses interest in an adjustable-rate delinquency, unless the rate is
shared-appreciation under mortgage transaction after an increased, or the new amount financed
§ 226.19(b)(2)(ii)(F). application form has been provided or exceeds the unpaid balance plus earned
(viii) Disclosure of additional accessed or the consumer has paid a finance charge and premiums for
information and Web site. The non-refundable fee, the creditor shall continuation of insurance of the types
disclosure and Web site information provide to the consumer the disclosures described in § 226.4(d).
required by paragraph (b)(3) of this required by paragraph (b) of this section (5) The renewal of optional insurance
section shall be located outside and within three business days after the purchased by the consumer and added
beneath the tables required by creditor is informed of such interest by to an existing transaction, if disclosures
paragraph (b)(4)(iv). the consumer or by an intermediary relating to the initial purchase were
(c) Publications for transactions broker or agent. provided as required by this subpart.
secured by real property or a dwelling. (5) Terms not usually offered. If the (b) Assumptions. An assumption
In a closed-end consumer credit consumer expresses an interest in occurs when a creditor expressly agrees
transaction secured by real property or negotiating loan terms that are not in writing with a subsequent consumer
a dwelling, the creditor shall provide generally offered, the creditor need not to accept that consumer as a primary
the following Board publications: provide the disclosures required by obligor on an existing [residential
(1) The publication entitled ‘‘Key paragraph (b) of this section before an mortgage transaction]flclosed-end
Questions to Ask about Your Mortgage,’’ application form is provided but shall credit transaction secured by real
as published by the Board. provide such disclosures as soon as property or a dwellingfi. Before the
(2) The publication entitled ‘‘Fixed vs. reasonably possible after the terms to be assumption occurs, the creditor shall
Adjustable Rate Mortgages,’’ as disclosed have been determined and not make new disclosures to the subsequent
published by the Board. later than the time the consumer pays a consumer, based on the remaining
(d) Timing of disclosures. (1) General. non-refundable fee. In all cases the obligation. If the finance charge
Except as otherwise provided by this creditor shall provide the disclosures originally imposed on the existing
paragraph (d), the creditor shall provide required by paragraph (c) of this section obligation was an add-on or discount
the disclosures and publications at the time an application form is finance charge, the creditor need only
required by paragraphs (b) and (c) of provided or before the consumer pays a disclose:
this section at the time an application non-refundable fee, including a fee for (1) The unpaid balance of the
form is provided to the consumer or obtaining a consumer’s credit history, obligation assumed.
before the consumer pays a non- whichever is earlier. (2) The total charges imposed by the
refundable fee, including a fee for (6) Additional loan program creditor in connection with the
obtaining the consumer’s credit history, disclosures. If, after an application form assumption.
whichever is earlier.fi is provided or the consumer pays a non- (3) The information required to be
[(c)]fl(2)fi Electronic disclosures. refundable fee, a consumer expresses an disclosed under [§ 226.18(k), (l), (m),
For an application that is accessed by interest in an adjustable-mortgage loan and (n)] fl§ 226.38 (a)(5), (f)(2), (h),
the consumer in electronic form, the program for which the creditor has not (j)(2), (j)(3), and (j)(4)fi.
disclosures and publications required (4) The annual percentage rate
provided the disclosures required by
by paragraph (b) fland (c)fi of this originally imposed on the obligation.
paragraph (b) of this section, the (5) The [payment schedule under
section may be provided to the creditor shall provide such disclosures
consumer in electronic form on or with § 226.18(g)] flinterest rate and payment
within a reasonable time after the summary under § 226.38(c)fi and the
the application. consumer expresses such interest. fi
fl(i) Except as provided in paragraph total [of] payments under [§ 226.18(h)],
7. Section 226.20 is revised to read as
(d)(2)(ii), if a consumer accesses an fl§ 226.38(e)(5)fi based on the
follows:
ARM loan application electronically, remaining obligation.
the creditor shall provide the § 226.20 Subsequent disclosure (c) [Variable-rate adjustments.]
disclosures and publications required requirements. flRate adjustments.fi 45c An
under paragraphs (b) and (c) of this (a) Refinancings. A refinancing occurs adjustment to the interest rate with or
section in electronic form. when an existing obligation that was without a corresponding adjustment to
(ii) If a consumer who is physically subject to this subpart is satisfied and the payment in [a variable-rate]flan
present in the creditor’s office accesses replaced by a new obligation adjustable-ratefi mortgage subject to
a loan application electronically, the undertaken by the same consumer. A
45c flReserved.fi[Information provided in
creditor may provide disclosures and refinancing is a new transaction
accordance with variable-rate subsequent disclosure
publications required under paragraphs requiring new disclosures to the regulations of other Federal agencies may be
(b) and (c) of this section in either consumer. The new finance charge shall substituted for the disclosure required by paragraph
electronic or paper form. include any unearned portion of the old (c) of this section.]
§ 226.19(b) is an event requiring new interest, and taxes and insurance in under which and period in which the
disclosures to the consumer. flAn escrow, as applicable. The current creditor may impose the penalty and the
adjustment to the interest rate with a payment allocation disclosed shall be amount of the maximum penalty
corresponding adjustment to the based on the payment allocation in the possible during the period between the
payment due to the conversion of an last payment period during which the date the creditor delivers or mails the
adjustable-rate mortgage subject to current interest rate applies. The new disclosures required by this paragraph
§ 226.19(b) to a fixed-rate mortgage also payment allocation disclosed shall be (c) and the last day the creditor may
is an event requiring new disclosures to based on the payment allocation in the impose the penalty.
the consumer.fi[At least once each year first payment period during which the (ii) A telephone number the consumer
during which an interest rate new interest rate applies. may call to obtain additional
adjustment is implemented without an (C) The current and new payment and information about the consumer’s loan.
accompanying payment change, and at the due date for the new payment. (iii) A telephone number and Internet
least 25, but no more than 120, calendar (iii) A description of the change in the Web site for housing counseling
days before a payment at a new level is index or formula and any application of resources maintained by the Department
due, the following disclosures, as previously foregone interest. of Housing and Urban Development.
applicable, must be delivered or placed (iv) The extent to which the creditor (5) Format of disclosures. (i) The
in the mail: has foregone any increase in the interest disclosures required by this paragraph
(1) The current and prior interest rate and the earliest date the creditor (c) shall be provided in the form of
rates. may apply foregone interest to future tables with headings, content and
(2) The index values upon which the adjustments, subject to rate caps. format substantially similar to Form
current and prior interest rates are (v) Limits on interest rate or payment H¥4(G) in Appendix H to this part,
based. increases at each adjustment, if any, and where an interest rate adjustment is
(3) The extent to which the creditor the maximum interest rate or payment accompanied by a payment change, or
has foregone any increase in the interest over the life of the loan. Form H¥4(K) in Appendix H to this
rate. (vi) A statement of whether or not part part, where a creditor provides an
(4) The contractual effects of the of the new payment will be allocated to annual notice of interest rate
adjustment, including the payment due pay the loan principal and a statement adjustments without an accompanying
after the adjustment is made, and a of the payment required to fully payment change. The disclosures
statement of the loan balance. amortize the loan at the new interest required by paragraph (c)(2) or (c)(3) of
(5) The payment, if different from that rate over the remainder of the loan term this section shall be grouped together
referred to in paragraph (c)(4) of this or to fully amortize the loan without with the disclosures required by
section, that would be required to fully extending the loan term, if different paragraph (c)(4) of this section, and
amortize the loan at the new interest from the new payment disclosed shall be in a prominent location.
rate over the remainder of the loan pursuant to paragraph (c)(2)(ii)(C) of this (ii) The disclosures required by
term.] section. paragraph (c)(2)(i) or paragraph (c)(3)(i)
fl(1) Timing of disclosures. (i) (vii) A statement of the loan balance of this section shall precede the other
Payment change. If an interest rate as of the date the interest rate change disclosures required by paragraph (c)(2)
adjustment is accompanied by a will become effective. or (c)(3). The disclosures required by
payment change, the creditor shall (3) Content of annual interest rate paragraph (c)(4) shall be located directly
deliver or place in the mail the notice. The creditor shall provide the beneath the disclosures required by
disclosures required by paragraph (c)(2) following information on the annual paragraph (c)(2) or (c)(3).
of this section at least 60, but no more notice provided pursuant to paragraph (iii) The disclosures required by
than 120, calendar days before a (c)(1)(ii) of this section, as applicable: paragraph (c)(2)(ii) shall be in the form
payment at a new level is due. (i) The specific time period covered of a table with headings, content, and
(ii) No payment change. At least once by the disclosure, and a statement that format substantially similar to Form H–
each year during which an interest rate the interest rate on the loan has changed 4(G) in Appendix H to this part. The
adjustment is implemented without an during the past year without changing disclosures required by paragraphs
accompanying payment change, the required payments. (c)(2)(iii) through (c)(2)(vii) of this
creditor shall deliver or place in the (ii) The highest and lowest interest section shall be located directly below
mail the disclosures required by rates that applied during the period the table required by paragraph (c)(2)(ii).
paragraph (c)(3) of this section. specified under paragraph (c)(3)(i) of (d) Periodic statement. (1) Timing and
(2) Content of payment change this section. content of disclosures. If a mortgage
disclosures. The creditor must provide (iii) Any foregone increase in the transaction secured by real property or
the following information on the notice interest rate or application of previously a dwelling provides a consumer with
provided pursuant to paragraph (c)(1)(i) foregone interest. multiple payment options that include a
of this section: (iv) The maximum interest rate that payment that results in negative
(i) A statement that changes are being may apply over the life of the loan. amortization, for each period after
made to the interest rate, the date such (v) A statement of the loan balance as consummation and not later than fifteen
change is effective, and a statement that of the last day of the time period days before payment is due, subject to
more detailed information is available required to be disclosed by paragraph paragraph (c) of this section, the creditor
in the loan agreement(s). (c)(3)(i) of this section. shall mail or deliver to the consumer a
(ii) A table containing the following (4) Additional information. In periodic statement that discloses the
disclosures— addition to the disclosures provided following information, as applicable:
(A) The current and new interest under paragraph (c)(2) or (c)(3) of this (i) Payment. Based on the interest rate
rates. section, the creditor shall provide the in effect at the time the disclosure is
(B) If payments on the loan may be following information: made, the payment amount required
interest-only or negatively amortizing, (i) If the creditor may impose a to—
the amount of the current and new penalty if the obligation is prepaid in (A) Pay off the loan balance in full by
payment allocated to pay principal, full, a statement of the circumstances the end of the term through regular
periodic payments without a balloon creditor with evidence of adequate (iv) Premiums or other charges for
payment, with a statement that the property insurance. credit life, accident, health, or loss-of-
payment is ‘‘recommended to reduce (3) The creditor must provide the income insurance, or debt-cancellation
loan balance,’’ using that term; following information, clearly and coverage (whether or not the debt-
(B) Prevent negative amortization, if conspicuously, on the notice required in cancellation coverage is insurance
the legal obligation explicitly permits paragraph (e)(2)(ii) of this section: under applicable law) that provides for
the consumer to elect to pay interest (i) The creditor’s name and contact cancellation of all or part of the
only without paying principal; and information, the loan number, and the consumer’s liability in the event of the
(C) Pay the minimum amount address or description of the property loss of life, health, or income or in the
required under the legal obligation. securing the credit transaction; case of accident, written in connection
(ii) Effects. A statement of the interest (ii) That the consumer is obligated to with the credit transaction.]
and principal, if any, covered by the maintain property insurance on the * * * * *
payment amounts disclosed under property securing the credit transaction; (c) * * *
paragraph (d)(1)(i) of this section, a (iii) That the required property (1) Notices. The following statement
statement describing the effects of insurance has lapsed; flin bold text and minimum 10-point
making such payments, and the earliest (iv) That the creditor is authorized to fontfi: [‘‘You are not required to
date payments at a higher level may be obtain the property insurance on the complete this agreement merely because
due. consumer’s behalf; you have received these disclosures or
(iii) Unpaid interest. The amount that (v) The date the creditor can charge have signed a loan application. If you
will be added to the loan balance each the consumer for the cost of creditor- obtain this loan, the lender will have a
period due to unpaid interest. placed property insurance; mortgage on your home. You could lose
(vi) How the consumer may provide
(2) Format of disclosures. (i) Form of your home, and any money you have
evidence of property insurance;
a table. The disclosures required by put into it, if you do not meet your
(vii) The cost of creditor-placed
paragraph (d)(1) of this section shall be obligations under the loan.’’]fl‘‘If you
property insurance stated as an annual
in the form of a table with headings, are unable to make the payments on this
premium, and that this premium is
content and format substantially similar loan, you could lose your home. You
likely significantly higher than a
to Form H–4(L) in Appendix H to this have no obligation to accept this loan.
premium for property insurance
part. Your signature below only confirms that
purchased by the consumer; and
(ii) Location of disclosures. The (viii) That creditor-placed property you have received this form.’’fi
disclosures required by this paragraph insurance may not provide as much * * * * *
(d) shall be placed in a prominent coverage as homeowner’s insurance. (5) Amount borrowed. For a mortgage
location, except that if the disclosures (4) Within 15 days after a creditor refinancing, the total amount the
are made concurrently with the charges the consumer for creditor- consumer will borrow, as reflected by
disclosures required by paragraph (c) of placed property insurance, the creditor the [face] amount of the note flor other
this section, the disclosures required by must mail or deliver to the consumer a loan agreementfi; and where the
paragraph (c) shall precede the copy of the individual policy, certificate amount borrowed includes premiums or
disclosures required by this paragraph or other evidence of the creditor-placed other charges for optional credit
(d). property insurance.fi insurance or debt-cancellation flor debt
(iii) Segregation of disclosures. The suspensionfi coverage, that fact shall be
table described in paragraph (d)(2)(i) of Subpart E—Special Rules for Certain stated, grouped together with the
this section shall contain only the Home Mortgage Transactions disclosure of the amount borrowed. The
information required by paragraph disclosure of the amount borrowed shall
(d)(1). Other information may be 8. Section 226.32 is amended by be treated as accurate if it is not more
presented with the table, provided such revising paragraphs (b)(1), (c)(1), and than $100 above or below the amount
information appears outside the (c)(5), to read as follows: required to be disclosed.
required table. § 226.32 Requirements for certain closed- * * * * *
(e) Creditor-placed property end home mortgages. 9. Section 226.36, as added on July
insurance. (1) ‘‘Creditor-placed property * * * * * 30, 2008 (73 FR 44604), is amended by:
insurance’’ means property insurance (b) * * * A. Revising the section heading,
coverage obtained by the creditor when (1) For purposes of paragraph (a)(1)(ii) B. Revising paragraph (a),
the property insurance required by the of this section, points and fees means C. Revising paragraphs (b)(1)
credit agreement has lapsed. flall items included in the finance introductory text, (b)(1)(i)(A) through
(2) A creditor may not charge a charge, pursuant to § 226.4, except (D), (b)(1)(ii)(A) and (D), and (b)(2),
consumer for obtaining property interest or the time-price differential.fi D. Revising the introductory text of
insurance on property securing a credit [:] paragraph (c)(1),
transaction, unless: (i) All items required to be disclosed E. Redesignating paragraph (d) as
(i) The creditor has made a reasonable under § 226.4(a) and 226.4(b), except paragraph (f), and
determination that the required property F. Adding new paragraphs (d) and (e).
interest or the time-price differential;
insurance has lapsed; The additions and revisions read as
(ii) All compensation paid to
follows:
(ii) The creditor has mailed or mortgage brokers;

delivered a written notice to the (iii) All items listed in § 226.4(c)(7) § 226.36 Prohibited acts or practices in
consumer with the disclosures set forth (other than amounts held for future connection with credit secured by flreal
in paragraph (e)(3) of this section at payment of taxes) unless the charge is property or a dwellingfi [a consumer’s
least 45 days before a charge is imposed reasonable, the creditor receives no principal dwelling].
on the consumer for creditor-placed direct or indirect compensation in (a) flLoan originator andfi mortgage
property insurance; and connection with the charge, and the broker defined. fl(1) Loan originator.
(iii) During the 45-day notice period, charge is not paid to an affiliate of the For purposes of this section, the term
the consumer has not provided the creditor; and ‘‘loan originator’’ means with respect to
a particular transaction, a personfi [For as the creditor adheres to a policy of terms and conditions. In connection
purposes of this section ‘‘mortgage selecting the most reliable appraisal, with a consumer credit transaction
broker’’ means a person, other than an rather than the appraisal that states the secured by real property or a dwelling,
employee of a creditor,] who for highest value; no loan originator shall receive and no
compensation or other monetary gain, or * * * * * person shall pay to a loan originator,
in expectation of compensation or other (2) When extension of credit directly or indirectly, compensation in
monetary gain, arranges, negotiates, or prohibited. In connection with a an amount that is based on any of the
otherwise obtains an extension of consumer credit transaction secured by transaction’s terms or conditions. For
consumer credit for another person. flreal property orfi a [consumer’s purposes of this paragraph the principal
[The term includes a person meeting principal] dwelling, a creditor who amount of credit extended is not
this definition, even if the consumer knows, at or before loan consummation, deemed to be a transaction term or
credit obligation is initially payable to of a violation of paragraph (b)(1) of this condition. This paragraph (d)(1) shall
such person, unless the person section in connection with an appraisal not apply to any transaction in which
provides] flThe term ‘‘loan originator’’ shall not extend credit based on such paragraph (d)(2) applies.
includes employees of the creditor. The appraisal unless the creditor documents (2) Payments by persons other than
term includes the creditor if the creditor that it has acted with reasonable consumer. If a loan originator receives
does not providefi the funds for the diligence to determine that the appraisal compensation directly from the
transaction at consummation out of the does not materially misstate or consumer in a transaction secured by
flcreditor’sfi [person’s] own resources, misrepresent the value of such dwelling. real property or a dwelling:
out of deposits held by the flcreditorfi (i) The loan originator shall not
* * * * *
[person], or by drawing on a bona fide receive compensation, directly or
(c) Servicing practices. (1) In
warehouse line of credit. indirectly, from any person other than
connection with a consumer credit
fl(2) Mortgage broker. For purposes the consumer in connection with the
transaction secured by flreal property
of this section, a mortgage broker with transaction; and
orfi a [consumer’s principal] dwelling, (ii) No person who knows or has
respect to a particular transaction is any no servicer shall—
loan originator that is not an employee reason to know of the consumer-paid
* * * * * compensation to the loan originator,
of the creditor.fi
ALTERNATIVE 1—PARAGRAPH (d). other than the consumer, shall pay any
(b) Misrepresentation of value of
fl(d) Prohibited payments to loan compensation to the loan originator,
consumer’s dwelling—(1) Coercion of
originators. (1) Payments based on directly or indirectly, in connection
appraiser. In connection with a
transaction terms and conditions. In with the transaction.
consumer credit transaction secured by
connection with a consumer credit (3) Affiliates. For purposes of
flreal property orfi a [consumer’s
transaction secured by real property or paragraph (d) of this section, affiliated
principal] dwelling, no creditor or
a dwelling, no loan originator shall entities shall be treated as a single
mortgage broker, and no affiliate of a
receive and no person shall pay to a ‘‘person.’’fi
creditor or mortgage broker, shall
loan originator, directly or indirectly, OPTIONAL PROPOSAL—
directly or indirectly coerce, influence,
compensation in an amount that is PARAGRAPH (e).
or otherwise encourage an appraiser to
based on any of the transaction’s terms fl(e) Prohibition on steering. (1)
misstate or misrepresent the value of
or conditions. For purposes of this General. In connection with a credit
such dwelling.
paragraph, the principal amount of transaction secured by real property or
(i) * * *
credit extended is deemed to be a a dwelling, a loan originator shall not
(A) Implying to an appraiser that
transaction term. This paragraph (d)(1) direct or ‘‘steer’’ a consumer to
current or future retention of the
shall not apply to any transaction in consummate a transaction based on the
appraiser depends on the amount at
which paragraph (d)(2) of this section fact that the originator will receive
which the appraiser values a
applies. greater compensation from the creditor
[consumer’s principal] dwelling;
(2) Payments by persons other than in that transaction than in other
(B) Excluding an appraiser from
consumer. If a loan originator receives transactions the originator offered or
consideration for future engagement
compensation directly from the could have offered to the consumer,
because the appraiser reports a value of
consumer in a transaction secured by unless the transaction is in the
a [consumer’s principal] dwelling that
real property or a dwelling: consumer’s interest.
does not meet or exceed a minimum
(i) The loan originator shall not (2) Permissible transactions. A
threshold;
receive compensation, directly or transaction does not violate paragraph
(C) Telling an appraiser a minimum
indirectly, from any person other than (e)(1) of this section if the loan was
reported value of a [consumer’s
the consumer in connection with the chosen by the consumer from at least
principal] dwelling that is needed to
transaction; and three loan options for each type of
approve the loan; (ii) No person who knows or has
(D) Failing to compensate an transaction in which the consumer
reason to know of the consumer-paid expressed an interest, and the
appraiser because the appraiser does not
compensation to the loan originator, conditions specified in paragraph (e)(3)
value a [consumer’s principal] dwelling
other than the consumer, shall pay any of this section are met. For purposes of
at or above a certain amount; and
compensation to the loan originator, paragraph (e) of this section, the phrase
* * * * * directly or indirectly, in connection ‘‘type of transaction’’ refers to whether

(ii) * * * with the transaction. a loan has:
(A) Asking an appraiser to consider (3) Affiliates. For purposes of (i) An annual percentage rate that
additional information about a paragraph (d) of this section, affiliated cannot increase after consummation, or
[consumer’s principal] dwelling or entities shall be treated as a single (ii) An annual percentage rate that
about comparable properties; ‘‘person.’’fi may increase after consummation.
* * * * * ALTERNATIVE 2—PARAGRAPH (d). (3) Loan options presented. A
(D) Obtaining multiple appraisals of a fl(d) Prohibited payments to loan transaction satisfies paragraph (e)(2) of
[consumer’s principal] dwelling, so long originators. (1) Payments based on this section only if the loan originator
presents the loan options required by separately from other required § 226.38(f), and precede the disclosures
that paragraph and all of the following disclosures under § 226.38: itemization required by § 226.38(j).
conditions are met: of amount financed under § 226.38(j)(1); (8) The loan program disclosures
(i) The loan originator obtains loan rebate under § 226.38(j)(2); late payment required by § 226.19(b) for an
options from a significant number of the under § 226.38(j)(3); property insurance adjustable-rate mortgage shall be
creditors with which the originator under § 226.38(j)(4); contract reference provided in a tabular format in
regularly does business and, for each under § 226.38(j)(5); and assumption accordance with the requirements of
type of transaction in which the under § 226.38(j)(6). § 226.19(b).
consumer expressed an interest the (c) Terminology. (1) Terminology used (9) The disclosures required by
originator must present and permit the in providing the disclosures required by § 226.20(c)(2)–(4) for an adjustable-rate
consumer to choose from at least three §§ 226.19, 226.20(c), 226.20(d) and adjustment notice shall be provided in
loans that include: 226.38 shall be consistent. a tabular format in accordance with the
(A) The loan with the lowest interest (2) The term annual percentage rate, requirements of § 226.20(c)(2)–(5).
rate; when required to be disclosed under (10) The disclosures required by
(B) The loan with the second lowest § 226.38(b)(1) together with a § 226.20(d)(1) for loans with negative
interest rate; and corresponding percentage rate, shall be amortization shall be provided in a
(C) The loan with the lowest total more conspicuous than any other tabular format in accordance with the
dollar amount for origination points or required disclosure, disclosed in at least requirements of § 226.20(d).
fees and discount points, as offered by a 16-point font, and be placed in a (e) Electronic disclosures. The
the creditors. prominent location and in close disclosures required by § 226.38 may be
(ii) The loan originator must have a proximity to a scaled graph in provided to the consumer in electronic
good faith belief that the options accordance with the requirements under form in accordance with the
presented to the consumer pursuant to § 226.38(b)(2). requirements under § 226.17(a)(1).fi
paragraph (e)(3)(i) of this section are (d) Specific formats. (1) The 11. A new § 226.38 is added to
loans for which the consumer likely disclosures required by § 226.38(a)(1) Subpart E to read as follows:
qualifies. through (5) shall be provided in
(iii) For each type of transaction, if the accordance with the requirements of fl§ 226.38 Content of disclosures for
§ 226.38(a), and precede all other closed-end mortgages.
originator presents to the consumer
more than three loans, the originator disclosures, except the identification In connection with a closed-end
must highlight the loans that satisfy the required by § 226.38(g) and the transaction secured by real property or
criteria specified in paragraph (e)(3)(i) of disclosures permitted under paragraph a dwelling, the creditor shall disclose
this section.fi (a)(2)(i) of this section; the following information:
fl(f)fi [(d)] This section does not (2) The disclosures required by (a) Loan summary. A separate section,
apply to a home equity line of credit § 226.38(b)(2) shall be provided in the labeled ‘‘Loan Summary.’’
subject to § 226.5b. form of a graph with shading, scaling (1) Loan amount. The principal
10. A new § 226.37 is added to and content in accordance with the amount the consumer will borrow as
Subpart E to read as follows: requirements of § 228.38(b)(2), placed in reflected in the loan contract.
a prominent location and in close (2) Loan term. The period of time to
fl§ 226.37 Special disclosure proximity to the disclosures required by repay the obligation in full.
requirements for closed-end mortgages. (3) Loan type and features. The loan
§§ 226.38(b)(1), 226.38(b)(3) and
(a) Form of disclosures—(1) General. 226.38(b)(4); types and loan features described in this
The creditor shall make the disclosures (3) The disclosures required by section.
required by §§ 226.19, 226.20(c), § 226.38(c), as applicable, shall be (i) Loan type. The loan type, as
226.20(d) and 226.38 clearly and provided in a tabular format in applicable:
conspicuously in writing, in a form that accordance with the requirements of (A) Adjustable-rate mortgage. If the
the consumer may keep. § 226.38(c), and placed in a prominent annual percentage rate may increase
(2) Grouped and segregated. The location; after consummation, the creditor shall
disclosures required by § 226.19, as (4) The disclosure required by disclose that the loan is an ‘‘adjustable-
applicable, § 226.20(c), § 226.20(d), or § 226.38(c)(2)(iii) shall be outlined in a rate mortgage,’’ using that term.
§ 226.38 shall be grouped together and box and placed directly beneath the (B) Step-rate mortgage. If the interest
segregated from everything else, except table required by § 226.38(c)(1) in rate will change after consummation,
as provided in paragraph (b) of this accordance with the requirements of and the rates and periods in which they
section, and shall not contain any § 226.38(c)(2)(iii); will apply are known, the creditor shall
information not directly related to the (5) The disclosures required by disclose that the loan is a ‘‘step-rate
disclosures required under §§ 226.19, § 226.38(d) shall be provided in a mortgage,’’ using that term.
226.20(c), 226.20(d), or 226.38, except: question and answer format in a tabular (C) Fixed-rate mortgage. If the
(i) The disclosures may include the format in accordance with the transaction is not an adjustable-rate
date of the transaction and the requirements of § 226.38(d), and shall mortgage or a step-rate mortgage, the
consumer’s name, address, and account not precede the disclosures required by creditor shall disclose that the loan is a
number; and § 226.38(a) through (c). ‘‘fixed-rate mortgage,’’ using that term.
(ii) The following disclosures may be (6) The disclosures required by (ii) Loan features. No more than two
made together with or separately from § 226.38(e) shall be provided in a loan features, as applicable:
other required disclosures under tabular format in accordance with the (A) Step-payments. If, under the terms
§ 226.38: the tax deductibility disclosure requirements of § 226.38(e), and precede of the legal obligation, the regular
under § 226.38(f)(4); and insurance, debt any information not directly related to periodic payments will gradually
cancellation, or debt suspension the disclosures required by § 226.38. increase by a set amount at
disclosure under § 226.38(h). (7) The disclosures required by predetermined times, the creditor shall
(b) Separate disclosures. The § 226.38(f) shall be provided in disclose that the loan has a ‘‘step-
following disclosures must be provided accordance with the requirements of payment’’ feature, using that term; and
(B) Payment option. If, under the including interest and settlement (v) The lighter and darker shaded
terms of the legal obligation, the charges.’’ areas shall each extend past the lowest
consumer may choose to make one or (2) A graph depicting the annual and highest APRs depicted on the axis,
more regular periodic payments that percentage rate (APR) disclosed under with a left pointing arrow to the left of
may cause the loan balance to increase, paragraph (b)(1) of this section and how lowest APR and a right-pointing arrow
the creditor shall disclose that the loan it relates to a range of rates including to the right of the highest APR.
has a ‘‘payment option’’ feature, using the average prime offer rate as defined (3) A statement of the average prime
that term; in § 226.35(a)(2) for the week in which offer rate as defined in § 226.35(a)(2),
(C) Negative amortization. If, under the disclosure required under this and the higher-priced mortgage loan
the terms of the legal obligation, the section is provided, and the higher- threshold, as defined in § 226.35(a)(1),
regular periodic payments will cause priced mortgage loan threshold as current as of the week the disclosure is
the loan balance to increase and the defined in § 226.35(a)(1). produced.
loan is not a loan described in (i) The graph shall consist of a (4) The average per-period savings
paragraphs (a)(3)(ii)(B) or (a)(3)(ii)(D) of horizontal line or axis, with a shaded from a 1 percentage point reduction in
this section, the creditor shall disclose bar extending above and below the line. the APR, which shall be calculated as
that the loan has a ‘‘negative The horizontal axis shall be used to follows:
amortization’’ feature, using that term; depict a range of APRs and the shaded (i) Reduce the interest rate by 1
or bar shall use lighter shading on the left percentage point and compute the total
(D) Interest-only payments. If, under and darker shading on the right to of payments that would result from the
the terms of the legal obligation, one or distinguish between the rates on the reduced interest rate;
more regular periodic payments may be graph that are below and above the APR (ii) Compute the difference between
applied to interest accrued only and not representing the higher-priced mortgage the total of payments in paragraph
to loan principal, and the loan is not a loan threshold. (b)(4)(i) of this section and the total of
loan described in paragraphs payments for the loan disclosed under
(ii) The lighter shaded area shall
(a)(3)(ii)(A) or (a)(3)(ii)(B) of this
comprise the first two-thirds of the § 226.38(e)(5)(i), and divide the
section, the creditor shall disclose that
graph to represent the rates that are difference by the total number of
the loan has an ‘‘interest-only payment’’
below the higher-priced mortgage loan payments required to pay the loan off by
feature, using that term.
(4) Total settlement charges. The threshold. On the horizontal axis, a its maturity.
‘‘total settlement charges,’’ using that range of APRs shall be plotted in the (5) Exemptions. The following
term, as disclosed under Regulation X, lighter shaded area, starting with the transactions are exempt from the
12 CFR part 3500. As applicable, a average prime offer rate depicted as the disclosures required under paragraphs
statement of the amount of the charges lowest APR on the left, and increasing (b)(2) and (b)(3) of this section:
already included in the loan amount in increments of .50 percentage points, (i) A transaction to finance the initial
and a statement that the total does not up to the APR that is the higher-priced construction of a dwelling;
include a down payment, with a mortgage loan threshold. The average (ii) A temporary or ‘‘bridge’’ loan with
reference to the Good Faith Estimate or prime offer rate shall be plotted as the a term of twelve months or less, such as
HUD–1 for details. lowest APR on the horizontal axis and a loan to purchase a new dwelling
(5) Prepayment penalty. If the shall be labeled as ‘‘Average Best APR’’ where the consumer plans to sell a
obligation includes a finance charge or ‘‘Avg. Best APR.’’ current dwelling within twelve months;
computed from time to time by (iii) The darker shaded area to the and
application of a rate to the unpaid right side of the APR representing the (iii) A reverse-mortgage transaction
principal balance and permits the higher-priced mortgage loan threshold subject to § 226.33.
creditor to impose a penalty if the shall comprise the last third of the (c) Interest rate and payment
obligation is prepaid in full, a statement graph, shall contain the words ‘‘high summary. The creditor shall disclose
indicating the amount of the maximum cost zone’’ and the APR that is 4 the following information about the
penalty and the circumstances and percentage points higher than the interest rate and periodic payments:
period in which the creditor may higher-priced mortgage threshold shall (1) The information in paragraphs
impose the penalty. be plotted as the highest APR on the (c)(2)–(4) of this section shall be in the
(6) Form of disclosures; tabular horizontal axis. Ellipses shall separate form of a table, with no more than five
format. The disclosures required by the APR representing the higher-priced columns, with headings, content and
paragraphs (a)(1) through (5) of this mortgage threshold and the highest APR format substantially similar to Forms H–
section shall be in the form of a table, on the graph. 19(A), H–19(B), or H–19(C) in Appendix
with headings, content and format (iv) The graph shall include the APR H to this part. The table shall contain
substantially similar to Forms H–19(A), disclosed under paragraph (b)(1) of this only the information required in
H–19(B), or H–19(C) in Appendix H to section and: paragraphs (c)(2)–(4).
this part. The table shall contain only (A) Identify its location on the (2) Interest rates—(i) Amortizing
the information required or permitted horizontal axis, which shall be labeled loans. (A) For fixed-rate mortgages, the
by paragraphs (a)(1) through (5). ‘‘this loan: __% APR,’’ or interest rate at consummation.
(b) Annual percentage rate. The (B) If the APR disclosed under (B) For an adjustable-rate mortgage or
disclosures specified in paragraph paragraph (b)(1) exceeds the highest a step-rate mortgage—
(b)(1)–(4) of this section shall be APR on the axis, identify its location (1) The interest rate at consummation
grouped together with headings, content beyond the rightmost edge of the shaded and the period of time until the first
and format substantially similar to graph, or interest rate adjustment, labeled as the
Forms H–19(A), H–19(B), or H–19(C) in (C) If the APR disclosed under ‘‘introductory rate and monthly
Appendix H to this part. paragraph (b)(1) is below the average payment’’;
(1) The ‘‘annual percentage rate,’’ prime offer rate, identify its location (2) The maximum possible interest
using that term, and the following beyond the leftmost edge of the shaded rate at the first scheduled interest rate
description: ‘‘overall cost of this loan graph. adjustment and the date on which the
adjustment will occur, labeled as of the amount of taxes and insurance, (c)(3) or (c)(4) of this section, then the
‘‘maximum at first adjustment’’; and including any mortgage insurance; balloon payment must be disclosed in
(3) The maximum possible interest (D) The sum of the amounts disclosed the table.
rate at any time and the earliest date on under paragraph (c)(3)(i)(A)–(C) of this (6) Special disclosures for loans with
which that rate may apply, labeled as section, with a description such as negative amortization. The following
‘‘maximum ever.’’ ‘‘total estimated monthly payment.’’ information, in close proximity to the
(C) If the loan provides for payment (ii) Interest-only payments. If the loan table required in paragraph (c)(1) of this
increases in paragraph (c)(3)(i)(B) of this is an interest-only loan, for each interest section, with headings, content and
section, the interest rate in effect at the rate disclosed under paragraph (c)(2)(i) format substantially similar to Form H–
time the first payment increase is of this section, the corresponding 19(C) in Appendix H to this part:
scheduled to occur and the date on payment and— (i) The maximum possible interest
which the increase will occur. (A) If the payment will be applied to rate, the period of time in which the
(ii) Negative amortization loans. The only the interest accrued, the amount interest rate could reach its maximum,
creditor shall disclose— applied to interest and an indication the amount of estimated taxes and
(A) The interest rate at consummation that none of the payment is being insurance included in each payment
and if it will adjust after consummation, applied to principal; disclosed, and a statement that the loan
the length of time until it will adjust (B) If the payment will be applied to offers payment options, two of which
and the label ‘‘introductory’’; interest accrued and principal, the are shown.
(B) The maximum possible interest earliest date that payment will be (ii) The dollar amount of the increase
rate that could apply when the required and the payment amount in the loan’s principal balance if the
consumer must begin making fully itemized by the amount applied to consumer makes only the minimum
amortizing payments under the terms of interest accrued and the amount applied required payments for the maximum
the legal obligation; to principal; possible time, and the earliest date on
(C) If the minimum required payment (C) The escrow information in which the consumer must make a fully
will increase before the consumer must paragraph (c)(3)(i)(C) of this section; and amortizing payment, assuming that the
begin making fully amortizing (D) The sum of all amounts required interest rate reaches its maximum at the
payments, the maximum possible to be disclosed under paragraph earliest possible time.
interest rate that would be in effect at (c)(3)(i)(A)–(C) of this section, with a (7) Definitions. For the purposes of
the first payment increase and the date description such as ‘‘total estimated this paragraph (c):
the increase is scheduled to occur; and monthly payment.’’ (i) The terms ‘‘adjustable-rate
(D) If a second payment increase in (4) Payments for negative mortgage,’’ ‘‘step-rate mortgage,’’ ‘‘fixed-
the minimum required payment may amortization loans. (i) The minimum rate mortgage,’’ and ‘‘interest-only’’
occur before the consumer must begin payment— shall have the meaning given to them in
making fully amortizing payments, the (A) Required until the first payment paragraphs (a)(3)(i) and (a)(3)(ii)(D) of
maximum possible interest rate that increase or interest rate increase; this section;
would in effect at the second payment (B) That would be due at the first (ii) The term ‘‘amortizing loan’’ means
increase and the date the increase is payment increase and the second, if a loan in which the regular periodic
scheduled to occur. any, in paragraphs (c)(2)(ii)(C) and (D) of payments cannot cause the principal
(iii) Introductory rate disclosure for this section; and balance to increase under the terms of
amortizing adjustable-rate mortgage. If (C) A statement that the minimum the legal obligation; the term ‘‘negative
the interest rate at consummation is less payment covers only some interest, does amortization’’ means a loan in which
than the fully-indexed rate— not cover any principal, and will cause the regular periodic payments may or
(A) The interest rate that applies at the loan amount to increase. will cause the principal balance to
consummation and the period of time (ii) The fully amortizing payment increase under the terms of the legal
the interest rate applies; amount at the earliest time when such obligation; and
(B) A statement that even if market a payment must be made; and, if (iii) The term ‘‘fully indexed rate’’
rates do not change, the interest rate applicable, means the interest rate calculated using
will increase at the first adjustment and (iii) In addition to the payments in the index value and margin at the time
the date of such rate adjustment; and paragraphs (c)(4)(i) and (ii) of this of consummation.
(C) The fully-indexed rate. section, for each interest rate required (d) Key questions about risk. The
(3) Payments for amortizing loans—(i) under paragraph (c)(2)(ii) of this section, creditor shall disclose the information
Principal and interest payments. If all the amount of the fully amortizing required in paragraphs (d)(1) and (d)(2)
regular periodic payments will be payment, labeled as the ‘‘full payment of this section, grouped together under
applied to the interest accrued and the option,’’ and a statement that payments the heading ‘‘Key Questions About
principal, for each interest rate cover all principal and interest. Risk,’’ using that term:
disclosed under paragraph (c)(2)(i) of (5) Balloon payments. (i) Except as (1) Required disclosures. The creditor
this section— provided in paragraph (c)(5)(ii) of this shall disclose the following
(A) The corresponding regular section, if the transaction will require a information—
periodic payment of principal and balloon payment, defined as a payment (i) Rate increases. A statement
interest, labeled as ‘‘principal and that is more than two times a regular indicating whether or not the interest
interest;’’ periodic payment, the balloon payment rate on the loan may increase. If the
(B) If the regular periodic payment must be disclosed separately from other interest rate on the loan may increase,
may increase without regard to an regular periodic payments disclosed a statement indicating the frequency
interest rate adjustment, the payment under this paragraph (c), in a manner with which the interest rate may
that corresponds to the first increase substantially similar to Model Clause increase and the date on which the first
and the earliest date on which the H–20 in Appendix H to this part. interest rate increase may occur.
increase could occur; (ii) If the balloon payment is (ii) Payment increases. A statement
(C) That an escrow account is scheduled to occur at the same time as indicating whether or not the periodic
required, if applicable, and an estimate another required payment in paragraph payment on the loan may increase. If the
periodic payment on the loan may creditor will give the consumer before labeled ‘‘Rate Calculation’’ that
increase, a statement indicating the date the creditor exercises such right. describes the method used to calculate
on which the first payment increase (v) No-documentation or low- the interest rate and the frequency of
may occur. For a payment option loan, documentation loans. A statement that interest rate adjustments. If the interest
if the periodic payment on the loan may the consumer’s loan will have a higher rate that applies at consummation is not
increase, statements indicating the dates rate or fees because the consumer did based on the index and margin that will
on which the full and minimum not document employment, income or be used to make later interest rate
payments may increase. other assets, along with a statement that adjustments, the statement must include
(iii) Prepayment penalty. If the if the consumer provides more the time period when the initial interest
obligation includes a finance charge documentation, the consumer could rate expires.
computed from time to time by decrease the interest rate or fees. (2) Rate and payment change limits.
application of a rate to the unpaid (vi) Shared-equity or shared- (i) For an adjustable-rate mortgage, any
principal balance, a statement appreciation. A statement that any limitations on the increase in the
indicating whether or not a penalty will future equity or appreciation in the real interest rate labeled in bold type ‘‘Rate
be imposed if the obligation is prepaid property or dwelling that secures the Change Limits,’’ together with a
in full. If the creditor may impose a loan must be shared, along with a statement of the maximum rate that may
prepayment penalty, a statement of the statement of the percentage of equity or apply pursuant to such limitations
circumstances under which and period appreciation to which the creditor is during the transaction’s term to
in which the creditor may impose the entitled, and the events that may trigger maturity.
penalty and the amount of the such obligation. (ii) If the regular periodic payment
maximum penalty. (3) Format requirements. (i) Form of required under the terms of the legal
disclosures; tabular format. The creditor obligation may cause the principal
(2) Additional disclosures. The
shall provide the disclosures required balance to increase, any limitations on
creditor shall disclose the following
by paragraphs (d)(1) and (2) of this the increase in the minimum payment
information, as applicable—
section, as applicable, in the form of a amount and an identification of the
(i) Interest-only payments. A
table with headings, content and format circumstances under which the
statement that periodic payments will
substantially similar to Forms H–19(A), minimum required payment may recast
be applied only toward interest on the
H–19(B), or H–19(C) in Appendix H to to a fully amortizing payment labeled,
loan, along with a statement of any
this part. The table shall contain only in bold type, ‘‘Payment Change Limits.’’
limitation on the number of periodic (3) Escrow. If applicable, a statement,
the information required or permitted
payments that will be applied only labeled in bold type ‘‘Escrow,’’ that
by paragraphs (d)(1) and (2).
toward interest on the loan, that such (ii) Question and answer format. The explains that an escrow account is
payments will cover the interest owed creditor shall provide the disclosures required for property taxes and
each month, but none of the principal, required by paragraphs (d)(1) through insurance, that the escrow payment is
and that making these periodic (d)(2) of this section grouped together an estimate that can change at any time,
payments means the loan amount will and presented in the format of question and that the consumer should consult
stay the same and the consumer will not and answer, in a manner substantially the good faith estimate of settlement
have paid any of the loan amount. For similar to Forms H–19(A), H–19(B), or costs and HUD–1 settlement statement
payment-option loans, a statement that H–19(C) in Appendix H to this part. for more details. If no escrow is
the loan gives the consumer the choice (iii) Highlighting. Each affirmative required, a statement of that fact and
to make periodic payments that cover answer for a feature required to be that the consumer will have to pay
the interest owed each month, but none disclosed under paragraphs (d)(1) and property taxes, homeowners’, and other
of the principal, and that making these (2) of this section shall be disclosed in insurance directly.
periodic payments means the loan bold text and in all capitalized letters. (4) Mortgage insurance. If applicable,
amount will stay the same and the Any negative answer shall be in a statement, labeled in bold type,
consumer will not have paid any of the nonbold text. ‘‘Private Mortgage Insurance,’’ that
loan amount. (iv) Order. The disclosures shall be private mortgage insurance is required
(ii) Negative amortization. A provided, as applicable, in the following and, if applicable, whether such
statement that the loan balance may order: rate increases under insurance is included in any escrow
increase even if the consumer makes the § 226.38(d)(1)(i), payment increases account. If other mortgage insurance is
periodic payments, along with a under § 226.38(d)(1)(ii), interest-only required, for example, for a transaction
statement that the minimum payment payments under § 226.38(d)(2)(i), insured by a government entity, the
covers only a part of the interest the negative amortization under statement shall be labeled, in bold type,
consumer owes each period and none of § 226.38(d)(2)(ii), balloon payment ‘‘Mortgage Insurance.’’
the principal, that the unpaid interest under § 226.38(d)(2)(iii), prepayment (5) Total payments. A creditor shall
will be added to the consumer’s loan penalty under § 226.38(d)(1)(iii), disclose the following information,
amount, and that over time this will demand feature under § 226.38(d)(2)(iv), grouped together under the subheading
increase the total amount the consumer no-documentation or low- ‘‘Total Payments,’’ using that term:
is borrowing and cause the consumer to documentation loans under (i) Total payments. The total
lose equity in the home. § 226.38(d)(2)(v), and shared-equity or payments amount, calculated based on
(iii) Balloon payment. A statement shared-appreciation under the number and amount of scheduled
that the consumer will owe a balloon § 226.38(d)(2)(vi). payments in accordance with the
payment, along with a statement of the (e) Information about payments. A requirements of § 226.18(g), together
amount that will be due and the date on creditor shall disclose the following with a statement that the total payments
which it will be due. information, grouped together under the is calculated on the assumption that
(iv) Demand feature. A statement that heading ‘‘More Information About Your market rates do not change, if
the creditor may demand full repayment Payments’’: applicable, and that the consumer
of the loan, along with a statement of (1) Rate calculation. For an makes all payments as scheduled. The
the timing of any advance notice the adjustable-rate mortgage, a statement statement must also specify the total
number of payments and whether the value of the dwelling, the creditor shall consumer does not have to buy the
total payments amount includes disclose that: product to get the loan. The term ‘‘not’’
estimated escrow. (i) The interest on the portion of the shall be in bold text and underlined.
(ii) Interest and settlement charges. credit extension that is greater than the (3) A statement that if the consumer
The interest and settlement charges, fair market value of the dwelling may already has insurance, then the policy
using that term, calculated as the not be tax deductible for Federal income or coverage may not provide the
finance charge in accordance with the tax purposes; and consumer with additional benefits.
requirements of § 226.4 and expressed (ii) The consumer should consult a (4) A statement that other types of
as a dollar figure, together with a brief tax adviser for further information insurance may give the consumer
statement that the interest and regarding the deductibility of interest similar benefits and are often less
settlement charges amount represents and charges. expensive.
part of the total payments amount. The (5) Additional information and Web (5) (i) If the eligibility restrictions are
disclosed interest and settlement site. A statement that if the consumer limited to age and/or employment, a
charges, and other disclosures affected does not understand any disclosure statement that based on the creditor’s
by the disclosed interest and settlement required by this section the consumer review of the consumer’s age and/or
charges (including the amount financed should ask questions, a statement that employment status at this time, the
and annual percentage rate), shall be the consumer may obtain additional consumer would be eligible to receive
treated as accurate if the amount information at the Web site of the benefits.
disclosed as the interest and settlement Federal Reserve Board, and a reference (ii) If there are other eligibility
charges— to that Web site. restrictions in addition to age and/or
(A) Is understated by no more than (6) Format—(i) Location. The employment, a statement that based on
$100; statements required by paragraph (f)(1) the creditor’s review of the consumer’s
(B) Is greater than the amount of this section must be disclosed age and/or employment status at this
required to be disclosed. together. The disclosure required by time, the consumer may be eligible to
(iii) Amount financed. The amount paragraph (f)(2) of this section must be receive benefits.
financed, using that term and expressed made together with the disclosure (6) If there are other eligibility
as a dollar figure, together with a brief paragraph (f)(3) of this section. The restrictions in addition to age and/or
statement that the interest and statements required by paragraph (f)(5) employment, such as pre-existing health
settlement charges and the amount of this section must be made together. conditions, a statement that the
financed are used to calculate the (ii) Highlighting. The first statement consumer may not qualify to receive any
annual percentage rate. The amount required to be disclosed by paragraphs benefits because of other eligibility
financed is calculated by subtracting all (f)(1) and (f)(5) of this section, and the restrictions.
statement required to be disclosed by (7) If the product is a debt suspension
prepaid finance charges from the loan
paragraph (f)(2), must be disclosed in agreement, a statement that the
amount required to be disclosed under
bold text. obligation to pay loan principal and
§ 226.38(a)(1).
(iii) Form of disclosures. The creditor interest is only suspended, and that
(6) Form of disclosures; tabular
must provide the disclosures required interest will continue to accrue during
format. The creditor must provide the
by paragraphs (f)(1) through (5) of this the period of suspension.
disclosures required by paragraphs (8) A statement that the consumer
section in a manner substantially
(e)(1) through (5) of this section in the may obtain additional information about
similar to Forms H–19(A), H–19(B), or
form of a table, with headings, content, the product at the Web site of the
H–19(C) in Appendix H to this part.
and format substantially similar to (g) Identification of creditor and loan Federal Reserve Board, and reference to
Forms H–19(A), H–19(B), or H–19(C) in originator—(1) Creditor. The identity of that Web site.
Appendix H to this part. The table shall the creditor making the disclosures. (9)(i) If the product is optional, a
contain only the information required or (2) Loan originator. The loan statement of the consumer’s request to
permitted by paragraphs (e)(1) through originator’s unique identifier, as defined purchase or enroll in the optional
(e)(5). by the Secure and Fair Enforcement for product and a statement of the cost of
(f) Additional disclosures. The Mortgage Licensing Act of 2008 Sections the product expressed as a dollar
creditor shall disclose the following 1503(3) and (12), 12 U.S.C. 5102(3) and amount per month or per year, as
information, grouped together: (12). applicable, together with the loan
(1) No obligation statement. A (h) Credit insurance and debt amount and the term of the product in
statement that the consumer has no cancellation and debt suspension years; or
obligation to accept the loan. If the coverage. The disclosures specified in (ii) If the product is required, a
creditor provides space for a consumer’s paragraphs (h)(1)–(10) of this section, statement that the product is required,
signature, a statement that a signature which shall be grouped together and along with a statement of the cost of the
by the consumer only confirms receipt substantially similar in headings, product expressed as a dollar amount
of the disclosure statement. content and format to Model Clauses H– per month or per year, as applicable,
(2) Security interest. A statement that 17(A) and H–17(C) in Appendix H to together with the loan amount and the
the consumer could lose the home if he this part. term of the product in years.
or she is unable to make payments on (1)(i) If the product is optional, the (iii) The cost, month or year, loan
the loan. term ‘‘OPTIONAL COSTS,’’ in amount, and term of the product shall
(3) No guarantee to refinance capitalized and bold letters, along with be underlined.
statement. A statement that there is no the name of the program, in bold letters; (10) A designation for the signature of
guarantee the consumer can refinance or the consumer and the date of the
the transaction to lower the interest rate (ii) If the product is required, the signing.
or monthly payments. name of the program, in bold letters. (i) Required deposit. If the creditor
(4) Tax deductibility. For a transaction (2) If the product is optional, the term requires the consumer to maintain a
secured by a dwelling, if the extension ‘‘STOP,’’ in capitalized and bold letters, deposit as a condition of the specific
of credit may exceed the fair market along with a statement that the transaction, a statement that the annual
percentage rate does not reflect the charge if the obligation is prepaid in To learn more about [credit insurance][debt
effect of the required deposit. A full. cancellation coverage][debt suspension
required deposit need not include: coverage], go to (Board’s Web site).
(3) Late payment. Any dollar or
(1) An escrow account for items such b Yes, I want to purchase optional (name
percentage charge that may be imposed of program) at an additional cost of (cost) per
as taxes, insurance or repairs; or before maturity due to a late payment,
(2) A deposit that earns not less than (month or year) for a loan of (loan amount)
other than a deferral or extension with a [policy/coverage] term of (term in
5 percent per year. charge. years) years.
(j) Separate disclosures. The following lllllllllllllllllllll
information must be provided (4) Property insurance. A statement
that the consumer may obtain property Signature of Borrower(s)
separately from the other information lllllllllllllllllllll
required to be disclosed under this insurance from any insurer that is
acceptable to the creditor. Date
section.
(1) Itemization of amount financed. (5) Contract reference. A statement G–16(D) Credit Insurance, Debt Cancellation
that the consumer should refer to the or Debt Suspension Sample
The creditor shall provide one of the
following disclosures: appropriate contract document for OPTIONAL COSTS
(i) A separate written itemization of information about nonpayment, default,
Credit Life Insurance
the amount financed, including: the right to accelerate the maturity of
(A) The amount of any proceeds the obligation, and prepayment rebates STOP. You do not have to buy this product
to get this loan.
distributed directly to the consumer. and penalties. At the creditor’s option,
(B) The amount credited to the the statement may also include a • If you have insurance already, this policy
may not provide you with any additional
consumer’s account with the creditor. reference to the contract for further benefits.
(C) Any amounts paid to other information about security interests and • Other types of insurance can give you
persons by the creditor on the about the creditor’s policy regarding similar benefits and are often less expensive.
consumer’s behalf. The creditor shall assumption of the obligation. • Based on our review of your age and/or
identify those persons, except that the (6) Assumption policy. A statement employment status at this time, you may be
following payees may be described whether or not a subsequent purchaser eligible to receive benefits.
using general terms and need not be • However, you may not qualify to receive
of the real property or dwelling from the any benefits because of other eligibility
further identified: Public officials or consumer may be permitted to assume restrictions.
government agencies, credit reporting the remaining obligation on its original
agencies, appraisers, and insurance To learn more about credit insurance, go to
terms. http://www.xxx.gov.
companies. 12. Appendix G to Part 226, as b Yes, I want to purchase optional credit
(D) The prepaid finance charge. life insurance at an additional cost of $72 per
amended on January 29, 2009 (74 FR
(ii) A statement that the consumer has month for a loan of $100,000 with a policy
5422) is amended by:
the right to receive a written itemization term of 10 years.
of the amount financed, together with a A. Adding entries for G–16(C) and G– lllllllllllllllllllll
space for the consumer to indicate 16(D) to the table of contents at the Signature of Borrower(s)
whether it is desired. If the consumer beginning of the appendix; and
lllllllllllllllllllll
requests it, the creditor shall provide an B. Adding new Model Clause G–16(C) Datefi
itemization that satisfies paragraph and new Sample G–16(D) in numerical 13. Appendix H to Part 226, as amended
(j)(1)(i) of this section at the same time order. on January 29, 2009 (74 FR 5441) is amended
as the other disclosures required by this Appendix G to Part 226—Open-End by:
section. A. Revising the table of contents at the
Model Forms and Clauses beginning of the appendix;
(iii) A good faith estimate of
settlement costs provided under the * * * * * B. Republishing H–4(A);
C. Removing H–4(B), H–4(C) and H–4(D);
Real Estate Settlement Procedures Act, flG–16(C) Credit Insurance, Debt
D. Republishing H–5;
12 U.S.C. 2601 et seq. (RESPA), in Cancellation or Debt Suspension Model
E. Removing and reserving H–6;
connection with disclosures under this Clause (§ 226.4(d)(1) and (d)(3))
F. Republishing H–7;
section delivered within three business G–16(D) Credit Insurance, Debt Cancellation G. Removing and reserving H–13 through
days of application pursuant to or Debt Suspension Sample (§ 226.4(d)(1) and H–15;
§ 226.19(a)(1), or the HUD–1 settlement (d)(3))fi H. Revising H–16; and
statement provided under RESPA, in I. Adding new H–4(B) through H–4(L), H–
* * * * *
connection with disclosures under this 17(C) and H–17(D), and H–18 through H–23
flG–16(C) Credit Insurance, Debt in numerical order.
section delivered three business days Cancellation or Debt Suspension Model
before consummation pursuant to Clause Appendix H to Part 226—Closed-End
§ 226.19(a)(2). The alternative provided Model Forms and Clauses
by this paragraph (j)(1)(iii) is available OPTIONAL COSTS
(Name of Program) * * * * *
whether or not those disclosures are H–4(A)—Variable-Rate Model Clauses
required by RESPA, but the HUD–1 STOP. You do not have to buy this product (§ 226.18(f)[(1)])
settlement statement satisfies this to get this loan. H–4(B)—[Variable-Rate Model Clauses
requirement only if it is provided to the • If you have insurance already, this policy (§ 226.18(f)(2)]flAdjustable-Rate Loan
consumer at the time required by may not provide you with any additional Program Model Form (§ 226.19(b))fi
§ 226.19(a)(2). benefits. H–4(C)—[Variable-Rate Model Clauses
(2) Rebate. If the obligation includes • Other types of insurance can give you (§ 226.19(b))]flAdjustable-Rate Loan
a finance charge other than one similar benefits and are often less expensive. Program Model Clauses (§ 226.19(b))fi
• Based on our review of your age and/or H–4(D)—[Variable-Rate Model Clauses
computed from time to time by employment status at this time, you (§ 226.20(c))]flAdjustable-Rate Loan
application of a rate to the unpaid [would][may] be eligible to receive benefits. Program Sample (Hybrid ARM)
principal balance, a statement • [However, you may not qualify to receive (§ 226.19(b))fi
indicating whether or not the consumer any benefits because of other eligibility flH–4(E)—Adjustable-Rate Loan Program
is entitled to a rebate of any finance restrictions.] Sample (Interest Only ARM) (§ 226.19(b))
H–4(F)—Adjustable-Rate Loan Program H–17(D)—Credit Insurance, Debt [the prime interest rate of (creditor)
Sample (Payment Option ARM) Cancellation or Debt Suspension Sample increases.]
(§ 226.19(b)) (§ 226.4(d)(1), (d)(3), and § 226.38(h)) [the balance in your deposit account falls
H–4(G)—Adjustable-Rate Adjustment Notice H–18—Creditor-Placed Property Insurance below $llll.]
Model Form (§ 226.20(c)) Model Clause (§ 226.20(e)) [you terminate your employment with
H–4(H)—Adjustable-Rate Adjustment Notice H–19(A)—Fixed Rate Mortgage Model Form (employer).]
(§ 226.38) [The interest rate will not increase
Model Clauses (§ 226.20(c))
H–19(B)—Adjustable-Rate Mortgage Model abovell%.]
H–4(I)—Adjustable-Rate Adjustment Notice Form (§ 226.38)
Sample (Interest Only ARM) (§ 226.20(c)) [The maximum interest rate increase at one
H–19(C)—Mortgage with Negative time will bell%.]
H–4(J)—Adjustable-Rate Adjustment Notice Amortization Model Form (§ 226.38)
Sample (Hybrid ARM) (§ 226.20(c)) [The rate will not increase more than once
H–19(D)—Fixed Rate Mortgage with Balloon
H–4(K)—Adjustable-Rate Annual Notice every (time period).]
Payment Sample (§ 226.38)
Model Form (§ 226.20(c)) H–19(E)—Fixed Rate Mortgage with Interest Any increase will take the form of:
H–4(L)—Negative Amortization Monthly Only Sample (§ 226.38) [higher payment amounts.]
Disclosure Model Form (§ 226.20(d))fi H–19(F)—Step-Payment Mortgage Sample [more payments of the same amount.]
(§ 226.38) [a larger amount due at maturity.]
* * * * * H–19(G)—Hybrid Adjustable-Rate Mortgage Example based on the specific transaction
H–6—[Assumption Policy Model Clause Sample (§ 226.38) [If the interest rate increases byll% in
(§ 226.18(q))]flReservedfi H–19(H)—Adjustable-Rate Mortgage with (time period),
* * * * * Interest Only Sample (§ 226.38) [your regular payments will increase to
H–13—[Mortgage with Demand Feature H–19(I)—Adjustable-Rate Mortgage with $llll.]
Sample]flReservedfi Payment Options Sample (§ 226.38) [you will have to makelladditional
H–14—[Variable-Rate Mortgage Sample H–20—Balloon Payment Model Clause payments.]
(§ 226.19(b))]flReservedfi (§ 226.38(c)(5)) [your final payment will increase to
H–15—[Graduated-Payment Mortgage H–21—Introductory Rate Model Clause $llll.]]
(§ 226.38(c)(2)(iii)) Example based on a typical transaction
Sample]flReservedfi
H–22—Key Questions About Risk Model [If your loan were for $llllatll% for
H–16—[Mortgage Sample
Clauses (§ 226.38(d)) (term) and the rate increased toll% in
(§ 226.32)]flSection 32 Loan Model H–23—Separate Disclosure Model Clauses (time period),
Clauses (§ 226.32(c))fi (§ 226.38(j)(2)–(6))fi [your regular payments would increase by
* * * * * * * * * * $llll.]
flH–17(C)—Credit Insurance, Debt [you would have to makelladditional
Cancellation or Debt Suspension Model H–4(A)—Variable Rate Model Clauses payments.]
Clause (§ 226.4(d)(1), (d)(3) and The annual percentage rate may increase [your final payment would increase by
§ 226.38(h)) during the term of this transaction if: $llll.]]
EP26AU09.028</GPH>
H–4(C)—Adjustable-Rate Loan Program (b) Conversion feature [You may have to pay fees when you
Model Clauses convert to a fixed rate loan.]]
[Conversion Feature
Interest Rate and Payment (c) Preferred rate
You have the option to convert your loan
(a) Limits on rate or payment changes to a fixed rate loan for (length of time). If you [Preferred Rate
convert your loan to a fixed rate loan, the The interest rate is a preferred rate that
[If a rate cap prevents us from adding part
[rate] [payment] may not increase more than could [increase] [decrease] byll% if
of an interest rate, we can add that increase
(frequency)[ or ll% overall]. [You may (description of event).] [You could pay fees
at a later adjustment date.] have a higher interest rate when you convert if [one or more] (description of event(s))
to a fixed rate loan.] occur(s).]
EP26AU09.029</GPH>
EP26AU09.030</GPH>
EP26AU09.031</GPH>
EP26AU09.032</GPH>
H–4(H) Adjustable-Rate Adjustment Notice needed to fully pay off your loan by the end fully pay off your loan by the end of the loan
Model Clauses of the loan term at the new interest rate is term at the new interest rate is $llll.]
$llll.] [Your new payment covers only part of the
Disclosure of New Monthly Payment interest that you owe this month, and
[Your new payment covers only part of the
[Your new payment covers all of the interest that you owe this month, and therefore the term of your loan will increase.
interest that you owe this month, but none The payment needed to fully pay off your
therefore unpaid interest will be added to
of the principal, and therefore will not loan by the end of the previous loan term at
your loan balance. The payment needed to
reduce your loan balance. The payment the new interest rate is $llll.]
EP26AU09.033</GPH>
EP26AU09.034</GPH>
* * * * *
EP26AU09.036</GPH>
EP26AU09.035</GPH>
* * * * * [At the end of your loan, will still owe use: • If you have insurance already, this policy
$ (balloon payment).] may not provide you with any additional
H–5—Demand Feature Model Clauses [Your interest rate may increase. Increase benefits.
This obligation [is payable on in the interest rate could increase your • Other types of insurance can give you
demand.][has a demand feature.] payment. The highest amount your payment similar benefits and are often less expensive.
[All disclosures are based on an assumed could increase is to $llll.] • Based on our review of your age and/or
maturity of one year.] * * * * * employment status at this time, you may be
H–6—[Assumption Policy Model eligible to receive benefits.
flH–17(C)—Credit Insurance, Debt • However, you may not qualify to receive
Clause]flReservedfi Cancellation or Debt Suspension Model any benefits because of other eligibility
[Assumption: Someone buying your house Clause restrictions.
[may, subject to conditions, be allowed [OPTIONAL COSTS] To learn more about credit insurance, go to
to][cannot] assume the remainder of the
(Name of Program) www.xxx.gov.
mortgage on the original terms.]
[STOP. You do not have to buy this product b Yes, I want to purchase optional credit life
H–7—Required Deposit Model Clause to get this loan.] insurance at an additional cost of $72 per
The annual percentage rate does not take • If you have insurance already, this policy month for a loan of $100,000 with a policy
into account your required deposit. may not provide you with any additional term of 10 years.
benefits. lllllllllllllllllllll
* * * * *
• Other types of insurance can give you Signature of Borrower(s)
H–13—[Mortgage With Demand Feature similar benefits and are often less expensive. lllllllllllllllllllll
Sample]flReservedfi • Based on our review of your age and/or Date
H–14—[Variable-Rate Mortgage employment status at this time, you
Sample]flReservedfi [would][may] be eligible to receive benefits. H–18—Creditor-Placed Property Insurance
• [However, you may not qualify to receive Model Clause
H–15—[Graduated-Payment Mortgage any benefits because of other eligibility
Sample]flReservedfi (Creditor name and contact information)
restrictions.]
H–16—[Mortgage Sample]flSection 32 Loan To learn more about [credit insurance][debt Re: (loan number) and (property address/
Model Clausesfi cancellation coverage][debt suspension description)
coverage], go to (Web site of the Federal Under our agreement, you must maintain
[You are not required to complete this Reserve Board).
agreement merely because you have received adequate insurance coverage on the property.
b [Yes, I want to purchase optional (name Our records show that your insurance policy
these disclosures or have signed a loan of program) at an additional cost of (cost) per
application. has expired or been cancelled, and we do not
(month or year) for a loan of (loan amount)
If you obtain this loan, the lender will have have evidence that you have obtained new
with a (policy/coverage) term of (term in
a mortgage on your home. insurance coverage. Under our agreement, we
years) years.]
YOU COULD LOSE YOUR HOME, AND can buy property insurance on your behalf
[(Name of program) is required and costs
ANY MONEY YOU HAVE PUT INTO IT, IF and charge you for the cost as early as (date).
(cost) per (month or year) for a loan of (loan
YOU DO NOT MEET YOUR OBLIGATIONS Therefore, we request that you provide us
amount) with a [policy/coverage] term of
UNDER THE LOAN.] with proof of insurance by (description of
(term in years) years.]
flIF YOU ARE UNABLE TO MAKE THE procedure for providing proof of insurance).
lllllllllllllllllllll
PAYMENTS ON THIS LOAN, YOU COULD Please consider the following facts about
LOSE YOUR HOME. Signature of Borrower(s) the insurance policy that we buy:
You have no obligation to accept this loan. lllllllllllllllllllll • The cost of this insurance policy is
Your signature below only confirms that you Date $llll per year and is probably
have received this form.fi significantly higher than the cost of
You are borrowing $llll (optional H–17(D)—Credit Insurance, Debt insurance you can buy through your own
credit insurance is b is not b included in Cancellation or Debt Suspension Sample insurance agent.
this amount). OPTIONAL COSTS • This insurance policy may not provide
The annual percentage rate on your loan as much coverage as an insurance policy you
will be:llll%. Credit Life Insurance buy through your own insurance agent].
Your regular (frequency) payment will be: STOP. You do not have to buy this product If you have any questions, please contact
$llll. to get this loan. us at (contact information).
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BILLING CODE 6210–01–C

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H–20—Balloon Payment Model Clause (c) Property Insurance Section 226.2—Definitions and Rules of
[Final Balloon Payment due (date): [You may get property insurance from any Construction
$llll] insurer that is acceptable to us.] * * * * *
H–21—Introductory Rate Model Clause (d) Contract Reference 2(a)(24) Residential mortgage
[Introductory Rate Notice Read your loan contract to find out what transaction.
You have a discounted introductory rate of happens if you stop making payments, 1. Relation to other sections. This
llll% that ends after (period). default, or pay off or refinance the loan early. term is important in [five]flthreefi
In the (date), even if market rates do not provisions in the regulation:
change, this rate will increase toll%.] (e) Assumption Policy i. Section 226.4(c)(7)—exclusions
[If you sell your home after you take out from the finance charge
H–22—Key Questions About Risk Model this loan, we may permit the new buyer to
Clauses
ii. Section 226.15(f)—exemption from
take over the payments on your mortgage.]fi the right of rescission
(a) Interest only feature 14. In Supplement I to Part 226, as [Section 226.18(q)—whether or not
amended on July 30, 2008 (73 FR 44604), and the obligation is assumable]
[Will any of my monthly payments be
on January 29, 2009 (74 FR 5450): [Section 226.20(b)—disclosure
interest-only?]
A. Under Section 226.2—Definitions and
[YES. Your (frequency) payments for the first requirements for assumptions]
Rules of Construction, 2(a)(24) Residential
(period) of the loan][This loan gives you the iii. Section 226.23(f)—exemption from
mortgage transaction, paragraphs 1, 2, and
choice to make (frequency) payments that] the right of rescission
5(ii) and 5(iii) are revised.
cover the interest you owe each month, but 2. Lien status. The definition is not
B. Section 226.4—Finance Charge, Section
none of the principal. Making these limited to first-lien transactions. [For
226.17—General Disclosure Requirements,
(frequency) payments means your loan example, a consumer might assume a
Section 226.18—Content of Disclosures,
amount will stay the same and you will be
Section 226.19—Certain Mortgage and paid-down first mortgage (or borrow
no closer to having it paid off.]
Variable-Rate Transactions, and Section part of the purchase price) and borrow
(b) Negative amortization feature 226.20—Subsequent Disclosure the balance of the purchase price from
[Even if I make my monthly payments, could Requirements are revised. a creditor who takes a second mortgage.
my loan balance increase?] C. Under Section 226.24—Advertising, The second mortgage transaction is a
[YES. Your minimum payment covers only 24(c) Advertisement of rate of finance charge, ‘‘residential mortgage transaction’’ if the
part of the interest you owe each (period) and paragraph 4 is revised. dwelling purchased is the consumer’s
none of the principal. The unpaid interest D. Under Section 226.25—Record
principal residence.]
will be added to your loan amount, which Retention, 25(a) General rule, new paragraph
5 is added. * * * * *
over time will increase the total amount you
are borrowing and cause you to lose equity E. Under Section 226.30—Limitation on 5. Acquisition. * * *
in your home.] Rates, paragraph 1 is revised. ii. Examples of new transactions
F. Under Section 226.32—Requirements for involving a previously acquired
(c) Balloon payment feature Certain Closed-End Home Mortgages, 32(b) dwelling include the financing of a
[Will I owe a balloon payment?] Definitions is removed, 32(c) Disclosures, balloon payment due under a land sale
[YES. You will owe a balloon payment of paragraph 1 is removed, and 32(c)(5) Amount contract and an extension of credit
$llll, due in (date of payment).] borrowed, paragraph 1 is revised. made to a joint owner of property to buy
G. Under Section 226.35—Prohibited Acts out the other joint owner’s interest. [In
(d) Demand feature or Practices in Connection With Higher-
these instances, disclosures are not
[Can my lender demand full repayment at Priced Mortgage Loans, 35(a) Higher-priced
any time?] mortgage loans, Paragraph 35(a)(2), required under § 226.18(q (assumability
[YES. We can demand that you pay off the paragraph 4 is revised and new paragraph 5 policies). However, the]flThefi
full amount of your loan. We will give you is added. rescission rules of §§ 226.15 and 226.23
at least (period) notice.] H. Under Section 226.36—Prohibited Acts do apply to these new transactions.
or Practices in Connection with Credit [iii. In other cases, the disclosure and
(e) No-documentation or low-documentation Secured by a Consumer’s Principal Dwelling, rescission rules do not apply. For
feature the heading is revised, 36(a) Mortgage broker example, where a buyer enters into a
[Will my loan have a higher rate or fees defined, the heading is revised, paragraph 1 written agreement with the creditor
because I did not document my employment, is revised, and new paragraph 2 is added, holding the seller’s mortgage, allowing
income or other assets?] 36(b) Misrepresentation of value of the buyer to assume the mortgage, if the
[YES. If you provide more documentation, consumer’s principal dwelling, the heading is buyer had previously purchased the
you could decrease your interest rate or fees.] revised, and new 36(d) Prohibited payments
property and agreed with the seller to
to loan originators and 36(e) Prohibition on
(f) Shared-equity or shared-appreciation make the mortgage payments,
steering are added.
feature § 226.20(b) does not apply (assumptions
I. New Section 226.37—Special Disclosure
[Do I have to share any equity I gain?] Requirements for Closed-End Mortgages and involving residential mortgages).]
[YES. We are entitled to ll% of any gain Section 226.38—Content of Disclosures for * * * * *
you make when you sell or refinance this Closed-End Mortgages are added.
property.] J. Under Appendices G and H—Open-End § 226.4—Finance Charge.
H–23—Separate Disclosure Model Clauses and Closed-End Model Forms and Clauses, 4(a) Definition.
paragraphs 1 and 2 are revised. 1. Charges in comparable cash
(a) Rebate K. Appendix H—Closed-End Model Forms
transactions. Charges imposed

[If you pay off or refinance your loan, or and Clauses is revised. uniformly in cash and credit
sell this property early, you will receive a transactions are not finance charges. In
Supplement I to Part 226—Official Staff
refund of some of the interest and fees you determining whether an item is a
have paid on your loan.]
Interpretations
finance charge, the creditor should
(b) Late Payment
* * * * * compare the credit transaction in
[If you make a payment more than (number SUBPART A—GENERAL question with a similar cash transaction.
of days) days late, you may be charged a A creditor financing the sale of property
penalty equal to [$llll][ll%].] * * * * * or services may compare charges with
those payable in a similar cash is not separately imposed on the 4. Treatment of transaction fees on
transaction by the seller of the property consumer. (See § 226.4(b)(6).) credit card plans. Any transaction
or service. ii. A tax imposed by a State or other charge imposed on a cardholder by a
i. For example, the following items governmental body on a creditor is not card issuer is a finance charge,
are not finance charges: a finance charge if the creditor absorbs regardless of whether the issuer imposes
A. Taxes, license fees, or registration the tax as a cost of doing business and the same, greater, or lesser charge on
fees paid by both cash and credit does not separately impose the tax on withdrawals of funds from an asset
customers. the consumer. (For additional account such as a checking or savings
B. Discounts that are available to cash discussion of the treatment of taxes, see account. For example:
and credit customers, such as quantity other commentary to § 226.4(a).) i. Any charge imposed on a credit
discounts. 3. Forfeitures of interest. If the cardholder by a card issuer for the use
C. Discounts available to a particular creditor reduces the interest rate it pays of an automated teller machine (ATM)
group of consumers because they meet or stops paying interest on the to obtain a cash advance (whether in a
certain criteria, such as being members consumer’s deposit account or any proprietary, shared, interchange, or
of an organization or having accounts at portion of it for the term of a credit other system) is a finance charge
a particular financial institution. This is transaction (including, for example, an regardless of whether the card issuer
the case even if an individual must pay overdraft on a checking account or a imposes a charge on its debit
cash to obtain the discount, provided loan secured by a certificate of deposit), cardholders for using the ATM to
that credit customers who are members the interest lost is a finance charge. (See withdraw cash from a consumer asset
of the group and do not qualify for the the commentary to § 226.4(c)(6).) For account, such as a checking or savings
discount pay no more than the example: account.
i. A consumer borrows $5,000 for 90 ii. Any charge imposed on a credit
nonmember cash customers.
days and secures it with a $10,000 cardholder for making a purchase or
D. Charges for a service policy, auto
certificate of deposit paying 15% obtaining a cash advance outside the
club membership, or policy of insurance interest. The creditor charges the United States, with a foreign merchant,
against latent defects offered to or consumer an interest rate of 6% on the or in a foreign currency is a finance
required of both cash and credit loan and stops paying interest on $5,000 charge, regardless of whether a charge is
customers for the same price. of the $10,000 certificate for the term of imposed on debit cardholders for such
ii. In contrast, the following items are the loan. The interest lost is a finance transactions. The following principles
finance charges: charge and must be reflected in the apply in determining what is a foreign
A. Inspection and handling fees for annual percentage rate on the loan. transaction fee and the amount of the
the staged disbursement of construction- ii. However, the consumer must be fee:
loan proceeds. entitled to the interest that is not paid A. Included are fees imposed when
B. Fees for preparing a Truth in in order for the lost interest to be a transactions are made in a foreign
Lending disclosure statement, if finance charge. For example: currency and converted to U.S. dollars;
permitted by law (for example, the Real A. A consumer wishes to buy from a fees imposed when transactions are
Estate Settlement Procedures Act financial institution a $10,000 certificate made in U.S. dollars outside the U.S.;
prohibits such charges in certain of deposit paying 15% interest but has and fees imposed when transactions are
transactions secured by real property). only $4,000. The financial institution made (whether in a foreign currency or
C. Charges for a required maintenance offers to lend the consumer $6,000 at an in U.S. dollars) with a foreign merchant,
or service contract imposed only in a interest rate of 6% but will pay the 15% such as via a merchant’s Web site. For
credit transaction. interest only on the amount of the example, a consumer may use a credit
iii. If the charge in a credit transaction consumer’s deposit, $4,000. The card to make a purchase in Bermuda, in
exceeds the charge imposed in a creditor’s failure to pay interest on the U.S. dollars, and the card issuer may
comparable cash transaction, only the $6,000 does not result in an additional impose a fee because the transaction
difference is a finance charge. For finance charge on the extension of took place outside the United States.
example: credit, provided the consumer is B. Included are fees imposed by the
A. If an escrow agent is used in both entitled by the deposit agreement with card issuer and fees imposed by a third
cash and credit sales of real estate and the financial institution to interest only party that performs the conversion, such
the agent’s charge is $100 in a cash on the amount of the consumer’s as a credit card network or the card
transaction and $150 in a credit deposit. issuer’s corporate parent. (For example,
transaction, only $50 is a finance B. A consumer enters into a combined in a transaction processed through a
charge. time deposit/credit agreement with a credit card network, the network may
2. Costs of doing business. Charges financial institution that establishes a impose a 1 percent charge and the card-
absorbed by the creditor as a cost of time deposit account and an open-end issuing bank may impose an additional
doing business are not finance charges, line of credit. The line of credit may be 2 percent charge, for a total of a 3
even though the creditor may take such used to borrow against the funds in the percentage point foreign transaction fee
costs into consideration in determining time deposit. The agreement provides being imposed on the consumer.)
the interest rate to be charged or the for an interest rate on any credit C. Fees imposed by a third party are
cash price of the property or service extension of, for example, 1%. In included only if they are directly passed
sold. However, if the creditor separately addition, the agreement states that the on to the consumer. For example, if a
imposes a charge on the consumer to creditor will pay 0% interest on the credit card network imposes a 1 percent
cover certain costs, the charge is a amount of the time deposit that fee on the card issuer, but the card
finance charge if it otherwise meets the corresponds to the amount of the credit issuer absorbs the fee as a cost of doing
definition. For example: extension(s). The interest that is not business (and only passes it on to
i. A discount imposed on a credit paid on the time deposit by the financial consumers in the general sense that the
obligation when it is assigned by a institution is not a finance charge (and interest and fees are imposed on all its
seller-creditor to another party is not a therefore does not affect the annual customers to recover its costs), then the
finance charge as long as the discount percentage rate computation). fee is not a foreign transaction fee and
need not be disclosed. In another iii. For example, a stamp tax, property transaction may be excluded under
example, if the credit card network tax, intangible tax, or any other State or § 226.4(a). A charge for conducting or
imposes a 1 percent fee for a foreign local tax imposed on the consumer, or attending a closing is a finance charge
transaction on the card issuer, and the on the credit transaction, is not a and may be excluded only if the charge
card issuer imposes this same fee on the finance charge even if the tax is is included in and is incidental to a
consumer who engaged in the foreign collected by the creditor. lump-sum fee excluded under
transaction, then the fee is a foreign iv. In addition, a tax is not a finance § 226.4(c)(7).
transaction fee and a finance charge. charge if it is excluded from the finance fl3. Closed-end mortgage
D. A card issuer is not required to charge by another provision of the transactions. Comments 4(a)(2)–1 and
disclose a fee imposed by a merchant. regulation or commentary (for example, 4(a)(2)–2 do not apply to closed-end
For example, if the merchant itself if the tax is imposed uniformly in cash transactions secured by real property or
performs the currency conversion and and credit transactions). a dwelling, pursuant to § 226.4(g).fi
adds a fee, this fee need not be disclosed fl6. Transactions with no seller. In a 4(a)(3) Special rule; mortgage broker
by the card issuer. Under § 226.9(d), a transaction where there is no seller, fees.
card issuer is not obligated to disclose such as a refinancing of an existing 1. General. A fee charged by a
finance charges imposed by a party extension of credit described in mortgage broker is excluded from the
honoring a credit card, such as a § 226.20(a), there is no comparable cash finance charge if it is the type of fee that
merchant, although the merchant is transaction. Thus, the exclusion from is also excluded when charged by the
required to disclose such a finance the finance charge of charges of a type creditor. For example, to exclude an
charge if the merchant is subject to the payable in a comparable cash application fee from the finance charge
Truth in Lending Act and Regulation Z. transaction does not apply to such under § 226.4(c)(1), a mortgage broker
E. The foreign transaction fee is transactions.fi must charge the fee to all applicants for
determined by first calculating the 4(a)(1) Charges by third parties. credit, whether or not credit is
dollar amount of the transaction by 1. Choosing the provider of a required extended.
using a currency conversion rate outside service. An example of a third-party 2. Coverage. This rule applies to
the card issuer’s and third party’s charge included in the finance charge is charges paid by consumers to a
control. Any amount in excess of that the cost of required mortgage insurance, mortgage broker in connection with a
dollar amount is a foreign transaction even if the consumer is allowed to consumer credit transaction secured by
fee. Conversion rates outside the card choose the insurer. real property or a dwelling.
issuer’s and third party’s control 2. Annuities associated with reverse 3. Compensation by lender. The rule
include, for example, a rate selected mortgages. Some creditors offer requires all mortgage broker fees to be
from the range of rates available in the annuities in connection with a reverse- included in the finance charge.
wholesale currency exchange markets, mortgage transaction. The amount of the Creditors sometimes compensate
an average of the highest and lowest premium is a finance charge if the mortgage brokers under a separate
rates available in such markets, or a creditor requires the purchase of the arrangement with those parties.
government-mandated or government- annuity incident to the credit. Examples Creditors may draw on amounts paid by
managed exchange rate (or a rate include the following: the consumer, such as points or closing
selected from a range of such rates). i. The credit documents reflect the costs, to fund their payment to the
F. The rate used for a particular purchase of an annuity from a specific broker. Compensation paid by a creditor
transaction need not be the same rate provider or providers. to a mortgage broker under an
that the card issuer (or third party) itself ii. The creditor assesses an additional agreement is not included as a separate
obtains in its currency conversion charge on consumers who do not component of a consumer’s total finance
operations. In addition, the rate used for purchase an annuity from a specific charge (although this compensation may
a particular transaction need not be the provider. be reflected in the finance charge if it
rate in effect on the date of the iii. The annuity is intended to replace comes from amounts paid by the
transaction (purchase or cash advance). in whole or in part the creditor’s consumer to the creditor that are finance
5. Taxes. payments to the consumer either charges, such as points and interest).
i. Generally, a tax imposed by a State immediately or at some future date. 4(b) Examples of finance charges.
or other governmental body solely on a 4(a)(2) Special rule; closing agent 1. Relationship to other provisions.
creditor is a finance charge if the charges. Charges or fees shown as examples of
creditor separately imposes the charge 1. General. This rule applies to finance charges in § 226.4(b) may be
on the consumer. charges by a third party serving as the excludable under § 226.4(c), (d), or (e).
ii. In contrast, a tax is not a finance closing agent for the particular loan. An For example[:
charge (even if it is collected by the example of a closing agent charge i. Premiums]fl, premiumsfi for
creditor) if applicable law imposes the included in the finance charge is a credit life insurance, shown as an
tax: courier fee where the creditor requires example of a finance charge under
A. Solely on the consumer; the use of a courier. § 226.4(b)(7), may be excluded if the
B. On the creditor and the consumer 2. Required closing agent. If the requirements of § 226.4(d)(1) are met.
jointly; creditor requires the use of a closing flThey may not be excluded, however,
C. On the credit transaction, without agent, fees charged by the closing agent in transactions subject to § 226.4(g).fi
indicating which party is liable for the are included in the finance charge only [ii. Appraisal fees mentioned in
tax; or if the creditor requires the particular § 226.4(b)(4) are excluded for real
D. On the creditor, if applicable law service, requires the imposition of the property or residential mortgage
directs or authorizes the creditor to pass charge, or retains a portion of the transactions under § 226.4(c)(7).]
the tax on to the consumer. (For charge. Fees charged by a third-party Paragraph 4(b)(2).
purposes of this section, if applicable closing agent may be otherwise 1. Checking account charges. A
law is silent as to passing on the tax, the excluded from the finance charge under checking or transaction account charge
law is deemed not to authorize passing § 226.4. For example, a fee that would imposed in connection with a credit
it on.) be paid in a comparable cash feature is a finance charge under
§ 226.4(b)(2) to the extent the charge the policy is assigned to or otherwise i. Creditors may exclude from the
exceeds the charge for a similar account made payable to the creditor to satisfy finance charge discounts offered to
without a credit feature. If a charge for an insurance requirement. Such a policy consumers for using cash or another
an account with a credit feature does is not ‘‘written in connection with’’ the means of payment instead of using a
not exceed the charge for an account transaction, as long as the insurance was credit card or an open-end plan. The
without a credit feature, the charge is not purchased for use in that credit discount may be in whatever amount
not a finance charge under § 226.4(b)(2). extension, since it was previously the seller desires, either as a percentage
To illustrate: owned by the consumer. of the regular price (as defined in
i. A $5 service charge is imposed on 2. Insurance written in connection section 103(z) of the act, as amended) or
an account with an overdraft line of with a transaction. Credit insurance a dollar amount. Pursuant to section
credit (where the institution has agreed sold before or after an open-end [(not 167(b) of the act, this provision applies
in writing to pay an overdraft), while a home-secured)] plan is opened is only to transactions involving an open-
$3 service charge is imposed on an considered ‘‘written in connection with end credit plan or a credit card (whether
account without a credit feature; the $2 a credit transaction.’’ Insurance sold open-end or closed-end credit is
difference is a finance charge. (If the after consummation in closed-end credit extended on the card). The merchant
difference is not related to account transactions [or after the opening of a must offer the discount to prospective
activity, however, it may be excludable home-equity plan subject to the buyers whether or not they are
as a participation fee. See the requirements of § 226.5b] is not cardholders or members of the open-end
commentary to § 226.4(c)(4). considered ‘‘written in connection credit plan. The merchant may,
ii. A $5 service charge is imposed for with’’ the credit transaction if the however, make other distinctions. For
each item that results in an overdraft on insurance is written because of the example:
an account with an overdraft line of consumer’s default (for example, by A. The merchant may limit the
credit, while a $25 service charge is failing to obtain or maintain required discount to payment by cash and not
imposed for paying or returning each property insurance) or because the offer it for payment by check or by use
item on a similar account without a consumer requests insurance after of a debit card.
credit feature; the $5 charge is not a consummation [or the opening of a B. The merchant may establish a
finance charge. home-equity plan subject to the discount plan that allows a 15%
Paragraph 4(b)(3). requirements of § 226.5b] (although discount for payment by cash, a 10%
1. Assumption fees. The assumption credit-sale disclosures may be required discount for payment by check, and a
fees mentioned in § 226.4(b)(3) are for the insurance sold after 5% discount for payment by a particular
finance charges only when the consummation if it is financed). credit card. None of these discounts is
assumption occurs and the fee is 3. Substitution of life insurance. The a finance charge.
imposed on the new buyer. The premium for a life insurance policy ii. Pursuant to section 171(c) of the
assumption fee is a finance charge in the purchased and assigned to satisfy a act, discounts excluded from the finance
new buyer’s transaction. credit life insurance requirement must charge under this paragraph are also
Paragraph 4(b)(5). be included in the finance charge, but excluded from treatment as a finance
1. Credit loss insurance. Common only to the extent of the cost of the charge or other charge for credit under
examples of the insurance against credit credit life insurance if purchased from any State usury or disclosure laws.
loss mentioned in § 226.4(b)(5) are the creditor or the actual cost of the 3. Determination of the regular price.
mortgage guaranty insurance, holder in policy (if that is less than the cost of the i. The regular price is critical in
due course insurance, and repossession insurance available from the creditor). If determining whether the difference
insurance. Such premiums must be the creditor does not offer the required between the price charged to cash
included in the finance charge only for insurance, the premium to be included customers and credit customers is a
the period that the creditor requires the in the finance charge is the cost of a discount or a surcharge, as these terms
insurance to be maintained. policy of insurance of the type, amount, are defined in amended section 103 of
2. Residual value insurance. Where a and term required by the creditor. the act. The regular price is defined in
creditor requires a consumer to 4. Other insurance. Fees for required section 103 of the act as ‘‘* * * the tag
maintain residual value insurance or insurance not of the types described in or posted price charged for the property
where the creditor is a beneficiary of a § 226.4(b)(7) and (b)(8) are finance or service if a single price is tagged or
residual value insurance policy written charges and are not excludable. For posted, or the price charged for the
in connection with an extension of example: property or service when payment is
credit (as is the case in some forms of i. The premium for a hospitalization made by use of an open-end credit plan
automobile balloon-payment financing, insurance policy, if it is required to be or a credit card if either (1) no price is
for example), the premiums for the purchased only in a credit transaction, tagged or posted, or (2) two prices are
insurance must be included in the is a finance charge. tagged or posted * * *.’’
finance charge for the period that the Paragraph 4(b)(9). ii. For example, in the sale of motor
insurance is to be maintained. If a 1. Discounts for payment by other vehicle fuel, the tagged or posted price
creditor pays for residual value than credit. The discounts to induce is the price displayed at the pump. As
insurance and absorbs the payment as a payment by other than credit mentioned a result, the higher price (the open-end
cost of doing business, such costs are in § 226.4(b)(9) include, for example, the credit or credit card price) must be
not considered finance charges. (See following situation: displayed at the pump, either alone or
comment 4(a)–2.) i. The seller of land offers individual along with the cash price. Service
Paragraphs 4(b)(7) and (b)(8). tracts for $10,000 each. If the purchaser station operators may designate separate
1. Pre-existing insurance policy. The pays cash, the price is $9,000, but if the pumps or separate islands as being for
insurance discussed in § 226.4(b)(7) and purchaser finances the tract with the either cash or credit purchases and
(b)(8) does not include an insurance seller the price is $10,000. The $1,000 display only the appropriate prices at
policy (such as a life or an automobile difference is a finance charge for those the various pumps. If a pump is capable
collision insurance policy) that is who buy the tracts on credit. of displaying on its meter either a cash
already owned by the consumer, even if 2. Exception for cash discounts. or a credit price depending upon the
consumer’s means of payment, both the Paragraph 4(c)(2). or the amount of credit available under
cash price and the credit price must be 1. Late-payment charges. the plan are not excluded from the
displayed at the pump. A service station i. Late-payment charges can be finance charge by § 226.4(c)(4). Thus, for
operator may display the cash price of excluded from the finance charge under example, a fee that is charged and then
fuel by itself on a curb sign, as long as § 226.4(c)(2) whether or not the person refunded to the consumer based on the
the sign clearly indicates that the price imposing the charge continues to extend extent to which the consumer uses the
is limited to cash purchases. credit on the account or continues to credit available would be a finance
4(b)(10) Debt cancellation and debt provide property or services to the charge. (See the commentary to
suspension fees. consumer. In determining whether a § 226.4(b)(2). Also, see comment 14(c)–
1. Definition. Debt cancellation charge is for actual unanticipated late 2 for treatment of certain types of fees
coverage provides for payment or payment on a 30-day account, for excluded in determining the annual
satisfaction of all or part of a debt when example, factors to be considered percentage rate for the periodic
a specified event occurs. The term ‘‘debt include: statement.)
cancellation coverage’’ includes A. The terms of the account. For Paragraph 4(c)(5).
guaranteed automobile protection, or example, is the consumer required by 1. Seller’s points. The seller’s points
‘‘GAP,’’ agreements, which pay or the account terms to pay the account mentioned in § 226.4(c)(5) include any
satisfy the remaining debt after property balance in full each month? If not, the charges imposed by the creditor upon
insurance benefits are exhausted. Debt charge may be a finance charge. the non-creditor seller of property for
suspension coverage provides for B. The practices of the creditor in providing credit to the buyer or for
suspension of the obligation to make handling the accounts. For example, providing credit on certain terms. These
one or more payments on the date(s) regardless of the terms of the account, charges are excluded from the finance
otherwise required by the credit does the creditor allow consumers to charge even if they are passed on to the
agreement, when a specified event pay the accounts over a period of time buyer, for example, in the form of a
occurs. The term ‘‘debt suspension’’ without demanding payment in full or higher sales price. Seller’s points are
does not include loan payment deferral taking other action to collect? If no effort frequently involved in real estate
arrangements in which the triggering is made to collect the full amount due, transactions guaranteed or insured by
event is the bank’s unilateral decision to the charge may be a finance charge. governmental agencies. A commitment
allow a deferral of payment and the ii. Section 226.4(c)(2) applies to late- fee paid by a non-creditor seller (such
borrower’s unilateral election to do so, payment charges imposed for failure to as a real estate developer) to the creditor
such as by skipping or reducing one or make payments as agreed, as well as should be treated as seller’s points.
more payments (‘‘skip payments’’). failure to pay an account in full when Buyer’s points (that is, points charged to
2. Coverage written in connection with due. the buyer by the creditor), however, are
a transaction. Coverage sold after 2. Other excluded charges. Charges finance charges.
consummation in closed-end credit for ‘‘delinquency, default, or a similar 2. Other seller-paid amounts.
transactions [or after the opening of a occurrence’’ include, for example, Mortgage insurance premiums and other
home-equity plan subject to the charges for reinstatement of credit finance charges are sometimes paid at or
requirements of § 226.5b] is not ‘‘written privileges or for submitting as payment before consummation or settlement on
in connection with’’ the credit a check that is later returned unpaid. the borrower’s behalf by a non-creditor
transaction if the coverage is written Paragraph 4(c)(3). seller. The creditor should treat the
because the consumer requests coverage 1. Assessing interest on an overdraft payment made by the seller as seller’s
after consummation [or the opening of balance. A charge on an overdraft points and exclude it from the finance
a home-equity plan subject to the balance computed by applying a rate of charge if, based on the seller’s payment,
requirements of § 226.5b] (although interest to the amount of the overdraft the consumer is not legally bound to the
credit-sale disclosures may be required is not a finance charge, even though the creditor for the charge. A creditor who
for the coverage sold after consumer agrees to the charge in the gives disclosures before the payment
consummation if it is financed). account agreement, unless the financial has been made should base them on the
Coverage sold before or after an open- institution agrees in writing that it will best information reasonably available.
end [(not home-secured)] plan is opened pay such items. Paragraph 4(c)(6).
is considered ‘‘written in connection Paragraph 4(c)(4). 1. Lost interest. Certain federal and
with a credit transaction.’’ 1. Participation fees—periodic basis. State laws mandate a percentage
4(c) Charges excluded from the The participation fees described in differential between the interest rate
finance charge. § 226.4(c)(4) do not necessarily have to paid on a deposit and the rate charged
Paragraph 4(c)(1). be formal membership fees, nor are they on a loan secured by that deposit. In
1. Application fees. An application limited to credit card plans. The some situations, because of usury limits
fee that is excluded from the finance provision applies to any credit plan in the creditor must reduce the interest
charge is a charge to recover the costs which payment of a fee is a condition rate paid on the deposit and, as a result,
associated with processing applications of access to the plan itself, but it does the consumer loses some of the interest
for credit. The fee may cover the costs not apply to fees imposed separately on that would otherwise have been earned.
of services such as credit reports, credit individual closed-end transactions. The Under § 226.4(c)(6), such ‘‘lost interest’’
investigations, and appraisals. The fee may be charged on a monthly, need not be included in the finance
creditor is free to impose the fee in only annual, or other periodic basis; a one- charge. This rule applies only to an
certain of its loan programs, such as time, nonrecurring fee imposed at the interest reduction imposed because a
flautomobilefi [mortgage] loans. time an account is opened is not a fee rate differential is required by law and
However, if the fee is to be excluded that is charged on a periodic basis, and a usury limit precludes compliance by
from the finance charge under may not be treated as a participation fee. any other means. If the creditor imposes
§ 226.4(c)(1), it must be charged to all 2. Participation fees—exclusions. a differential that exceeds that required,
applicants, not just to applicants who Minimum monthly charges, charges for only the lost interest attributable to the
are approved or who actually receive nonuse of a credit card, and other excess amount is a finance charge. (See
credit. charges based on either account activity the commentary to § 226.4(a).)
Paragraph 4(c)(7). 4(d) Insurance and debt cancellation 5. Required credit life insurance; debt
1. [Real estate or residential mortgage and debt suspension coverage. cancellation or suspension coverage.
transaction] flOpen-end real-property- 1. General. Section 226.4(d) permits Credit life, accident, health, or loss-of-
secured creditficharges. The list of insurance premiums and charges and income insurance, and debt cancellation
charges in § 226.4(c)(7) applies flto debt cancellation and debt suspension and suspension coverage described in
open-end credit plans secured by real charges to be excluded from the finance § 226.4(b)(10), must be voluntary in
property and open-end residential charge. The required disclosures must order for the premium or charges to be
mortgage transactionsfi [both to be made in writing, except as provided excluded from the finance charge.
residential mortgage transactions (which in § 226.4(d)(4). The rules on location of Whether the insurance or coverage is in
may include, for example, the purchase insurance and debt cancellation and fact required or optional is a factual
of a mobile home) and to other debt suspension disclosures for closed- question. If the insurance or coverage is
transactions secured by real estate.] The end transactions are in § 226.17(a). For required, the premiums must be
fees are excluded from the finance purposes of § 226.4(d), all references to included in the finance charge, whether
charge even if the services for which the insurance also include debt cancellation the insurance or coverage is purchased
fees are imposed are performed by the and debt suspension coverage unless the from the creditor or from a third party.
creditor’s employees rather than by a context indicates otherwise. If the consumer is required to elect one
third party. In addition, the cost of 2. Timing of disclosures. If disclosures of several options—such as to purchase
verifying or confirming information are given early, for example under credit life insurance, or to assign an
connected to the item is also excluded. § 226.17(f)[or § 226.19(a)], the creditor existing life insurance policy, or to
For example, credit-report fees cover not must redisclose if the actual premium is pledge security such as a certificate of
only the cost of the report but also the different at the time of consummation. deposit—and the consumer purchases
cost of verifying information in the If insurance disclosures are not given at the credit life insurance policy, the
report. In all cases, charges excluded the time of early disclosure and premium must be included in the
under § 226.4(c)(7) must be bona fide insurance is in fact written in finance charge. (If the consumer assigns
and reasonable. connection with the transaction, the a preexisting policy or pledges security
2. Lump-sum charges. If a lump sum disclosures under § 226.4(d) must be instead, no premium is included in the
charged for several services includes a made in order to exclude the premiums finance charge. The security interest
charge that is not excludable, a portion from the finance charge. would be disclosed under § 226.6(a)(4),
of the total should be allocated to that 3. Premium rate increases. The § 226.6(b)(5)(ii), or § 226.18(m). See the
service and included in the finance creditor should disclose the premium commentary to § 226.4(b)(7) and (b)(8).)
charge. However, a lump sum charged amount based on the rates currently in 6. Other types of voluntary insurance.
for conducting or attending a closing effect and need not designate it as an Insurance is not credit life, accident,
(for example, by a lawyer or a title estimate even if the premium rates may health, or loss-of-income insurance if
company) is excluded from the finance increase. An increase in insurance rates the creditor or the credit account of the
charge if the charge is primarily for after consummation of a closed-end consumer is not the beneficiary of the
services related to items listed in credit transaction or during the life of an insurance coverage. If the premium for
§ 226.4(c)(7) (for example, reviewing or open-end credit plan does not require such insurance is not imposed by the
completing documents), even if other redisclosure in order to exclude the creditor as an incident to or a condition
incidental services such as explaining additional premium from treatment as a of credit, it is not covered by § 226.4.
various documents or disbursing funds finance charge. 7. Signatures. If the creditor offers a
for the parties are performed. The entire 4. Unit-cost disclosures. number of insurance options under
charge is excluded even if a fee for the i. Open-end credit. The premium or § 226.4(d), the creditor may provide a
incidental services would be a finance fee for insurance or debt cancellation or means for the consumer to sign or initial
charge if it were imposed separately. debt suspension for the initial term of for each option, or it may provide for a
3. Charges assessed during the loan coverage may be disclosed on a unit- single authorizing signature or initial
term. flChargesfi [Real estate or cost basis in open-end credit with the options selected designated by
residential mortgage transaction transactions. The cost per unit should some other means, such as a check
charges] excluded under § 226.4(c)(7) be based on the initial term of coverage, mark. The insurance authorization may
are those charges imposed solely in unless one of the options under be signed or initialed by any consumer,
connection with the initial decision to comment 4(d)–12 is available. as defined in § 226.2(a)(11), or by an
grant credit. This would include, for ii. Closed-end credit. One of the authorized user on a credit card
example, a fee to search for tax liens on transactions for which unit-cost account.
the property or to determine if flood disclosures (such as 50 cents per year 8. Property insurance. To exclude
insurance is required. The exclusion for each $100 of the amount financed) property insurance premiums or charges
does not apply to fees for services to be may be used in place of the total from the finance charge, the creditor
performed periodically during the loan insurance premium involves a must allow the consumer to choose the
term, regardless of when the fee is particular kind of insurance plan. For insurer and disclose that fact. This
collected. For example, a fee for one or example, a consumer with a current disclosure must be made whether or not
more determinations during the loan indebtedness of $8,000 is covered by a the property insurance is available from
term of the current tax-lien status or plan of credit life insurance coverage or through the creditor. The requirement
flood-insurance requirements is a with a maximum of $10,000. The that an option be given does not require
finance charge, regardless of whether consumer requests an additional $4,000 that the insurance be readily available
the fee is imposed at closing, or when loan to be covered by the same from other sources. The premium or
the service is performed. If a creditor is insurance plan. Since the $4,000 loan charge must be disclosed only if the
uncertain about what portion of a fee to exceeds, in part, the maximum amount consumer elects to purchase the
be paid at consummation or loan closing of indebtedness that can be covered by insurance from flor throughfi the
is related to the initial decision to grant the plan, the creditor may properly give creditor; in such a case, the creditor
credit, the entire fee may be treated as the insurance-cost disclosures on the must also disclose the term of the
a finance charge. $4,000 loan on a unit-cost basis. property insurance coverage if it is less
than the term of the obligation. is written for one year is one year even use reasonably reliable evidence of the
flInsurance is available ‘‘from or though premiums are paid monthly and consumer’s age or employment status to
through a creditor’’ if it is available from the term of the credit transaction is four satisfy this condition. Reasonably
the creditor’s affiliate, as defined under years. reliable evidence of a consumer’s age
the Bank Holding Company Act, 12 B. The initial term of an insurance would include using the date of birth on
U.S.C. 1841(k).fi policy is the full term of the credit the consumer’s credit application, on
9. Single-interest insurance. Blanket transaction if the consumer pays or the driver’s license or other government-
and specific single-interest coverage are finances a single premium in advance. issued identification, or on the credit
treated the same for purposes of the 12. Initial term; alternative. report. Reasonably reliable evidence of
regulation. A charge for either type of i. General. A creditor has the option a consumer’s employment status would
single-interest insurance may be of providing cost disclosures on the include the consumer’s information on
excluded from the finance charge if: basis of one year of insurance or debt a credit application, an Internal
i. The insurer waives any right of cancellation or debt suspension Revenue Service Form W-2, tax returns,
subrogation. coverage instead of a longer initial term payroll receipts, or other evidence such
ii. The other requirements of (provided the premium or fee is clearly as a letter or e-mail from the consumer
§ 226.4(d)(2) are met. This includes, of labeled as being for one year) if: or the consumer’s employer. If the
course, giving the consumer the option A. The initial term is indefinite or not consumer does not meet the product’s
of obtaining the insurance from a person clear, or age or employment eligibility criteria at
of the consumer’s choice. The creditor B. The consumer has agreed to pay a the time of enrollment, then the
need not ascertain whether the premium or fee that is assessed premium or charge is not voluntary. In
consumer is able to purchase the periodically but the consumer is under such circumstances, the premium or
insurance from someone else. no obligation to continue the coverage, charge is a finance charge. If the creditor
10. Single-interest insurance defined. whether or not the consumer has made offers a bundled product (such as credit
The term single-interest insurance as an initial payment. life insurance combined with credit
used in the regulation refers only to the ii. Open-end plans. For open-end involuntary unemployment insurance)
types of coverage traditionally included plans, a creditor also has the option of and the consumer is not eligible for all
in the term vendor’s single-interest providing unit-cost disclosure on the of the bundled products, then the
insurance (or VSI), that is, protection of basis of a period that is less than one creditor must either: (1) treat the entire
tangible property against normal year if the consumer has agreed to pay premium or charge for the bundled
property damage, concealment, a premium or fee that is assessed product as a finance charge, or (2) offer
confiscation, conversion, embezzlement, periodically, for example monthly, but the consumer the option of selecting
and skip. Some comprehensive the consumer is under no obligation to only the products for which the
insurance policies may include a variety continue the coverage. consumer is eligible and exclude the
of additional coverages, such as iii. Examples. To illustrate: premium or charge from the finance
repossession insurance and holder-in- A. A credit life insurance policy charge if the consumer chooses an
due-course insurance. These types of providing coverage for a flseven-year optional product for which the
coverage do not constitute single- automobilefi [30-year mortgage] loan consumer meets the age or employment
interest insurance for purposes of the has an initial term of flsevenfi [30] eligibility criteria at the time of
regulation, and premiums for them do years, even though premiums are paid enrollment.fi
not qualify for exclusion from the monthly and the consumer is not 4(d)(3) Voluntary debt cancellation or
finance charge under § 226.4(d). If a required to continue the coverage. debt suspension fees.
policy that is primarily VSI also Disclosures may be based on the initial 1. General. Fees charged for the
provides coverages that are not VSI or term, but the creditor also has the specialized form of debt cancellation
other property insurance, a portion of option of making disclosures on the agreement known as guaranteed
the premiums must be allocated to the basis of coverage for an assumed initial automobile protection (‘‘GAP’’)
non-excludable coverages and included term of one year. agreements must be disclosed according
in the finance charge. However, such 13. Loss-of-income insurance. The to § 226.4(d)(3) rather than according to
allocation is not required if the total loss-of-income insurance mentioned in § 226.4(d)(2) for property insurance.
premium in fact attributable to all of the § 226.4(d) includes involuntary 2. Disclosures. Creditors can comply
non-VSI coverages included in the unemployment insurance, which with § 226.4(d)(3) by providing a
policy is $1.00 or less (or $5.00 or less provides that some or all of the disclosure that refers to debt
in the case of a multiyear policy). consumer’s payments will be made if cancellation or debt suspension
11. Initial term. the consumer becomes unemployed coverage whether or not the coverage is
i. The initial term of insurance or debt involuntarily. considered insurance. Creditors may use
cancellation or debt suspension fl14. Age or employment eligibility the model credit insurance disclosures
coverage determines the period for criteria. A premium or charge for credit only if the debt cancellation or debt
which a premium amount must be life, accident, health, or loss-of-income suspension coverage constitutes
disclosed, unless one of the options insurance, or debt cancellation or debt insurance under State law. (See Model
discussed under comment 4(d)–12 is suspension coverage is voluntary and Clauses and Samples at G–16 and H–17
available. For purposes of § 226.4(d), the can be excluded from the finance charge in Appendix G and Appendix H to part
initial term is the period for which the only if the consumer meets the 226 for guidance on how to provide the
insurer or creditor is obligated to product’s age or employment eligibility disclosure required by § 226.4(d)(3)(iii)
provide coverage, even though the criteria at the time of enrollment. To for debt suspension products.)
consumer may be allowed to cancel the exclude such a premium or charge from 3. Multiple events. If debt cancellation
coverage or coverage may end due to the finance charge, the creditor must or debt suspension coverage for two or
nonpayment before that term expires. determine at the time of enrollment that more events is provided at a single
ii. For example: the consumer is eligible for the product charge, the entire charge may be
A. The initial term of a property under the product’s age or employment excluded from the finance charge if at
insurance policy on an automobile that eligibility restrictions. The creditor may least one of the events is accident or loss
of life, health, or income and the 3. Notary fees. In order for a notary fee third parties they retain, generally are
conditions specified in § 226.4(d)(3) or, to be excluded under § 226.4(e)(1), all of finance charges unless otherwise
as applicable, § 226.4(d)(4), are satisfied. the following conditions must be met: excluded. (Note that § 226.4(a)(2) does
4. Disclosures in programs combining i. The document to be notarized is one not apply to closed-end transactions
debt cancellation and debt suspension used to perfect, release, or continue a secured by real property or a dwelling,
features. If the consumer’s debt can be security interest. pursuant to § 226.4(g).) Insurance
cancelled under certain circumstances, ii. The document is required by law premiums generally are finance charges,
the disclosure may be modified to to be notarized. whether imposed by a closing agent or
reflect that fact. The disclosure could, iii. A notary is considered a public another insurer, although premiums for
for example, state (in addition to the official under applicable law. property insurance are excluded if
language required by § 226.4(d)(3)(iii)) iv. The amount of the fee is set or § 226.4(d)(2) is satisfied. Premiums for
that ‘‘In some circumstances, my debt authorized by law. credit insurance (or fees for debt
may be cancelled.’’ However, the 4. Non-filing insurance. The exclusion cancellation or debt suspension
disclosure would not be permitted to in § 226.4(e)(2) is available only if non- agreements) and premiums for lender’s
list the specific events that would result filing insurance is purchased. If the coverage under a title insurance policy
in debt cancellation. creditor collects and simply retains a fee are finance charges because they are
4(d)(4) Telephone purchases. as a sort of ‘‘self-insurance’’ against non- imposed as an incident to the extension
filing, it may not be excluded from the of credit. In contrast, premiums for
1. Affirmative request. A creditor
finance charge. If the non-filing owner’s title insurance coverage are not
would not satisfy the requirement to
insurance premium exceeds the amount finance charges because they are not
obtain a consumer’s affirmative request
of the fees excludable from the finance imposed as an incident to the extension
if the ‘‘request’’ was a response to a
charge under § 226.4(e)(1), only the of credit.
script that uses leading questions or
excess is a finance charge. For example:
negative consent. A question asking 3. Charges in comparable cash
i. The fee for perfecting a security
whether the consumer wishes to enroll transactions. While the exclusions in
interest is $5.00 and the fee for releasing
in the credit insurance or debt § 226.4(c) through (e), other than
the security interest is $3.00. The
cancellation or suspension plan and §§ 226.4(c)(5) and 226.4(d)(2) are
creditor charges $10.00 for non-filing
seeking a yes-or-no response (such as inapplicable to closed-end transactions
insurance. Only $8.00 of the $10.00 is
‘‘Do you want to enroll in this optional secured by real property or a dwelling,
excludable from the finance charge.
debt cancellation plan?’’) would not be 4(f) Prohibited offsets. charges in connection with such
considered leading. 1. Earnings on deposits or transactions that are payable in a
4(e) Certain security interest charges. investments. The rule that the creditor comparable cash transaction are not
1. Examples. shall not deduct any earnings by the finance charges. See comment 4(a)-1.
i. Excludable charges. Sums must be consumer on deposits or investments For example, property taxes and fees or
actually paid to public officials to be applies whether or not the creditor has taxes imposed to record the deed
excluded from the finance charge under a security interest in the property. evidencing transfer from the seller to the
§ 226.4(e)(1) and (e)(3). Examples are fl4(g) Special rule; mortgage buyer of title to the property securing
charges or other fees required for filing transactions. the transaction are not finance charges
or recording security agreements, 1. Applicability of commentary to because they would be paid even if no
mortgages fl(for open-end credit; but mortgages. The staff commentary under credit were extended to finance the
see § 226.4(g) regarding closed-end §§ 226.4(a)(2) and 226.4(c) through (e) purchase. In contrast, fees or taxes
mortgage credit)fi, continuation (other than that under §§ 226.4(c)(2), imposed to record the mortgage, deed of
statements, termination statements, and 226.4(c)(5), and 226.4(d)(2)) does not trust, or other security instrument
similar documents, as well as intangible apply to closed-end transactions evidencing the creditor’s security
property or other taxes even when the secured by real property or a dwelling. interest in the property securing the
charges or fees are imposed by the state The staff commentary under §§ 226.4(a) transaction are finance charges because
solely on the creditor and charged to the (other than paragraph (2) of that they would not be incurred were it not
consumer (if the tax must be paid to section), 226.4(c)(2), 226.4(c)(5), and for the extension of credit.
record a security agreement). (See 226.4(d)(2), however, does apply to such * * * * *
comment 4(a)–5 regarding the treatment transactions.
of taxes, generally.) 2. Third-party charges. Charges Subpart C—Closed-End Credit
ii. Charges not excludable. If the imposed by third parties are finance
obligation is between the creditor and a charges if they fit the general definition § 226.17—General Disclosure
third party (an assignee, for example), under § 226.4(a). Thus, if a third-party Requirements.
charges or other fees for filing or charge is payable directly or indirectly 17(a) Form of Disclosures
recording security agreements, by the consumer and imposed directly Paragraph 17(a)(1)
mortgages, continuation statements, or indirectly by the creditor as an
termination statements, and similar incident to the extension of credit, it is 1. Clear and conspicuous. This
documents relating to that obligation are a finance charge unless it would be standard requires that disclosures be in
not excludable from the finance charge payable in a comparable cash a reasonably understandable form. For
under this section. transaction. For example, appraisal and example, while the regulation requires
2. Itemization. The various charges credit report fees are finance charges no mathematical progression or format,
described in § 226.4(e)(1) and (e)(3) may because they meet the definition in the disclosures must be presented in a
be totaled and disclosed as an aggregate § 226.4(a). This test generally does not way that does not obscure the
sum, or they may be itemized by the depend on whether the creditor requires relationship of the terms to each other.
specific fees and taxes imposed. If an the service for which the charge is In addition, although no minimum type
aggregate sum is disclosed, a general imposed. In addition, charges imposed size is mandated, the disclosures must
term such as security interest fees or by closing agents required by the be legible, whether typewritten,
filing fees may be used. creditor, whether their own or those of handwritten, or printed by computer.
2. Segregation of disclosures. The information for transactions secured by document. For example, the disclosure
disclosures may be grouped together real property or a dwelling.)fi The given under § 226.18(q) may state,
and segregated from other information following is directly related information ‘‘Someone buying your home may,
in a variety of ways. For example, the flfor a transaction not secured by real subject to conditions in the due-on-sale
disclosures may appear on a separate property or a dwellingfi: clause contained in the loan document,
sheet of paper or may be set off from i. A description of a grace period after assume the remainder of the mortgage
other information on the contract or which a late payment charge will be on the original terms.’’
other documents: imposed. For example, the disclosure xi. If a State or Federal law prohibits
[•]fli.fi By outlining them in a box given under § 226.18(l) may state that a prepayment penalties and excludes the
[•]flii.fi By bold print dividing lines late charge will apply to ‘‘any payment charging of interest after prepayment
[•]fliii.fi By a different color received more than 15 days after the due from coverage as a penalty, a statement
background date.’’ that the borrower may have to pay
[•]fliv.fi By a different type style ii. A statement that the transaction is interest for some period after
[(The general segregation requirement not secured. For example, the creditor prepayment in full. The disclosure may
described in this subparagraph does not may add a category labelled state, for example, ‘‘If you prepay your
apply to the disclosures required under ‘‘unsecured’’ or ‘‘not secured’’ to the loan on other than the regular
§§ 226.19(b) and 226.20(c) although the security interest disclosures given under installment date, you may be assessed
disclosures must be clear and § 226.18(m). interest charges until the end of the
conspicuous.)] iii. The basis for any estimates used month.’’
3. Location. The regulation imposes in making disclosures. For example, if xii. More than one hypothetical
no specific location requirements on the the maturity date of a loan depends example under
segregated disclosures. For example: solely on the occurrence of a future § 226.18(f)[(1)(iv)]fl(4)fi in
[•]fli.fi They may appear on a event, the creditor may indicate that the transactions with more than one
disclosure statement separate from all disclosures assume that event will occur variable-rate feature. For example, in a
other material. at a certain time. variable-rate transaction with an option
[•]flii.fi They may be placed on the iv. The conditions under which a permitting consumers to convert to a
same document with the credit contract demand feature may be exercised. For fixed-rate transaction, the disclosures
or other information, so long as they are example, in a loan subject to demand may include an example illustrating the
segregated from that information. after five years, the disclosures may effects of an increase resulting from
[•]fliii.fi They may be shown on the state that the loan will become payable conversion in addition to the example
front or back of a document. on demand in five years. illustrating an increase resulting from
[•]fliv.fi They need not begin at the v. An explanation of the use of changes in the index.
top of a page. pronouns or other references to the xiii. flReserved.fi[The disclosures
[•]flv.fi They may be continued parties to the transaction. For example, set forth under section 226.18(f)(1) for
from one page to another. the disclosures may state, ‘‘‘You’ refers variable-rate transactions subject to
4. Content of segregated disclosures. to the customer and ‘we’ refers to the section 226.18(f)(2).]
Footnotes 37 and 38 contain exceptions creditor.’’ xiv. fl[Reserved]fi[A statement
to the requirement that the disclosures vi. Instructions to the creditor or its whether or not a subsequent purchase of
under § 226.18 be segregated from employees on the use of a multiple- the property securing an obligation may
material that is not directly related to purpose form. For example, the be permitted to assume the remaining
those disclosures. Footnote 37 lists the disclosures may state, ‘‘Check box if obligation on its original terms.]
items that may be added to the applicable.’’ xv. A late-payment fee disclosure
segregated disclosures, even though not vii. A statement that the borrower under § 226.18(l) on a single payment
directly related to those disclosures. may pay a minimum finance charge loan.
Footnote 38 lists the items required upon prepayment in a simple-interest xvi. The notice set forth in
under § 226.18 that may be deleted from transaction. For example, when State [§ 226.19(a)(4)]fl§ 226.38(f)(1)fi, in a
the segregated disclosures and appear law prohibits penalties, but would allow closed-end transaction not subject to
elsewhere. Any one or more of these a minimum finance charge in the event § 226.19(a)(1)(i). In a mortgage
additions or deletions may be combined of prepayment, the creditor may make transaction subject to § 19(a)(1)(i), the
and appear either together with or the § 226.18(k)(1) disclosure by stating, creditor must disclose the notice
separate from the segregated ‘‘You may be charged a minimum contained in
disclosures. The itemization of the finance charge.’’ [§ 226.19(a)(4)]fl§ 226.38(f)(1)fi
amount financed under § 226.18(c), viii. A brief reference to negative grouped together with the disclosures
however, must be separate from the amortization in variable-rate made under [§ 226.18. See comment
other segregated disclosures under transactions. For example, in the 19(a)(4)–1.]fl§ 226.38.fi
§ 226.18. If a creditor chooses to include variable-rate disclosures, the creditor 6. Multiple-purpose forms. flExcept
the security interest charges required to may include a short statement such as for transactions secured by real property
be itemized under § 226.4(e) and ‘‘Unpaid interest will be added to or a dwelling, tfi[T]he creditor may
§ 226.18(o) in the amount financed principal.’’ (See the commentary to design a disclosure statement that can
itemization, it need not list these § 226.18(f)[(1)(iii)]fl(3)fi.) be used for more than one type of
charges elsewhere. ix. A brief caption identifying the transaction, so long as the required
5. Directly Related. flExcept in a disclosures. For example, the disclosures for individual transactions
transaction secured by real property or disclosures may bear a general title such are clear and conspicuous. (See the
a dwelling, tfi[T]he segregated as ‘‘Federal Truth in Lending Commentary to appendices G and H for
disclosures may, at the creditor’s option, Disclosures’’ or a descriptive title such a discussion of the treatment of
include any information that is directly as ‘‘Real Estate Loan Disclosures.’’ disclosures that do not apply to specific
related to those disclosures. fl(See the x. A statement that a due-on-sale transactions.) Any disclosure listed in
commentary to § 226.37(a)(2) for a clause or other conditions on § 226.18 (except the itemization of the
discussion of directly related assumption are contained in the loan amount financed under § 226.18(c)) may
be included on a standard disclosure heading on the contract document or timing requirements for closed-end
statement even though not all of the information required by State law. transactions secured by real property or
creditor’s transactions include those [•]flii.fi The terms need not be more a dwelling.fi See the commentary to
features. For example, the statement conspicuous except as part of the § 226.19(b) for the timing rules for
may include: finance charge and annual percentage additional disclosures required upon
[•]fli.fi The variable rate disclosure rate disclosures under § 226.18(d) and the conversion to [a variable-rate
under § 226.18(f). (e), although they may, at the creditor’s transaction secured by a consumer’s
[•]flii.fi The demand feature option, be highlighted wherever used in principal dwelling with a term greater
disclosure under § 226.18(i). the required disclosures. For example, than one year]flan adjustable-rate
[•]fliii.fi A reference to the the terms may, but need not, be transaction secured by real property or
possibility of a security interest arising highlighted when used in disclosing a a dwellingfi.) If consummation of the
from a spreader clause, under prepayment penalty under § 226.18(k) closed-end transaction occurs at the
§ 226.18(m). or a required deposit under § 226.18(r). same time as the consumer enters into
[• The assumption policy disclosure [•]fliii.fi The creditor’s identity the open-end agreement, the closed-end
under § 226.18(q).] under § 226.18(a) may, but need not, be credit disclosures may be given at the
[•]fliv.fi The required deposit more prominently displayed than the time of conversion. If disclosures are
disclosure under § 226.18(r). finance charge and annual percentage delayed until conversion and the
7. Balloon payment financing with rate. closed-end transaction has a variable-
leasing characteristics. In certain credit [•]fliv.fi The terms need not be more rate feature, disclosures should be based
sale or loan transactions, a consumer conspicuous than figures (including, for on the rate in effect at the time of
may reduce the dollar amount of the example, numbers, percentages, and conversion. (See the commentary to
payments to be made during the course dollar signs) § 226.5 regarding conversion of closed-
of the transaction by agreeing to make, 2. Making disclosures more end to open-end credit.)
at the end of the loan term, a large final conspicuous. The terms finance charge 3. Disclosures provided on credit
payment based on the expected residual and annual percentage rate may be contracts. Creditors must give the
value of the property. The consumer made more conspicuous in any way that required disclosures to the consumer in
may have a number of options with highlights them in relation to the other writing, in a form that the consumer
respect to the final payment, including, required disclosures. For example, they may keep, before consummation of the
among other things, retaining the may be: transaction. See § 226.17(a)(1) and (b).
property and making the final payment, [•]fli.fi Capitalized when other Sometimes the disclosures are placed on
refinancing the final payment, or disclosures are printed in capital and the same document with the credit
transferring the property to the creditor lower case. contract. Creditors are not required to
in lieu of the final payment. Such [•]flii.fi Printed in larger type, bold give the consumer two separate copies
transactions may have some of the print or different type face. of the document before consummation,
characteristics of lease transactions [•]fliii.fi Printed in a contrasting one for the consumer to keep and a
subject to Regulation M, but are color. second copy for the consumer to
considered credit transactions where the [•]fliv.fi Underlined. execute. The disclosure requirement is
consumer assumes the indicia of [•]flv.fi Set off with asterisks. satisfied if the creditor gives a copy of
ownership, including the risks, burdens 17(b) Time of disclosures. the document containing the
and benefits of ownership upon 1. Consummation. As a general rule, unexecuted credit contract and
consummation. These transactions are disclosures must be made before disclosures to the consumer to read and
governed by the disclosure requirements ‘‘consummation’’ of the transaction. The sign; and the consumer receives a copy
of this regulation instead of Regulation disclosures flfor transactions not to keep at the time the consumer
M. Creditors should not include in the secured by real property or a dwellingfi becomes obligated. It is not sufficient for
segregated Truth in Lending disclosures need not be given by any particular time the creditor merely to show the
additional information. Thus, before consummation[, except in certain consumer the document containing the
disclosures should show the large final mortgage transactions and variable-rate disclosures before the consumer signs
payment in the payment schedule and transactions secured by the consumer’s and becomes obligated. The consumer
should not, for example, reflect the principal dwelling with a term greater must be free to take possession of and
other options available to the consumer than one year under § 226.19.]fl Pre- review the document in its entirety
at maturity. flFor extensions of credit consummation disclosures for before signing.
secured by real property or a dwelling, transactions secured by real property or i. Example. To illustrate:
the large final payment in the payment a dwelling must be provided in A. A creditor gives a consumer a
schedule should be disclosed in accordance with the timing multiple-copy form containing a credit
accordance with the requirements under requirements in § 226.19.fi (See the agreement and TILA disclosures. The
section 226.38(c), as applicable.fi commentary to § 226.2(a)(13) regarding consumer reviews and signs the form
Paragraph 17(a)(2). the definition of consummation.) and returns it to the creditor, who
1. When disclosures must be more 2. Converting open-end to closed-end separates the copies and gives one copy
conspicuous. The following rules apply credit. Except for home equity plans to the consumer to keep. The creditor
to the requirement that the terms annual subject to § 226.5b in which the has satisfied the disclosure requirement.
percentage rate and finance charge be agreement provides for a repayment 17(c) Basis of disclosures and use of
shown more conspicuously: phase, if an open-end credit account is estimates.
[•]fli.fi The terms must be more converted to a closed-end transaction [Paragraph ]17(c)(1)flLegal
conspicuous only in relation to the under a written agreement with the obligationfi.
other required disclosures under consumer, the creditor must provide a 1. [Legal obligation.]flGeneral.fi The
§ 226.18. For example, when the set of closed-end credit disclosures disclosures shall reflect the credit terms
disclosures are included on the contract before consummation of the closed-end to which the parties are legally bound
document, those 2 terms need not be transaction. (flSee the commentary to as of the outset of the transaction. In the
more conspicuous as compared to the § 226.19(a) for a discussion of disclosure case of disclosures required under
§ 226.20(c), the disclosures shall reflect holiday seasons or seasonal not take into account the reduction in
the credit terms to which the parties are employment, the disclosures should the interest rate and payment level for
legally bound when the disclosures are reflect the regular monthly payments. the first 2 years resulting from the
provided. The legal obligation is fl3. Number of transactions. buydown.
determined by applicable State law or Creditors have flexibility in handling [4.]fl2.fi Consumer buydowns. In
other law. flThe disclosures should be credit extensions that may be viewed as certain transactions, the consumer may
based on the assumption that the multiple transactions. For example: pay an amount to the creditor to reduce
consumer will abide by the terms of the i. When a creditor finances the credit the payments or obtain a lower interest
legal obligation throughout the term of sale of a radio and a television on the rate on the transaction. Consumer
the transaction. For example, the same day, the creditor may disclose the buydowns must be reflected in the
disclosures should be based on the sales as either 1 or 2 credit sale disclosures given for that transaction.
assumption that the consumer makes transactions. To illustrate, in a mortgage transaction,
payments on time and in full. In the ii. When a creditor finances a loan the creditor and consumer agree to a
case of an adjustable-rate mortgage along with a credit sale of health note specifying a 14 percent interest
described in § 226.38(a)(3)(i)(A), the insurance, the creditor may disclose in rate. However, in a separate document,
creditor shall make the disclosure one of several ways: a single credit sale the consumer agrees to pay an amount
required by § 226.38(c) based on the transaction, a single loan transaction, or to the creditor at consummation in
assumption that the interest rate a loan and a credit sale transaction. return for a reduction in the interest rate
increases as fast as it can, taking into iii. The separate financing of a to 12 percent for a portion of the
account any limitations on increases downpayment in a credit sale mortgage term. The amount paid by the
under the legal obligation.fi (Certain transaction may, but need not, be consumer may be deposited in an
transactions are specifically addressed disclosed as 2 transactions (a credit sale escrow account or may be retained by
in this commentary. See, for example, and a separate transaction for the the creditor. Depending upon the
the discussion of buydown transactions financing of the downpayment).fi buydown plan, the consumer’s
elsewhere in the commentary to [3. Third-party buydown.]fl17(c)(1)(i) prepayment of the obligation may or
§ 226.17(c).) Buydowns. may not result in a portion of the
[•]fli.fi The fact that a term or 1. Third-party buydown.fi In certain amount being credited or refunded to
contract may later be deemed transactions, a seller or other third party the consumer. In the disclosures given
unenforceable by a court on the basis of may pay an amount, either to the for the mortgage, the creditor must
equity or other grounds does not, by creditor or to the consumer, in order to reflect the terms of the buydown
itself, mean that disclosures based on reduce the consumer’s payments or buy agreement. For example:
that term or contract did not reflect the down the interest rate for all or a [•]fli.fi The amount paid by the
legal obligation. portion of the credit term. For example, consumer is a prepaid finance charge
2. Modification of obligation. The a consumer and a bank agree to a [(]fl,fi even if deposited in an escrow
legal obligation normally is presumed to mortgage with an interest rate of 15% account[)]. fl(In transactions secured by
be contained in the note or contract that and level payments over 25 years. By a real property or a dwelling, ‘‘finance
evidences the agreement. But this separate agreement, the seller of the charges’’ are referred to as ‘‘interest and
presumption is rebutted if another property agrees to subsidize the settlement charges’’ under
agreement between the parties legally consumer’s payments for the first 2 § 226.38(e)(5)(ii).)fi
modifies that note or contract. If the years of the mortgage, giving the [•]flii.fi A composite annual
parties informally agree to a consumer an effective rate of 12% for percentage rate must be calculated,
modification of the legal obligation, the that period. taking into account both interest rates,
modification should not be reflected in [•]fli.fi If the lower rate is reflected as well as the effect of the prepaid
the disclosures unless it rises to the in the credit contract between the finance charge.
level of a change in the terms of the consumer and the bank, the disclosures [•]fliii.fi The payment schedule
legal obligation. For example: must take the buydown into account. must reflect the multiple payment levels
[•]fli.fi If the creditor offers a For example, the annual percentage rate resulting from a buydownfl, in a
preferential rate, such as an employee must be a composite rate that takes transaction not secured by real property
preferred rate, the disclosures should account of both the lower initial rate or a dwellingfi.
reflect the terms of the legal and the higher subsequent rate, and if fl3. Lender buydown.fi The rules
obligationfl, subject to special the loan is not secured by real property regarding consumer buydowns do not
disclosure rules for transactions secured or a dwelling, the payment schedule apply to transactions known as ‘‘lender
by real property or a dwelling in disclosures must reflect the 2 payment buydowns.’’ In lender buydowns. a
§ 226.38(a)(3) and (c)fi. [(See the levels. However, the amount paid by the creditor pays an amount (either into an
commentary to § 226.19(b) for an seller would not be specifically reflected account or to the party to whom the
example of a preferred-rate transaction in the disclosures given by the bank, obligation is sold) to reduce the
that is a variable-rate transaction.)] since that amount constitutes seller’s consumer’s payments or interest rate for
[•]flii.fi If the contract provides for points and thus is not part of the finance all or a portion of the credit term.
a certain monthly payment schedule but charge. Typically, these transactions are
payments are made on a voluntary [•]flii.fi If the lower rate is not structured as a buydown of the interest
payroll deduction plan or an informal reflected in the credit contract between rate during an initial period of the
principal-reduction agreement, the the consumer and the bank and the transaction with a higher than usual rate
disclosures should reflect the schedule consumer is legally bound to the 15% for the remainder of the term. The
in the contract. rate from the outset, the disclosures disclosures for lender buydowns should
[•]fliii.fi If the contract provides for given by the bank must not reflect the be based on the terms of the legal
regular monthly payments but the seller buydown in any way. For obligation between the consumer and
creditor informally permits the example, the annual percentage rate the creditor. See comment [17(c)(1)–
consumer to defer payments from time and, in a transaction not secured by real 3]fl17(c)(1)(i)–1fi for the analogous
to time, for instance, to take account of property, the payment schedule, would rules concerning third-party buydowns.
[5.]fl4.fi Split buydowns. In certain adjustable-fi rate transaction must be as it is charged and, for the remainder
transactions, a third party (such as a given for the full term of the transaction of the term, the rate that would have
seller) and a consumer both pay an and must be based on the terms in effect been applied using the index or formula
amount to the creditor to reduce the at the time of consummation. Creditors at the time of consummation. The
interest rate. The creditor must include flgenerallyfi should base the interest rate at consummation need not
the portion paid by the consumer in the disclosures only on the initial rate and be used if a contract provides for a delay
finance charge and disclose the should not assume that this rate will in the implementation of changes in an
corresponding multiple payment levels increase fl(except as provided in index value. For example, if the contract
and composite annual percentage rate. § 226.38(c) for transactions secured by specifies that interest rate changes are
The portion paid by the third party and real property or a dwelling)fi. For based on the index value in effect 45
the corresponding reduction in interest example, in a fla variable- or days before the flinterest ratefi change
rate, however, should not be reflected in adjustable-ratefi loan with an initial date, creditors may use any index value
the disclosures unless the lower rate is flinterestfi rate of 10 percent and a 5 in effect during the 45fl-fiday period
reflected in the credit contract. See the percentage points rate cap, creditors before consummation in calculating a
discussion on third-party and consumer should base the disclosures on the composite annual percentage rate.
buydown transactions [elsewhere in the initial rate and should not assume that ii. The effect of the multiple rates
commentary to § 226.17(c)]flin the rate will increase 5 percentage must also be reflected in the calculation
comments 17(c)(1)(i)–1 and 17(c)(1)(i)– points. However, in a variable-rate and disclosure of the finance charge,
2, respectivelyfi. transaction with a seller buydown that total of payments, and payment
fl17(c)(1)(ii) Wrap-around is reflected in the credit contract, a schedule. fl(In transactions secured by
financing.fi consumer buydown, or a discounted or real property or a dwelling, creditors
[6. Wraparound financing.]fl1. premium rate, disclosures should be a disclose the ‘‘interest and settlement
General.fi Wrap-around transactions, composite rate based on the rate in charges’’ rather than the ‘‘finance
usually loans, involve the creditor’s effect during the initial period and the charge’’ and the ‘‘payment summary’’
wrapping the outstanding balance on an rate that is the basis of the variable-rate rather than the ‘‘payment schedule.’’
existing loan and advancing additional feature for the remainder of the term. See § 226.38(c) and (e)(5).fi
funds to the consumer. The pre-existing (See the commentary to section iii. If a loan contains a rate or
loan, which is wrapped, may be to the 226.17(c)fl(1)fi for a discussion of payment cap that would prevent the
same consumer or to a different buydown, discounted, and premium initial rate or payment, at the time of the
consumer. In either case, the consumer transactions and the commentary to first adjustment, from changing to the
makes a single payment to the new section 226.19(a)(2) for a discussion of rate determined by the index or formula
creditor, whom makes the payments on [the] redisclosure in [certain mortgage at consummation, the effect of that rate
the pre-existing loan to the original transactions with a variable-rate] or payment cap should be reflected in
creditor. Wrap-around loans or sales are fltransactions secured by real property the disclosures.
considered new single-advance or a dwelling with an adjustable-ratefi iv. Because these transactions involve
transactions, with an amount financed feature. irregular payment amounts, an annual
equaling the sum of the new funds [9.]fl2.fi Use of estimates in percentage rate tolerance of 14; of 1
advanced by the wrap creditor and the variable-flor adjustable-firate percent applies, in accordance with
remaining principal owed to the original transactions. The variable- flor § 226.22(a)(3).
creditor on the pre-existing loan. In adjustable-fi rate feature does not, by v. Examples of discounted
disclosing the itemization of the amount itself, make the disclosures estimates. [variable]fladjustablefi-rate
financed, the creditor may use a label [10.]fl3.fi Discounted and premium transactions flsecured by real property
such as ‘‘the amount that will be paid variable-flor adjustable-firate or a dwellingfi include:
to creditor X’’ to describe the remaining transactions. In some variable-flor A. A 30-year loan for $100,000 with
principal balance on the pre-existing adjustable-firate transactions, creditors no prepaid [finance charges]flinterest
loan. This approach to Truth in Lending may set an initial interest rate that is not and settlement chargesfi and rates
calculations has no effect on determined by the index or formula determined by the Treasury bill rate
calculations required by other statutes, used to make later interest rate plus 2 percent. Rate and payment
such as State usury laws. adjustments. Typically, this initial rate adjustments are made annually.
[7.]fl2.fi Wrap-around financing charged to consumers is lower than the Although the Treasury bill rate at the
with balloon payments. For wrap- rate would be if it were calculated using time of consummation is 10 percent, the
around transactions involving a large the index or formula. However, in some creditor sets the interest rate for one
final payment of the new funds before cases the initial rate may be higher. In year at 9 percent, instead of 12 percent
the maturity of the pre-existing loan, the a discounted transaction, for example, a according to the formula. The
amount financed is the sum of the new creditor may calculate interest rates disclosures should reflect a composite
funds and the remaining principal on according to a formula using the six- annual percentage rate of 11.63 percent
the pre-existing loan. The disclosures month Treasury bill rate plus a 2 based on 9 percent for one year and 12
should be based on the shorter term of percent margin. If the Treasury bill rate percent for 29 years. [Reflecting those
the wrap loan, with a large final at consummation is 10 percent, the two rate levels, the payment schedule
payment of both the new funds and the creditor may forgo the 2 percent spread should show 12 payments of $804.62
total remaining principal on the pre- and charge only 10 percent for a limited and 348 payments of $1,025.31.] The
existing loan (although only the wrap time, instead of setting an initial rate of [finance charge]flinterest and
loan will actually be paid off at that 12 percent. settlement chargesfi should be
time). i. When creditors use an initial $266,463.32 and the total of payments
fl17(c)(1)(iii) Variable- or adjustable- interest rate that is not calculated using $366,463.32.
rate transactions.fi the index or formula for later rate B. Same loan as above, except with a
[8.]fl1.fi Basis of disclosures [in adjustments, the disclosures should 2 percent rate cap on periodic
variable-rate transactions]. The reflect a composite annual percentage adjustments. The disclosures should
disclosures for a variable-flor rate based on the initial rate for as long reflect a composite annual percentage
rate of 11.53 percent based on 9 percent standards at the time of renewal are [12.]fl 6.fi Graduated-payment
for the first year, 11 percent for the examples of conditions outside a adjustable-rate mortgage. Graduated
second year, and 12 percent for the consumer’s control.) If, however, a payment adjustable rate mortgages
remaining 28 years. [Reflecting those creditor is not obligated to renew as involve both [a variable]flan
three rate levels, the payment schedule described above, disclosures must be adjustablefi interest rate and scheduled
should show 12 payments of $804.62, based on the term of the balloon- [variations]fladjustmentsfi in payment
12 payments of $950,09, and 336 payment loan. Disclosures also must be amounts during the loan term. For
payments of $365,234.76.] The [finance based on the term of the balloon- example, under these plans, a series of
charge]flinterest and settlement payment loan in balloon-payment graduated payments may be scheduled
chargesfi should be $265,234.76 and instruments in which the legal before rate adjustments affect payment
the total of payments should be obligation provides that the loan will be amounts, or the initial scheduled
$365,234.76. renewed by a ‘‘refinancing’’ of the payment may remain constant for a set
C. Same loan as above, except with a obligation, as that term is defined by period before rate adjustments affect the
71⁄2; percent cap on payment § 226.20(a). If it cannot be determined payment amount. In any case, the initial
adjustments. The disclosures should from the legal obligation that the loan payment amount may be insufficient to
reflect a composite annual percentage will be renewed by a ‘‘refinancing,’’ cover the scheduled interest, causing
rate of 11.64 percent, based on 9 percent disclosures must be based either on the negative amortization from the outset of
for one year and 12 percent for 29 years. term of the balloon-payment loan or on the transaction. In these transactions,
[Because of the payment cap, five levels the payment amortization, depending the disclosures should treat these
of payments should be reflected.] The on whether the creditor is features as follows:
[finance charge]flinterest and unconditionally obligated to renew the [•]fli.fi The finance charge includes
settlement chargesfi should be loan as described above. (This the amount of negative amortization
$277,040.60, and the total of payments discussion does not apply to based on the assumption that the rate in
$377,040.60. construction loans subject to effect at consummation remains
vi. A loan in which the initial interest § 226.17(c)(6).) unchanged.
rate is set according to the index or [• ‘‘Shared-equity’’ or ‘‘shared- [•]flii.fi The amount financed does
formula used for later adjustments but is appreciation’’ mortgages that have a not include the amount of negative
not set at the value of the index or fixed rate of interest and an appreciation amortization.
formula at consummation is not a share based on the consumer’s equity in [•]fliii.fi As in any variable- flor
discounted or premium variable-flor the mortgaged property, in a transaction adjustable-fi rate transaction, the
adjustable-firate loan. For example, if a not secured by real property or a annual percentage rate is based on the
creditor commits to an initial rate based dwelling. The appreciation share is terms in effect at consummation.
on the formula on a date prior to payable in a lump sum at a specified [• The schedule of payments
consummation, but the index has time. Disclosures must be based on the discloses the amount of any scheduled
moved during the period between that fixed interest rate. (As discussed in the initial payments followed by an
time and consummation, a creditor commentary to § 226.2, other types of adjusted level of payments based on the
should base its disclosures on the initial shared-equity arrangements are not initial interest rate. Since some
rate. considered ‘‘credit’’ and are not subject mortgage plans contain limits on the
[11. Examples of variable-rate to Regulation Z.)] amount of the payment adjustment, the
transactions.] fl4. General. In general, [•]flii.fi Preferred-rate loans where payment schedule in a transaction not
vfi[V]ariable-rate transactions include: the terms of the legal obligation provide secured by real property or a dwelling,
[•]fli.fi Renewable balloon-payment that the initial underlying rate is fixed or payment summary, in a transaction
instruments flwith a fixed interest but will increase upon the occurrence of secured by real property or a dwelling
ratefi where the creditor is both some event, such as an employee may require several different levels of
unconditionally obligated to renew the leaving the employ of the creditor, and payments, even with the assumption
balloon-payment loan at the consumer’s the note reflects the preferred rate. The that the original interest rate does not
option (or is obligated to renew subject disclosures are to be based on the increase.]
to conditions within the consumer’s preferred rate. [13.]fl7.fi Growth-equity mortgages.
control) and has the option of increasing [• Graduated-payment mortgages and flGrowth-equity mortgages, afi[A]lso
the interest rate at the time of renewal. step-rate transactions without a referred to as payment-escalated
fl(However, a transaction secured by variable-rate feature are not considered mortgages, [these mortgage plans
real property or a dwelling with a variable-rate transactions. ‘‘Shared- involve] scheduled payment increases
balloon payment and a fixed interest equity’’ or ‘‘shared-appreciation’’ to prematurely amortize the loan. The
rate must be disclosed as a fixed-rate mortgages are not considered variable- initial payment amount is determined as
transaction under § 226.38(a)(3) whether rate transactions.] for a long-term loan with a fixed interest
or not the transaction is renewable.)fi [•]fliii.fi ‘‘Price level adjusted rate. Payment increases are scheduled
Disclosures must be based on the mortgages’’ or other indexed mortgages periodically, based on changes in an
payment amortization (unless the that have a fixed rate of interest but index. The larger payments result in
specified term of the obligation with provide for periodic adjustments to accelerated amortization of the loan. In
renewals is shorter) and on the rate in payments and the loan balance to reflect disclosing these mortgage plans,
effect at the time of consummation of changes in an index measuring prices or creditors [may either—
the transaction. (Examples of conditions inflation. Disclosures are to be based on • Estimate]flmust estimatefi the
within a consumer’s control include the fixed interest rate. amount of payment increases, based on
requirements that a consumer be current fl5. Not variable- or adjustable-rate the best information reasonably
in payments or continue to reside in the transactions. Graduated-payment available[, or
mortgaged property. In contrast, setting mortgages and step-rate transactions • Disclose by analogy to the variable-
a limit on the rate at which the creditor without a variable-rate feature are not rate disclosures in section 226.18(f)(1)].
would be obligated to renew or considered variable- or adjustable-rate (This discussion does not apply to
reserving the right to change the credit transactions.fi growth-equity mortgages in which the
amount of payment increases can be events which do not include the • The separate financing of a
accurately determined at the time of consumer’s death, the creditor must downpayment in a credit sale
disclosure. For these mortgages, [as for base the disclosures upon the transaction may, but need not, be
graduated-payment mortgages,] occurflrfience of the event estimated disclosed as 2 transactions (a credit sale
disclosures should reflect the scheduled to be most likely to occur first.) and a separate transaction for the
increases in payments.) [•]fliii.fi In making the disclosures, financing of the downpayment).]
[14. Reverse mortgages.]fl17(c)(1)(iv) the creditor must assume that all [17. Special rules for tax refund
Repayment upon occurrence of future disbursements and accrued interest will anticipation loans.]fl17(c)(1)(v) Tax
event.fi be paid by the consumer. For example, refund-anticipation loan.fi
fl1. General.fi Reverse mortgages, if the note has a nonrecourse provision fl1. General.fi Tax refund loans,
also known as reverse annuity or home providing that the consumer is not also known as refund anticipation loans
equity conversion mortgages, typically obligated for an amount greater than the (RALs), are transactions in which a
involve the disbursement of monthly value of the house, the creditor must creditor will lend up to the amount of
advances to the consumer for a fixed nonetheless assume that the full amount a consumer’s expected tax refund. RAL
period or until the occurrence of an to be disbursed will be repaid. In this agreements typically require repayment
event such as the consumer’s death. case, however, the creditor may include upon demand, but also may provide that
Repayment of the loan (generally a a statement such as ‘‘The disclosures repayment is required when the refund
single payment of principal and accrued assume full repayment of the amount is made. The agreements also typically
interest) may be required to be made at advanced plus accrued interest, provide that if the amount of the refund
the end of the disbursements or, for although the amount you may be is less than the payment due, the
example, upon the death of the required to pay is limited by your consumer must pay the difference.
consumer. fl(However, a reverse agreement.’’ Repayment often is made by a
mortgage is covered by § 226.33 only if [•]fliv.fi Some reverse mortgages preauthorized offset to a consumer’s
the consumer’s death is one of the provide that some or all of the
account held with the creditor when the
conditions of repayment, as provided refund has been deposited by electronic
appreciation in the value of the property
under § 226.33(a).)fi In disclosing these transfer. Creditors may charge fees for
will be shared between the consumer
transactions, creditors must apply the RALs in addition to fees for filing the
and the creditor. [Such loans are
following rules, as applicable: consumer’s tax return electronically. In
[•]fli.fi If the reverse mortgage has a considered variable-rate mortgages, as
RAL transactions subject to the
specified period for disbursements but described in comment 17(c)(1)–11, and
regulation the following special rules
repayment is due only upon the the appreciation feature must be
apply:
occurrence of a future event such as the disclosed in accordance with [•]fli.fi If, under the terms of the
death of the consumer, the creditor must § 226.18(f)(1). If the reverse mortgage legal obligation, repayment of the loan
assume that disbursements will be made has a variable interest rate, is written for is required when the refund is received
until they are scheduled to end. The a term greater than one year, and is by the consumer (such as by deposit
creditor must assume repayment will secured by the consumer’s principal into the consumer’s account), the
occur when disbursements end (or dwelling, the shared appreciation disclosures should be based on the
within a period following the final feature must be described under creditor’s estimate of the time the
disbursement which is not longer than § 226.19(b)(2)(vii).]flIf the reverse refund will be delivered even if the loan
the regular interval between mortgage has an adjustable interest rate also contains a demand clause. The
disbursements). This assumption should and is secured by real property or a practice of a creditor to demand
be used even though repayment may dwelling, the creditor must disclose the repayment upon delivery of refunds
occur before or after the disbursements shared-equity or shared-appreciation does not determine whether the legal
are scheduled to end. In such cases, the feature as required by §§ 226.19(b)(3)(iii) obligation requires that repayment be
creditor may include a statement such and 226.38(d)(2)(iii).fi made at that time; this determination
as ‘‘The disclosures assume that you [15. Morris Plan transactions. When a must be made according to applicable
will repay the loan at the time our deposit account is created for the sole State or other law. (See comment
payments to you end. As provided in purpose of accumulating payments and 17(c)(5)–1 for the rules regarding
your agreement, your repayment may be then is applied to satisfy entirely the disclosures if the loan is payable solely
required at a different time.’’ consumer’s obligation in the on demand or is payable either on
[•]flii.fi If the reverse mortgage has transaction, each deposit made into the demand or on an alternate maturity
neither a specified period for account is considered the same as a date.)
disbursements nor a specified payment on a loan for purposes of [•]flii.fi If the consumer is required
repayment date and these terms will be making disclosures. to repay more than the amount
determined solely by reference to future 16. Number of transactions. Creditors borrowed, the difference is a finance
events including the consumer’s death, have flexibility in handling credit charge unless excluded under § 226.4.
the creditor may assume that the extensions that may be viewed as In addition, to the extent that any fees
disbursements will end upon the multiple transactions. For example: charged in connection with the loan
consumer’s death (estimated by using • When a creditor finances the credit (such as for filing the tax return
actuarial tables, for example) and that sale of a radio and a television on the electronically) exceed those fees for a
repayment will be required at the same same day, the creditor may disclose the comparable cash transaction (that is,
time (or within a period following the sales as either 1 or 2 credit sale filing the tax return electronically
date of the final disbursement which is transactions. without a loan), the difference must be
not longer than the regular interval for • When a creditor finances a loan included in the finance charge.
disbursements). Alternatively, the along with a credit sale of health [18.]fl17(c)(1)(vi)fi Pawn
creditor may base the disclosures upon insurance, the creditor may disclose in transactions.
another future event it estimates will be one of several ways: a single credit sale fl1. General.fi When, in connection
most likely to occur first. (If terms will transaction, a single loan transaction, or with an extension of credit, a consumer
be determined by reference to future a loan and a credit sale transaction. pledges or sells an item to a pawnbroker
creditor in return for a sum of money and (iii)fi. Even though other on the information known to the
and retains the right to redeem the item disclosures are based on the same creditor at the time the disclosure
for a greater sum (the redemption price) assumption on which a specific document is prepared, the disclosures
within a specified period of time, estimated disclosure was based, the are considered accurate under this rule,
disclosures are required. In addition to creditor has some flexibility in labelling and affected disclosures are also
other disclosure requirements that may the estimates. Generally, only the considered accurate, even if the
be applicable under § 226.18, for particular disclosure for which the exact disclosures are not labeled as estimates.
purposes of pawn transactions: information is unknown is labelled as For example, if the amount of per-diem
i. The amount financed is the initial an estimate. However, when several interest used to prepare disclosures is
sum paid to the consumer. The disclosures are affected because of the less than the amount of per-diem
pawnbroker creditor need not provide a unknown information, the creditor has interest charged at consummation, and
separate itemization of the amount the option of labelling either every as a result the finance charge is
financed if that entire amount is paid affected disclosure or only the understated by $200, the disclosed
directly to the consumer and the disclosure primarily affected. For finance charge is considered accurate
disclosed description of the amount example, when the finance charge is even though the understatement is not
financed is ‘‘the amount of cash given unknown because the date of within the $100 tolerance of
directly to you’’ or a similar phrase. consummation is unknown, the creditor § 226.18(d)(1), and the finance charge
ii. The finance charge is the difference must label the finance charge as an was not labeled as an estimate. In this
between the initial sum paid to the estimate and may also label as estimates example, if in addition to the
consumer and the redemption price the total of payments and the payment understatement related to the per-diem
plus any other finance charges paid in schedule. When many flnumericalfi interest, a $90 fee is incorrectly omitted
connection with the transaction. (See disclosures are estimates, the creditor from the finance charge, causing it to be
§ 226.4.) may use a general statement, such as understated by a total of $290, the
iii. The term of the transaction, for ‘‘all numerical disclosures except the finance charge is considered accurate
calculating the annual percentage rate, late payment disclosure are estimates,’’ because the $90 fee is within the
is the period of time agreed to by the as a method to label those disclosures as tolerance in § 226.18(d)(1).
pawnbroker creditor and the consumer. estimates.
The term of the transaction does not 3. Simple-interest transactions. If Paragraph 17(c)(3)
include a grace period (including any consumers do not make timely 1. Minor variations. Section
statutory grace period) after the agreed payments in a simple-interest 226.17(c)(3) allows creditors to
redemption date. transaction, some of the amounts disregard certain factors in calculating
Paragraph 17(c)(2)(i). calculated for Truth in Lending and making disclosures. For example:
1. Basis for estimates. Disclosures disclosures will differ from amounts [•]fli.fi Creditors may ignore the
may be estimated when the exact that consumers will actually pay over effects of collecting payments in whole
information is unknown at the time the term of the transaction. Creditors cents. Because payments cannot be
disclosures are madefl, except that may label disclosures as estimates in collected in fractional cents, it is often
creditors may not provide estimated these transactions[.]flexcept as difficult to amortize exactly an
disclosures in disclosures required by otherwise provided by § 226.19(a)(2). obligation with equal payments; the
§ 226.19(a)(2)(ii) and (iii)fi. Information (See the commentary on § 226.19(a)(2) amount of the last payment may require
is unknown if it is not reasonably for a discussion of circumstances where adjustment to account for the rounding
available to the creditor at the time the creditors may not disclose estimates for of the other payments to whole cents.
disclosures are made. The ‘‘reasonably transactions secured by real property or [•]flii.fi Creditors may base their
available’’ standard requires that the a dwelling.)fi For example, because the disclosures on calculation tools that
creditor, acting in good faith, exercise finance charge and total of payments assume that all months have an equal
due diligence in obtaining information. may be larger than disclosed if number of days, even if their practice is
For example, the creditor must at a consumers make late payments, to take account of the variations in
minimum utilize generally accepted creditors may label the finance charge months for purposes of collecting
calculation tools, but need not invest in and total of payments as estimates. On interest. For example, a creditor may
the most sophisticated computer the other hand, creditors may choose use a calculation tool based on a 360-
program to make a particular type of not to label disclosures as estimatesfl. day year, when it in fact collects interest
calculation. The creditor normally may In all cases, creditorsfi [and] may base by applying a factor of 1/365 of the
rely on the representations of other [all] disclosures on the assumption that annual rate to 365 days. This rule does
parties in obtaining information. For payments will be made on time fland not, however, authorize creditors to
example, the creditor might look to the in the amounts required by the terms of ignore, for disclosure purposes, the
consumer for the time of consummation, the legal obligation,fi disregarding any effects of applying 1/360 of an annual
to insurance companies for the cost of possible [inaccuracies]fldifferencesfi rate to 365 days.
insurance, or to realtors for taxes and resulting from consumers’ payment 2. Use of special rules. A creditor may
escrow fees. The creditor may utilize patterns. utilize the special rules in § 226.17(c)(3)
estimates in making disclosures even for purposes of calculating and making
though the creditor knows that more Paragraph 17(c)(2)(ii)
all disclosures for a transaction or may,
precise information will be available by 1. Per diem interest. This paragraph at its option, use the special rules for
the point of consummation. However, applies to any numerical amount (such some disclosures and not others.
new disclosures may be required under as the finance charge, annual percentage Paragraph 17(c)(4).
§ 226.17(f) or § 226.19. rate, or payment amount) that is affected 1. Payment schedule irregularities.
2. Labelling estimates. Estimates must by the amount of the per-diem interest When one or more payments in a
be designated as such in the segregated charge that will be collected at transaction differ from the others
disclosuresfl, except that creditors may consummation. If the amount of per- because of a long or short first period,
not provide estimated disclosures in the diem interest used in preparing the the variations may be ignored in
disclosures required by § 226.19(a)(2)(ii) disclosures for consummation is based disclosing the payment schedule,
finance charge, annual percentage rate, maturity date is stated in the legal based on a long-term amortization
and other terms. For example: obligation. Whether an alternate schedule and a large final payment due
[•]fli.fi A 36-month auto loan might maturity date is stated in the legal after a shorter term, are not demand
be consummated on June 8 with obligation is determined by applicable obligations unless a demand feature is
payments due on July 1 and the first of law. An alternate maturity date is not specifically contained in the contract.
each succeeding month. The creditor inferred from an informal principal For example, a mortgage with a term of
may base its calculations on a payment reduction agreement or a similar 5 years and a payment
schedule that assumes 36 equal understanding between the parties. [schedule]flsummaryfi based on 20
intervals and 36 equal installment However, when the note itself specifies years would not be treated as a mortgage
payments, even though a precise a principal reduction schedule (for with a demand feature, in the absence
computation would produce slightly example, ‘‘payable on demand or $2,000 of any contractual demand provisions.
different amounts because of the shorter plus interest quarterly’’), an alternate [In this type of mortgage, disclosures
first period. maturity is stated and the disclosures should be based on the 5-year
[•]flii.fi By contrast, in the same must reflect that date. flSee term.]fl(See § 226.38(c)(3) for
example, if the first payment were not §§ 226.19(b)(2)(ii)(D) and requirements for interest rate and
scheduled until August 1, the irregular 226.38(d)(2)(iv) and associated payment summary disclosures for
first period would exceed the limits in commentary to determine how to balloon payment mortgages.)fi
§ 226.17(c)(4); the creditor could not use disclose a demand feature for a Paragraph 17(c)(6).
the special rule and could not ignore the transaction secured by real property or 1. Series of advances. Section
extra days in the first period in a dwelling.fi 226.17(c)(6)(i) deals with a series of
calculating its disclosures. 2. Future event as maturity date. An advances under an agreement to extend
2. Measuring odd periods. In obligation whose maturity date is credit up to a certain amount. A creditor
determining whether a transaction may determined solely by a future event, as may treat all of the advances as a single
take advantage of the rule in for example, a loan payable only on the transaction or disclose each advance as
§ 226.17(c)(4), the creditor must sale of property, is not a demand a separate transaction. If these advances
measure the variation against a regular obligation. Because no demand feature are treated as 1 transaction and the
period. For purposes of that rule: is contained in the obligation, demand timing and amounts of advances are
[•]fli.fi The first period is the period disclosures under § 226.18(i) are unknown, creditors must make
from the date on which the finance inapplicable. The disclosures should be disclosures based on estimates, as
charge begins to be earned to the date based on the creditor’s estimate of the provided in § 226.17(c)(2). If the
of the first payment. time at which the specified event will advances are disclosed separately,
[•]flii.fi The term is the period from occur, and flin a transaction not disclosures must be provided before
the date on which the finance charge secured by real property or a dwellingfi each advance occurs, with the
begins to be earned to the date of the may indicate the basis for the creditor’s disclosures for the first advance
final payment. estimate, as noted in the commentary to provided by consummation.
[•]fliii.fi The regular period is the § 226.17(a). 2. Construction loans. Section
most common interval between 3. Demand after stated period. Most 226.17(c)(6)(ii) provides a flexible rule
payments in the transaction. demand transactions contain a demand for disclosure of construction loans that
In transactions involving regular feature that may be exercised at any may be permanently financed. These
periods that are monthly, semimonthly point during the term, but [certain transactions have 2 distinct phases,
or multiples of a month, the length of transactions]fla transaction mayfi similar to 2 separate transactions. The
the irregular and regular periods may be convert to demand status only after a construction loan may be for initial
calculated on the basis of either the fixed period. [For example, in States construction or subsequent
actual number of days or an assumed prohibiting due-on-sale clauses, the construction, such as rehabilitation or
30-day month. In other transactions, the Federal National Mortgage Association remodelling. The construction period
length of the periods is based on the (FNMA) requires mortgages that it usually involves several disbursements
actual number of days. purchases to include a call option rider of funds at times and in amounts that
3. Use of special rules. A creditor may that may be exercised after 7 years. are unknown at the beginning of that
utilize the special rules in § 226.17(c)(4) These mortgages are generally written as period, with the consumer paying only
for purposes of calculating and making long-term obligations, but contain a accrued interest until construction is
some disclosures but may elect not to do demand feature that may be exercised completed. Unless the obligation is paid
so for all of the disclosures. For only within a 30-day period at 7 years.] at that time, the loan then converts to
example, the variations may be ignored The disclosures for [these permanent financing in which the loan
in calculating and disclosing the annual transactions]fla transaction that amount is amortized just as in a
percentage rate but taken into account converts to demand status after a fixed standard mortgage transaction. Section
in calculating and disclosing the finance periodfi should be based upon the 226.17(c)(6)(ii) permits the creditor to
charge and payment schedule. legally agreed-upon maturity date. Thus, give either one combined disclosure for
4. Relation to prepaid finance flfor example,fi if a mortgage both the construction financing and the
charges. Prepaid finance charges, containing [the 7-year FNMA call permanent financing, or a separate set of
including ‘‘odd-days’’ or ‘‘per-diem’’ option] fla call option the creditor may disclosures for the 2 phases. This rule
interest, paid prior to or at closing may exercise during the first 30 days of the is available whether the consumer is
not be treated as the first payment on a eighth year after loan originationfi is initially obligated to accept construction
loan. Thus, creditors may not disregard written as a 20-year obligation, the financing only or is obligated to accept
an irregularity in disclosing such disclosures should be based on the 20- both construction and permanent
finance charges. year term, with the demand feature financing from the outset. If the
Paragraph 17(c)(5). disclosed under [§ 226.18(i)]fl consumer is obligated on both phases
1. Demand disclosures. Disclosures § 226.38(d)(2)(iv)fi. and the creditor chooses to give 2 sets
for demand obligations are based on an 4. Balloon mortgages. Balloon of disclosures, both sets must be given
assumed 1-year term, unless an alternate payment mortgages, with payments to the consumer initially, because both
transactions would be consummated at made, even though the disclosing are based on estimates and marked as
that time. (Appendix D provides a creditor is not the seller. such.
method of calculating the annual 2. Multiple consumers. When two B. In a regular transaction flnot
percentage rate and other disclosures for consumers are joint obligors with secured by real property or a
construction loans, which may be used, primary liability on an obligation, the dwellingfi, if early disclosures are
at the creditor’s option, in disclosing disclosures may be given to either one marked as estimates and the disclosed
construction financing.) of them. If one consumer is merely a annual percentage rate is within 1⁄8 of 1
3. Multiple-advance construction surety or guarantor, the disclosures percentage point of the rate at
loans. Section 226.17(c)(6)(i) and (ii) are must be given to the principal debtor. In consummation, the creditor need not
not mutually exclusive. For example, in rescindable transactions, however, redisclose the changed terms (including
a transaction that finances the separate disclosures must be given to the annual percentage rate).
construction of a dwelling that may be each consumer who has the right to [ii. Nonmortgage loan.]flC.fi If
permanently financed by the same rescind under § 226.23, although the disclosures flfor a transaction not
creditor, the construction phase may disclosures required under § 226.19(b) secured by real property or a dwellingfi
consist of a series of advances under an need only be provided to the consumer are made on July 1, the transaction is
agreement to extend credit up to a who expresses an interest in a variable- consummated on July 15, and the
certain amount. In these cases, the rate loan program. finance charge increased by $35 but the
creditor may disclose the construction 17(e) Effect of subsequent events. disclosed annual percentage rate is
phase as either 1 or more than 1 1. Events causing inaccuracies. within the permitted tolerance, the
transaction and also disclose the Inaccuracies in disclosures are not creditor must at least redisclose the
permanent financing as a separate violations if attributable to events changed terms that were not marked as
transaction. estimates. (See § 226.18(d)(2) of this
occurring after the disclosures are made.
4. Residential mortgage transaction. part.)
[For example, when the consumer fails
See the commentary to § 226.2(a)(24) for [iii.]flii.fi Mortgage loan. At the
to fulfill a prior commitment to keep the time [TILA disclosures]flthe
a discussion of the effect of collateral insured and the creditor then
§ 226.17(c)(6) on the definition of a disclosures required by
provides the coverage and charges the § 226.19(a)(2)(ii)fi are prepared in July,
residential mortgage transaction. consumer for it, such a change does not
5. Allocation of points. When a the loan closing is scheduled for July 31
make the original disclosures and the creditor does not plan to collect
creditor utilizes the special rule in
inaccurate.] The creditor may, however, per-diem interest at consummation.
§ 226.17(c)(6) to disclose credit
be required to make new disclosures Consummation actually occurs on
extensions as multiple transactions,
under § 226.17(f) or § 226.19 if the August 5, and per-diem interest for the
buyers points or similar amounts
events occurred between disclosure and remainder of August is collected as a
imposed on the consumer must be
consummation or under § 226.20 if the prepaid finance charge. [Assuming there
allocated for purposes of calculating
events occurred after consummation.fl were no other changes requiring
disclosures. While such amounts should
For example, when the consumer fails redisclosure, t]flTfihe creditor may
not be taken into account more than
to fulfill a prior commitment to keep the rely on the disclosures prepared in July
once in making calculations, they may
collateral insured and the creditor then that were accurate when they were
be allocated between the transactions in
provides the coverage and charges the prepared. However, if the creditor
any manner the creditor chooses. For
consumer for it, such a change does not prepares new disclosures in August that
example, if a construction-permanent
make the original disclosures will be provided at consummation, the
loan is subject to 5 points imposed on
inaccurate. However, the creditor would new disclosures must take into account
the consumer and the creditor chooses
be required to provide the notice the amount of the per-diem interest
to disclose the 2 phases separately, the
required under § 226.20(e).fi known to the creditor at that time.
5 points may be allocated entirely to the
17(f) Early disclosures. 2. Variable flor adjustablefi rate.
construction loan, entirely to the
permanent loan, or divided in any 1. Change in rate or other terms. The addition of a variable flor
manner between the two. However, the Redisclosure is required for changes that adjustablefi rate feature to the credit
entire 5 points may not be applied occur between the time disclosures are terms, after early disclosures are given,
twice, that is, to both the construction made and consummation if the annual requires new disclosures. fl(See
and the permanent phases. percentage rate in the consummated § 226.19(a)(2) to determine when new
17(d) Multiple creditors; multiple transaction exceeds the limits disclosures are required for transactions
consumers. prescribed in this section, even if the secured by real property or a
1. Multiple creditors. If a credit [initial]flpriorfi disclosures would be dwelling.fi
transaction involves more than one considered accurate under the 3. Content of new disclosures.
creditor: tolerances in § 226.18(d) or fl§ fi flSubject to § 226.19(a), ifi[I]f
[•]fli.fi The creditors must choose 226.22(a). To illustrate: redisclosure is required flin a
which of them will make the i. [General.]flNon-mortgage loan.fi transaction not secured by real property
disclosures. A. If disclosures are made in a regular or a dwellingfi, the creditor has the
[•]flii.fi A single, complete set of transaction flnot secured by real option of either providing a complete
disclosures must be provided, rather property or a dwellingfi on July 1, the set of new disclosures, or providing
than partial disclosures from several transaction is consummated on July 15, disclosures of only the terms that vary
creditors. and the actual annual percentage rate from those originally disclosed. flIf the
[•]fliii.fi All disclosures for the varies by more than 1⁄8 of 1 percentage creditor chooses to provide a complete
transaction must be given, even if the point from the disclosed annual set of new disclosures, the creditor may
disclosing creditor would not otherwise percentage rate, the creditor must either but need not highlight the new terms,
have been obligated to make a particular redisclose the changed terms or furnish provided that the disclosures comply
disclosure. For example, if one of the a complete set of new disclosures before with the format requirements of
creditors is the seller, the total sale price consummation. Redisclosure is required § 226.17(a). If the creditor chooses to
disclosure under § 226.18(j) must be even if the disclosures made on July 1 disclose only the new terms, all the new
terms must be disclosed. For example, them to appear apart from the other period, in one payment at the end of the
a different annual percentage rate will disclosures. Therefore, a creditor may interim period, or capitalized at the
almost always produce a different mail an insurance authorization to the beginning of the repayment period)
finance charge, and often a new consumer and then prepare the other must be reflected in the interim annual
schedule of payments; all of these disclosures to reflect whether or not the percentage rate. Interest subsidies, such
changes would have to be disclosed. If, authorization is completed by the as payments made by either a State or
in addition, unrelated terms such as the consumer. Creditors may also disclose the Federal government on an interim
amount financed or prepayment penalty the insurance cost on a unit-cost basis, loan, must be excluded in computing
vary from those originally disclosed, the if the transaction meets the the annual percentage rate on the
accurate terms must be disclosed. requirements of § 226.17(g). interim obligation, when the consumer
However, no new disclosures are 17(h) Series of sales—delay in has no contingent liability for payment
required if the only differences involve disclosures. of those amounts. Any finance charges
estimates other than the annual 1. Applicability. The creditor may that are paid separately by the student
percentage rate, and no variable rate delay the disclosures for individual at the outset or withheld from the
feature has been added (see comment credit sales in a series of such sales until proceeds of the loan are prepaid finance
17(f)-2). If a transaction is secured by the first payment is due on the current charges. An example of this type of
real property or a dwelling, the creditor sale, assuming the 2 conditions in this charge is the loan guarantee fee. The
must provide a complete set of new paragraph are met. If those conditions sum of the prepaid finance charges is
disclosures in all cases, however.fi (See are not met, the general timing rules in deducted from the loan proceeds to
the commentary to § 226.19(a)(2).) [§ 266.17(b)] fl§ 226.17(b)fi apply. determine the amount financed and
4. Special rules. [In mortgage 2. Basis of disclosures. Creditors included in the calculation of the
transactions subject to § 226.19, the structuring disclosures for a series of finance charge.
creditor must redisclose if, between the sales under § 226.17(h) may compute 3. Consolidation. Consolidation of the
delivery of the required early the total sale price as either: interim student credit extensions
disclosures and consummation, the [•]fli.fi The cash price for the sale
through a renewal note with a set
annual percentage rate changes by more plus that portion of the finance charge
repayment schedule is treated as a new
than a stated tolerance.]flSpecial and other charges applicable to that
transaction with disclosures made as
disclosure timing and content sale; or
[•]flii.fi The cash price for the sale, they would be for a refinancing. Any
requirements apply under § 226.19(a)(2) unearned portion of the finance charge
to disclosures provided before other charges applicable to the sale, and
the total finance charge and outstanding must be reflected in the new finance
consummation for mortgage transactions charge and annual percentage rate, and
secured by real property or a principal.
17(i) Interim student credit is not added to the new amount
dwelling.fi When subsequent events financed. In itemizing the amount
occur after consummation, new extensions.
1. Definition. Student credit plans financed under § 226.18(c), the creditor
disclosures are required only if there is may combine the principal balances
involve extensions of credit for
a refinancing or an assumption within remaining on the interim extensions at
education purposes where the
the meaning of § 226.20. the time of consolidation and categorize
Paragraph 17(f)(2). repayment amount and schedule are not
known at the time credit is advanced. them as the amount paid on the
1. Irregular transactions. For purposes consumer’s account.
of this paragraph, a transaction is These plans include loans made under
any student credit plan, whether 4. Approved student credit forms. See
deemed to be ‘‘irregular’’ according to
government or private, where the the commentary to appendix H
the definition in footnote 46 of
repayment period does not begin regarding disclosure forms approved for
§ 226.22(a)(3).
immediately. (Certain student credit use in certain student credit programs.
17(g) Mail or telephone orders—delay
in disclosures. plans that meet this definition are § 226.18—Content of Disclosures.
1. Conditions for use. When the exempt from Regulation Z. See 1. As applicable. fli.fi The
creditor receives a mail or telephone § 226.3(f).) Creditors in interim student disclosures required by this section
request for creditfl, except for credit extensions need not disclose the need be made only as applicable. Any
extensions of credit covered by sections terms set forth in this paragraph at the disclosure not relevant to a particular
226.19(a) and 226.19(b),fi the creditor time the credit is actually extended but transaction may be eliminated entirely.
may delay making the disclosures until must make complete disclosures at the For example:
the first payment is due if the following time the creditor and consumer agree [•]flA.fi In a loan transaction, the
conditions are met: upon the repayment schedule for the creditor may delete disclosure of the
[•]fli.fi The credit request is total obligation. At that time, a new set total sale price.
initiated without face-to-face or direct of disclosures must be made of all [•]flB.fi In a credit sale requiring
telephone solicitation. (Creditors may, applicable items under § 226.18. disclosure of the total sale price under
however, use the special rule when 2. Basis of disclosures. The § 226.18(j), the creditor may delete any
credit requests are solicited by mail.) disclosures given at the time of reference to a downpayment where no
[•]flii.fi The creditor has supplied execution of the interim note should downpayment is involved.
the specified credit information about reflect two annual percentage rates, one flii.fi Where the amounts of several
its credit terms either to the individual for the interim period and one for the numerical disclosures are the same, the
consumer or to the public generally. repayment period. The use of § 226.17(i) ‘‘as applicable’’ language also permits
That information may be distributed in making disclosures does not, by creditors to combine the terms, so long
through advertisements, catalogs, itself, make those disclosures estimates. as it is done in a clear and conspicuous
brochures, special mailers, or similar Any portion of the finance charge, such manner. For example:
means. as statutory interest, that is attributable [•]flA.fi In a transaction in which
2. Insurance. The location to the interim period and is paid by the the amount financed equals the total of
requirements for the insurance student (either as a prepaid finance payments, the creditor may disclose
disclosures under § 226.18(n) permit charge, periodically during the interim ‘‘amount financed/total of payments,’’
together with descriptive language, downpayment (either because they do [•]flA.fi If the creditor determines
followed by a single amount. not meet the definition or because the the principal loan amount under
[•]flB.fi However, if the terms are creditor simply chooses not to treat § 226.18(b)(1) to be $2,540, it has
separated on the disclosure statement them as downpayments) are included in included the loan fee in the principal
and separate space is provided for each the amount financed. loan amount and should deduct $40 as
amount, both disclosures must be [•]flii.fi Deferred downpayments a prepaid finance charge under
completed, even though the same that are treated as part of the § 226.18(b)(3), thereby obtaining an
amount is entered in each space. downpayment are not part of the amount financed of $2,500.
2. Format. See the commentary to amount financed under § 226.18(b)(1). [•]flB.fi If the creditor determines
§ 226.17 and appendix H for a Paragraph 18(b)(2). the principal loan amount under
discussion of the format to be used in 1. Adding other amounts. Fees or § 226.18(b)(1) to be $2,500, it has not
making these disclosures, as well as other charges that are not part of the included the loan fee in the principal
acceptable modifications. finance charge and that are financed loan amount and should not deduct any
18(a) Creditor. rather than paid separately at amount under § 226.18(b)(3), thereby
1. Identification of creditor. The consummation of the transaction are obtaining an amount financed of $2,500.
creditor making the disclosures must be included in the amount financed. fliii.fi The same rules apply when
identified. [This disclosure may, at the Typical examples are [real estate the creditor does not increase the face
creditor’s option, appear apart from the settlement charges and] premiums for amount of the note by the amount of the
other disclosures.] Use of the creditor’s voluntary credit life and disability charge but collects the charge by
name is sufficient, but the creditor may insurance excluded from the finance withholding it from the amount
also include an address and/or advanced to the consumer. To illustrate,
charge under § 226.4. This paragraph
telephone number. In transactions with the following examples assume a loan
does not include any amounts already
multiple creditors, any one of them may request of $2,500 with a loan fee of $40;
accounted for under § 226.18(b)(1), such
make the disclosures; the one doing so the creditor prepares a note for $2,500
as taxes, tag and title fees, or the costs
must be identified. and advances $2,460 to the consumer.
of accessories or service policies that the [•]flA.fi If the creditor determines
18(b) Amount financed.
1. Disclosure required. The net creditor includes in the cash price. the principal loan amount under
amount of credit extended must be Paragraph 18(b)(3). § 226.18(b)(1) to be $2,500, it has
disclosed using the term amount 1. Prepaid finance charges. fli.fi included the loan fee in the principal
financed and a descriptive explanation Prepaid finance charges that are paid loan amount and should deduct $40 as
similar to the phrase in the regulation. separately in cash or by check should be a prepaid finance charge under
2. Rebates and loan premiums. In a deducted under § 226.18(b)(3) in § 226.18(b)(3), thereby obtaining an
loan transaction, the creditor may offer calculating the amount financed. To amount financed of $2,460.
a premium in the form of cash or illustrate[• A]fl, afi consumer applies [•]flB.fi If the creditor determines
merchandise to prospective borrowers. for a loan of $2,500 with a $40 loan fee. the principal loan amount under
Similarly, in a credit sale transaction, a The face amount of the note is $2,500 § 226.18(b)(1) to be $2,460, it has not
seller’s or manufacturer’s rebate may be and the consumer pays the loan fee included the loan fee in the principal
offered to prospective purchasers of the separately by cash or check at closing. loan amount and should not deduct any
creditor’s goods or services. flSuch The principal loan amount for purposes amount under § 226.18(b)(3), thereby
premiums and rebates must be reflected of § 226.18(b)(1) is $2,500 and $40 obtaining an amount financed of $2,460.
in accordance with the terms of the legal should be deducted under § 226.18(b(3), fliv.fi Thus in the examples where
obligation between the parties. See thereby yielding an amount financed of the creditor derives the net amount of
§ 226.17(c)(1) and its commentary. $2,460. credit by determining a principal loan
Thus, if the creditor is legally obligated flii.fi In some instances, as when amount that does not include the
to provide the premium or rebate to the loan fees are financed by the creditor, amount of the finance charge, no
consumer as part of the credit finance charges are incorporated in the subtraction is appropriate. Creditors
transaction, the disclosures should face amount of the note. Creditors have should note, however, that although the
reflect its value in the manner and at the the option, when the charges are not charges are not subtracted as prepaid
time the creditor is obligated to provide add-on or discount charges, of finance charges in those examples, they
it.fi [At the creditor’s option, these determining a principal loan amount are nonetheless finance charges and
amounts may be either reflected in the under § 226.18(b)(1) that either includes must be treated as such.
Truth in Lending disclosures or or does not include the amount of the 2. Add-on or discount charges. All
disregarded in the disclosures. If the finance charges. (Thus the principal finance charges must be deducted from
creditor chooses to reflect them in the loan amount may, but need not, be the amount of credit in calculating the
§ 226.18 disclosures, rather than determined to equal the face amount of amount financed. If the principal loan
disregard them, they may be taken into the note.) When the finance charges are amount reflects finance charges that
account in any manner as part of those included in the principal loan amount, meet the definition of a prepaid finance
disclosures.] they should be deducted as prepaid charge in § 226.2, those charges are
Paragraph 18(b)(1). finance charges under § 226.18(b)(3). included in the § 226.18(b)(1) amount
1. Downpayments. A downpayment is When the finance charges are not and deducted under § 226.18(b)(3).
defined in § 226.2(a)(18) to include, at included in the principal loan amount, However, if the principal loan amount
the creditor’s option, certain deferred they should not be deducted under includes finance charges that do not
downpayments or pick-up payments. A § 226.18(b)(3). The following examples meet the definition of a prepaid finance
deferred downpayment that meets the illustrate the application of § 226.18(b) charge, the § 226.18(b)(1) amount must
criteria set forth in the definition may be to this type of transaction. Each example exclude those finance charges. The
treated as part of the downpayment, at assumes a loan request of $2,500 with following examples illustrate the
the creditor’s option. a loan fee of $40; the creditor assesses application of § 226.18(b) to these types
[•]fli.fi Deferred downpayments that the loan fee by increasing the face of transactions. Each example assumes a
are not treated as part of the amount of the note to $2,540. loan request of $1000 for 1 year, subject
to a 6 percent precomputed interest rate, prepaid finance charges.fi [as discussed differ from the requirements of
with a $10 loan fee paid separately at in the commentary to § 226.18(g).] §§ 226.18(c) and 226.19(a)(2). If a
consummation. ii. Organize the categories in any creditor chooses to substitute RESPA’s
[•]fli.fi The creditor assesses add-on order. For example, the creditor may settlement statement for the itemization
interest of $60 which is added to the rearrange the terms in a mathematical when redisclosure is required under
$1000 in loan proceeds for an obligation progression that depicts the arithmetic § 226.19(a)(2), the statement must be
with a face amount of $1060. The relationship of the terms. delivered to the consumer at or prior to
principal for purposes of § 226.18(b)(1) iii. Add categories. For example, in a consummation. The disclosures
is $1000, no amounts are added under credit sale, the creditor may include the required by §§ 226.18(c) and
§ 226.18(b)(2), and the $10 loan fee is a cash price and the downpayment. If the 226.19(a)(2) may appear on the same
prepaid finance charge to be deducted credit sale involves a trade-in of the page or on the same document as the
under § 226.18(b)(3). The amount consumer’s car and an existing lien on good faith estimate or the settlement
financed is $990. that car exceeds the value of the trade- statement, so long as the requirements
[•]flii.fi The creditor assesses in amount, the creditor may disclose the of § 226.17(a) are met.]
discount interest of $60 and distributes consumer’s trade-in value, the creditor’s Paragraph 18(c)(1)(i).
$940 to the consumer, who is liable for payoff of the existing lien, and the 1. Amounts paid to consumer. This
an obligation with a face amount of resulting additional amount financed. encompasses funds given to the
$1000. The principal under iv. Further itemize each category. For consumer in the form of cash or a check,
§ 226.18(b)(1) is $940, which results in example, the amount paid directly to including joint proceeds checks, as well
an amount financed of $930, after the consumer may be subdivided into as funds placed in an asset account. It
the amount given by check and the may include money in an interest-
deduction of the $10 prepaid finance
amount credited to the consumer’s bearing account even if that amount is
charge under § 226.18(b)(3).
savings account. considered a required deposit under
[•]fliii.fi The creditor assesses $60 v. Label categories with different
in discount interest by increasing the § 226.18(r). For example, in a
language from that shown in § 226.18(c). transaction with total loan proceeds of
face amount of the obligation to $1060, For example, an amount paid on the
with the consumer receiving $1000. The $500, the consumer receives a check for
consumer’s account may be revised to $300 and $200 is required by the
principal under § 226.18(b)(1) is thus specifically identify the account as creditor to be put into an interest-
$1000 and the amount financed $990, ‘‘your auto loan with us.’’ bearing account. Whether or not the
after deducting the $10 prepaid finance vi. Delete, leave blank, mark ‘‘N/A,’’ $200 is a required deposit, it is part of
charge under § 226.18(b)(3). or otherwise flnotefi [not] the amount financed. At the creditor’s
18(c) Itemization of amount financed. inapplicable categories in the option, it may be broken out and labeled
1. Disclosure required. fli.fi The itemization. For example, in a credit in the itemization of the amount
creditor has 2 alternatives in complying sale with no prepaid finance charges or financed.
with § 226.18(c): amounts paid to others, the amount Paragraph 18(c)(1)(ii).
[•]flA.fi The creditor may inform financed may consist of only the cash 1. Amounts credited to consumer’s
the consumer, on the segregated price less downpayment. In this case, account. The term consumer’s account
disclosures, that a written itemization of the itemization may be composed of refers to an account in the nature of a
the amount financed will be provided only a single category and all other debt with that creditor. It may include,
on request, furnishing the itemization categories may be eliminated. for example, an unpaid balance on a
only if the customer in fact requests it. 3. Amounts appropriate to more than prior loan, a credit sale balance or other
[•]flB.fi The creditor may provide one category. When an amount may amounts owing to that creditor. It does
an itemization as a matter of course, appropriately be placed in any of not include asset accounts of the
without notifying the consumer of the several categories and the creditor does consumer such as savings or checking
right to receive it or waiting for a not wish to revise the categories shown accounts.
request. in § 226.18(c), the creditor has Paragraph 18(c)(1)(iii).
flii.fi Whether given as a matter of considerable flexibility in determining 1. Amounts paid to others. This
course or only on request, the where to show the amount. For includes, for example, tag and title fees;
itemization must be provided at the example[:] fl,fi [•][I]flifi n a credit amounts paid to insurance companies
same time as the other disclosures sale, the portion of the purchase price for insurance premiums; security
required by § 226.18, although separate being financed by the creditor may be interest fees, and amounts paid to credit
from those disclosures. viewed as either an amount paid to the bureaus, appraisers or public officials.
2. Additional information. Section consumer or an amount paid on the When several types of insurance
226.18(c) establishes only a minimum consumer’s account. premiums are financed, they may, at the
standard for the material to be included [4. RESPA transactions. The Real creditor’s option, be combined and
in the itemization of the amount Estate Settlement Procedures Act listed in one sum, labeled ‘‘insurance’’
financed. Creditors have considerable (RESPA) requires creditors to provide a or similar term. This includes, but is not
flexibility in revising or supplementing good faith estimate of closing costs and limited to, different types of insurance
the information listed in § 226.18(c) and a settlement statement listing the premiums paid to one company and
shown in model form H–3, although no amounts paid by the consumer. different types of insurance premiums
changes are required. The creditor may, Transactions subject to RESPA are paid to different companies. Except for
for example, do one or more of the exempt from the requirements of insurance companies and other
following: § 226.18(c) if the creditor complies with categories noted in footnote 41, third
i. Include amounts that reflect RESPA’s requirements for a good faith parties must be identified by name.
payments not part of the amount estimate and settlement statement. The 2. Charges added to amounts paid to
financed. For example, [escrow items itemization of the amount financed need others. A sum is sometimes added to the
and] certain insurance premiums may not be given, even though the content amount of a fee charged to a consumer
be included, fleven though they are and timing of the good faith estimate for a service provided by a third party
neither part of the amount financed nor and settlement statement under RESPA (such as for an extended warranty or a
service contract) that is payable in the such as ‘‘which is subject to change.’’ one year. Moreover, transactions subject
same amount in comparable cash and The finance charge must be shown on to section 226.18(f)(2) are subject to the
credit transactions. In the credit the disclosures only as a total amount; special early-disclosure requirements of
transaction, the amount is retained by the elements of the finance charge must section 226.19(b). (However, ‘‘shared-
the creditor. Given the flexibility not be itemized in the segregated equity’’ or ‘‘shared-appreciation’’
permitted in meeting the requirements disclosures, although the regulation mortgages are subject to the disclosure
of the amount financed itemization (see does not prohibit their itemization requirements of section 226.18(f)(1) and
the commentary to § 226.18(c)), the elsewhere. not to the requirements of sections
creditor in such cases may reflect that [2. [Reserved]] 226.18(f)(2) and 226.19(b) regardless of
the creditor has retained a portion of the [18(d)(2) Other Credit] the general coverage of those sections.)
amount paid to others. For example, the Creditors are permitted under footnote
creditor could add to the category [1]fl2fi. Tolerance. When a finance- 43 to substitute in any variable-rate
‘‘amount paid to others’’ language such charge error results in a misstatement of transaction the disclosures required
as ‘‘(we may be retaining a portion of the amount financed, or some other under Section 226.19(b) for those
this amount).’’ dollar amount for which the regulation disclosures ordinarily required under
Paragraph 18(c)(1)(iv). provides no specific tolerance, the Section 226.18(f)(1). Creditors who
1. Prepaid finance charge. Prepaid misstated disclosure does not violate the provide variable-rate disclosures under
finance charges that are deducted under act or the regulation if the finance- section 226.19(b) must comply with all
§ 226.18(b)(3) must be disclosed under charge error is within the permissible of the requirements of that section,
this section. The prepaid finance tolerance in this paragraph. including the timing of disclosures, and
charges must be shown as a total 18(e) Annual percentage rate. must also provide the disclosures
amount but may, at the creditor’s 1. Disclosure required. The creditor required under section 226.18(f)(2).
option, also be further itemized and must disclose the cost of the credit as an Creditors utilizing footnote 43 may, but
described. All amounts must be annual rate, using the term ‘‘annual need not, also provide disclosures
reflected in this total, even if portions of percentage rate,’’ plus a brief descriptive pursuant to section 226.20(c).
the prepaid finance charge are also phrase comparable to that used in (Substitution of disclosures under
reflected elsewhere. For example, if at § 226.18(e). For variable rate section 226.18(f)(1) in transactions
consummation the creditor collects transactions, the descriptor may be subject to section 226.19(b) is not
interim interest of $30 and a credit further modified with a phrase such as permitted under the footnote.)]
report fee of $10, a total prepaid finance ‘‘which is subject to change.’’ Under [Paragraph 18(f)(1).]
charge of $40 must be shown. At the § 226.17(a), the terms ‘‘annual [1.]fl2.fi Terms used in disclosure.
creditor’s option, the credit report fee percentage rate’’ and ‘‘finance charge’’ In describing the variable rate feature,
paid to a third party may also be shown must be more conspicuous than the the creditor need not use any prescribed
elsewhere as an amount included in other required disclosures. terminology. For example, limitations
§ 226.18(c)(1)(iii). The creditor may also 2. Exception. [Footnote 42]flSection and hypothetical examples may be
further describe the 2 components of the 226.18(e)fi provides an exception for described in terms of interest rates
prepaid finance charge, although no certain transactions in which no annual rather than annual percentage rates. The
itemization of this element is required percentage rate disclosure is required. model forms in appendix H provide
by § 226.18(c)(1)(iv). 18(f) Variable rate. examples of ways in which the variable
[2. Prepaid mortgage insurance 1. Coverage. The requirements of rate disclosures may be made.
premiums. RESPA requires creditors to § 226.18(f) apply to [all] transactions [2.]fl3.fi Conversion feature. In
give consumers a settlement statement flnot secured by real property or a variable-rate transactions with an option
disclosing the costs associated with dwellingfi in which the terms of the permitting consumers to convert to a
mortgage loan transactions. Included on legal obligation allow the creditor to fixed-rate transaction, the conversion
the settlement statement are mortgage increase the rate [originally disclosed to option is a variable-rate feature that
insurance premiums collected at the consumer. It includes]flcharged must be disclosed. In making
settlement, which are prepaid finance when the transaction is consummated. disclosures under § 226.18(f)[(1)],
charges. In calculating the total amount Increases in rate includefi not only creditors should disclose the fact that
of prepaid finance charges, creditors increases in the interest rate but also the rate may increase upon conversion;
should use the amount for mortgage increases in other components, such as identify the index or formula used to set
insurance listed on the line for mortgage the rate of required credit life insurance. the fixed rate; and state any limitations
insurance on the settlement statement [The provisions, however, do not apply on and effects of an increase resulting
(line 1002 on HUD–1 or HUD 1–A), to]flHowever, increases in rate do not from conversion that differ from other
without adjustment, even if the actual includefi increases resulting from variable-rate features. Because
amount collected at settlement may vary delinquency (including late payment), § 226.18(f)[(1)(iv)]fl(4)fi requires only
because of RESPA’s escrow accounting default, assumption, acceleration or one hypothetical example (such as an
rules. Figures for mortgage insurance transfer of the collateral fl, because example of the effect on payments
disclosed in conformance with RESPA creditors may assume that consumers resulting from changes in the index), a
shall be deemed to be accurate for abide by the terms of the legal second hypothetical example need not
purposes of Regulation Z.] obligation. See comment 17(c)(1)–1.fi be given.
18(d) Finance charge. [Section 226.18(f)(1) applies to variable- Paragraph 18(f)(1)[(i)].

1. Disclosure required. The creditor rate transactions that are not secured by 1. Circumstances. The circumstances
must disclose the finance charge as a the consumer’s principal dwelling and under which the rate may increase
dollar amount, using the term ‘‘finance to those that are secured by the include identification of any index to
charge,’’ and must include a brief principal dwelling but have a term of which the rate is tied, as well as any
description similar to that in one year or less. Section 226.18(f)(2) conditions or events on which the
§ 226.18(d). The creditor may, but need applies to variable-rate transactions that increase is contingent.
not, further modify the descriptor for are secured by the consumer’s principal i. When no specific index is used, any
variable rate transactions with a phrase dwelling and have a term greater than identifiable factors used to determine
whether to increase the rate must be iii. Multiple-advance construction 4. Timing of payments. i. General
disclosed. loans disclosed pursuant to appendix D, rule. Section 226.18(g) requires creditors
ii. When the increase in the rate is Part I. to disclose the timing of payments. To
purely discretionary, the fact that any [Paragraph 18(f)(2). meet this requirement, creditors may list
increase is within the creditor’s 1. Disclosure required. In variable-rate all of the payment due dates. They also
discretion must be disclosed. transactions that have a term greater have the option of specifying the
iii. When the index is internally than one year and are secured by the ‘‘period of payments’’ scheduled to
defined (for example, by that creditor’s consumer’s principal dwelling, the repay the obligation. As a general rule,
prime rate), the creditor may comply creditor must give special early creditors that choose this option must
with this requirement by either a brief disclosures under section 226.19(b) in disclose the payment intervals or
description of that index or a statement addition to the later disclosures frequency, such as ‘‘monthly’’ or ‘‘bi-
that any increase is in the discretion of required under section 226.18(f)(2). The weekly,’’ and the calendar date that the
the creditor. An externally defined disclosures under section 226.18(f)(2) beginning payment is due. For example,
index, however, must be identified. must state that the transaction has a a creditor may disclose that payments
Paragraph 18(f)[(1)(ii)]fl(2)fi. variable-rate feature and that variable- are due ‘‘monthly beginning on July 1,
1. Limitations. This includes any rate disclosures have been provided 1998.’’ This information, when
maximum imposed on the amount of an earlier. (See the commentary to section combined with the number of payments,
increase in the rate at any time, as well 226.17(a)(1) regarding the disclosure of is necessary to define the repayment
as any maximum on the total increase certain directly related information in period and enable a consumer to
over the life of the transaction. When addition to the variable-rate disclosures determine all of the payment due dates.
there are no limitations, the creditor required under section 226.18(f)(2).)] ii. Exception. In a limited number of
may, but need not, disclose that fact. 18(g) Payment schedule. circumstances, the beginning-payment
Limitations do not include legal limits 1. Amounts included in repayment date is unknown and difficult to
in the nature of usury or rate ceilings schedule. The repayment schedule determine at the time disclosures are
under State or Federal statutes or should reflect all components of the made. For example, a consumer may
regulations. (See § 226.30 for the rule finance charge, not merely the portion become obligated on a credit contract
requiring that a maximum interest rate attributable to interest. A prepaid that contemplates the delayed
be included in certain variable-rate finance charge, however, should not be disbursement of funds based on a
transactions.) shown in the repayment schedule as a contingent event, such as the
Paragraph 18(f)[(1)(iii)]fl(3)fi. separate payment. The payments may completion of home repairs. Disclosures
1. Effects. Disclosure of the effect of include amounts beyond the amount may also accompany loan checks that
an increase refers to an increase in the financed and finance charge. For are sent by mail, in which case the
number or amount of payments or an example, the disclosed payments may, initial disbursement and repayment
increase in the final payment. In at the creditor’s option, reflect certain dates are solely within the consumer’s
addition, the creditor may make a brief insurance premiums where the control. In such cases, if the beginning-
reference to negative amortization that premiums are not part of either the payment date is unknown the creditor
may result from a rate increase. (See the amount financed or the finance charge, may use an estimated date and label the
commentary to § 226.17(a)(1) regarding as well as real estate escrow amounts disclosure as an estimate pursuant to
directly related information.) If the such as taxes added to the payment in § 226.17(c). Alternatively, the disclosure
effect cannot be determined, the creditor mortgage transactions. may refer to the occurrence of a
must provide a statement of the possible 2. Deferred downpayments. As particular event, for example, by
effects. For example, if the exercise of discussed in the commentary to disclosing that the beginning payment is
the variable-rate feature may result in § 226.2(a)(18), deferred downpayments due ‘‘30 days after the first loan
either more or larger payments, both or pick-up payments that meet the disbursement.’’ This information also
possibilities must be noted. conditions set forth in the definition of may be included with an estimated date
Paragraph 18(f)[(1)(iv)]fl(4)fi. downpayment may be treated as part of to explain the basis for the creditor’s
1. Hypothetical example. The the downpayment. Even if treated as a estimate. See comment 17(a)(1)–5(iii).
example may, at the creditor’s option downpayment, that amount may 5. Mortgage insurance. The payment
appear apart from the other disclosures. nevertheless be disclosed as part of the schedule should reflect the consumer’s
The creditor may provide either a payment schedule, at the creditor’s mortgage insurance payments until the
standard example that illustrates the option. date on which the creditor must
terms and conditions of that type of 3. Total number of payments. automatically terminate coverage under
credit offered by that creditor or an flExcept for transactions secured by applicable law, even though the
example that directly reflects the terms real property or a dwelling, ifi[I]n consumer may have a right to request
and conditions of the particular disclosing the number of payments for that the insurance be cancelled earlier.
transaction. In transactions with more transactions with more than one The payment schedule must reflect the
than one variable-rate feature, only one payment level, creditors may but need legal obligation, as determined by
hypothetical example need be provided. not disclose as a single figure the total applicable State or other law. For
(See the commentary to § 226.17(a)(1) number of payments for all levels. For example, assume that under applicable
regarding disclosure of more than one example, in a transaction calling for 108 law, mortgage insurance must terminate
hypothetical example as directly related payments of $350, 240 payments of after the 130th scheduled monthly
information.) $335, and 12 payments of $330, the payment, and the creditor collects at
2. Hypothetical example not required. creditors need not state that there will closing and places in escrow two
The creditor need not provide a be a total of 360 payments. flFor months of premiums. If, under the legal
hypothetical example in the following transactions secured by real property or obligation, the creditor will include
transactions with a variable-rate feature: a dwelling, creditors must disclose as a mortgage insurance premiums in 130
i. Demand obligations with no single figure the total number of payments and refund the escrowed
alternate maturity date. payments for all levels. See payments when the insurance is
ii. Interim student credit extensions. § 226.38(e)(5)(i).fi terminated, the payment schedule
should reflect 130 premium payments. 226.18(i), or section 226.38(d)(2)(iv) for the lien, leaving a $500 deficit, and
If, under the legal obligation, the transactions secured by real property or reflect a downpayment of $0. The total
creditor will apply the amount a dwelling,fi do[es] not apply to sale price would include the $20,000
escrowed to the two final insurance transactions that convert to a demand cash price, an additional $500 financed
payments, the payment schedule should status as a result of the consumer’s under § 226.18(b)(2), and the amount of
reflect 128 monthly premium payments. default. A due-on-sale clause is not the finance charge. Alternatively, the
(For assumptions in calculating a considered a demand feature. A creditor creditor may reflect a downpayment of
payment schedule that includes may, but need not, treat its contractual $1,500 and finance the $2,000 deficit. In
mortgage insurance that must be right to demand payment of a loan made that case, the total sale price would
automatically terminated, see comments to its executive officers as a demand include the sum of the $20,000 cash
[17(c)(1)–8 and 17(c)(1)– feature to the extent that the contractual price, the $2,000 lien payoff amount as
10]fl17(c)(1)(iii)–1 and 17(c)(1)(iii)– right is required by Regulation O (12 an additional amount financed, and the
3fi.) CFR 215.5) or other federal law. amount of the finance charge.
[Paragraph ]18(h) Total of payments. 3. Relationship to payment schedule ii. If the consumer pays $3,000 in
1. Disclosure required. The total of disclosures. As provided in section cash, the creditor may apply the cash
payments must be disclosed using that 226.18(g)(1), flor section 226.38(c) for first to extinguish the lien and reflect
term, along with a descriptive phrase transactions secured by real property or the remainder as a downpayment of
similar to the one in the regulation. The a dwelling,fi in demand obligations $1,000. The total sale price would
descriptive explanation may be revised with no alternate maturity date, the reflect the $20,000 cash price and the
to reflect a variable rate feature with a creditor need only disclose the due amount of the finance charge. (The cash
brief phrase such as ‘‘based on the dates or payment periods of any payment extinguishes the trade-in
current annual percentage rate which scheduled interest payments for the first deficit and no charges are added under
may change.’’ year. If the demand obligation states an § 226.18(b)(2).) Alternatively, the
2. Calculation of total of payments. alternate maturity, however, the creditor may elect to reflect a
The total of payments is the sum of the disclosed payment schedule must downpayment of $3,000 and finance the
payments disclosed under § 226.18(g). reflect that stated term; the special rule $2,000 deficit. In that case, the total sale
For example, if the creditor disclosed a in section 226.18(g)(1)fl, or section price would include the sum of the
deferred portion of the downpayment as 226.38(c) for transactions secured by $20,000 cash price, the $2,000 lien
part of the payment schedule, that real property or a dwelling,fi is not payoff amount as an additional amount
payment must be reflected in the total available. financed, and the amount of the finance
disclosed under this paragraph. [Paragraph ]18(j) Total sale price.
charge.
3. Exception. [Footnote 44]flSection 1. Disclosure required. In a credit sale
transaction, the total sale price must be [Paragraph ]18(k) Prepayment.
226.18(h)fi permits creditors to omit
disclosure of the total of payments in disclosed using that term, along with a 1. Disclosure required. The creditor
single-payment transactions. This descriptive explanation similar to the must give a definitive statement of
exception does not apply to a one in the regulation. For variable rate whether or not a penalty will be
transaction calling for a single payment transactions, the descriptive phrase imposed or a rebate will be given.
of principal combined with periodic may, at the creditor’s option, be [•]fliii.fi The fact that no penalty
payments of interest. modified to reflect the variable rate will be imposed may not simply be
4. Demand obligations. In demand feature. For example, the descriptor may inferred from the absence of a penalty
obligations with no alternate maturity read: ‘‘The total cost of your purchase disclosure; the creditor must indicate
date, the creditor may omit disclosure of on credit, which is subject to change, that prepayment will not result in a
payment amounts under § 226.18(g)(1). including your downpayment of penalty.
In those transactions, the creditor need * * *.’’ The reference to a [•]flii.fi If a penalty or refund is
not disclose the total of payments. downpayment may be eliminated in possible for one type of prepayment,
[Paragraph] 18(i) Demand feature. transactions calling for no even though not for all, a positive
1. Disclosure requirements. The downpayment. disclosure is required. This applies to
disclosure requirements of this 2. Calculation of total sale price. The any type of prepayment, whether
provision apply not only to transactions figure to be disclosed is the sum of the voluntary or involuntary as in the case
payable on demand from the outset, but cash price, other charges added under of prepayments resulting from
also to transactions that are not payable § 226.18(b)(2), and the finance charge acceleration.
on demand at the time of consummation disclosed under § 226.18(d). [•]fliii.fi Any difference in rebate or
but convert to a demand status after a 3. Effect of existing liens. When a penalty policy, depending on whether
stated period. In demand obligations in credit sale transaction involves property prepayment is voluntary or not, must
which the disclosures are based on an that is being used as a trade-in (an not be disclosed with the segregated
assumed maturity of 1 year under automobile, for example) and that has a disclosures.
§ 226.17(c)(5), that fact must also be lien exceeding the value of the trade-in, 2. Rebate-penalty disclosure. A single
stated. Appendix H contains model the total sale price is affected by the transaction may involve both a
clauses that may be used in making this amount of any cash provided. (See precomputed finance charge and a
disclosure. comment 2(a)(18)–3.) To illustrate, finance charge computed by application
2. Covered demand features. The type assume a consumer finances the of a rate to the unpaid balance (for
of demand feature triggering the purchase of an automobile with a cash example, mortgages with mortgage-
disclosures required by section price of $20,000. Another vehicle used guarantee insurance). In these cases,
226.18(i)fl, or section 226.38(d)(2)(iv) as a trade-in has a value of $8,000 but disclosures about both prepayment
for transactions secured by real property has an existing lien of $10,000, leaving rebates and penalties are required.
or a dwelling, fiincludes only those a $2,000 deficit that the consumer must Sample form H–15 in appendix H
demand features contemplated by the finance. illustrates a mortgage transaction in
parties as part of the legal obligation. i. If the consumer pays $1,500 in cash, which both rebate and penalty
For example, [this provision]flsection the creditor may apply the cash first to disclosures are necessary.
3. Prepaid finance charge. The declining balance, when the principal is property subject to the security interest
existence of a prepaid finance charge in reduced on a monthly basis. must be identified by item or type. This
a transaction does not, by itself, require fl2.fi Methodology of computing. No disclosure is satisfied by a general
a disclosure under § 226.18(k). A description of the method of computing disclosure of the category of property
prepaid finance charge is not considered earned or unearned finance charges is subject to the security interest, such as
a penalty under § 226.18(k)(1), nor does required or permitted as part of the ‘‘motor vehicles,’’ ‘‘securities,’’ ‘‘certain
it require a disclosure under segregated disclosures under this household items,’’ or ‘‘household
§ 226.18(k)(2). At its option, however, a section. goods.’’ (Creditors should be aware,
creditor may consider a prepaid finance [Paragraph ]18(l) Late payment. however, that the Federal credit
charge to be under § 226.18(k)(2). If a 1. Definition. This paragraph requires practices rules, as well as some State
disclosure is made under § 226.18(k)(2) a disclosure only if charges are added to laws, prohibit certain security interests
with respect to a prepaid finance charge individual delinquent installments by a in household goods.) At the creditor’s
or other finance charge, the creditor may creditor who otherwise considers the option, however, a more precise
further identify that finance charge. For transaction ongoing on its original identification of the property or goods
example, the disclosure may state that terms. Late payment charges do not may be provided.
the borrower ‘‘will not be entitled to a include: 3. Mixed collateral. In some
refund of the prepaid finance charge’’ or [•]fli.fi The right of acceleration. transactions in which the credit is used
some other term that describes the [•]flii.fi Fees imposed for actual to purchase the collateral, the creditor
finance charge. collection costs, such as repossession may also take other property of the
Paragraph 18(k)(1). charges or attorney’s fees. consumer as security. In those cases, a
[•]fliii.fi Deferral and extension
1. Penalty. [This]flSection combined disclosure must be provided,
charges.
226.18(k)(1)fi applies only to those [•]fliv.fi The continued accrual of consisting of an identification of the
transactions in which the interest simple interest at the contract rate after purchase money collateral consistent
calculation takes account of all the payment due date. However, an with comment 18(m)–1 and a specific
scheduled reductions in principal, as increase in the interest rate is a late identification of the other collateral
well as transactions in which interest payment charge to the extent of the consistent with comment 18(m)–2.
calculations are made daily. The term increase. 4. After-acquired property. An after-
penalty as used here encompasses only 2. Content of disclosure. Many State acquired property clause is not a
those charges that are assessed strictly laws authorize the calculation of late security interest to be disclosed under
because of the prepayment in full of a charges on the basis of either a § 226.18(m).
simple-interest obligation, as an percentage or a specified dollar amount, 5. Spreader clause. The fact that
addition to all other amounts. Items and permit imposition of the lesser or collateral for pre-existing credit with the
which are penalties include, for greater of the 2 charges. The disclosure institution is being used to secure the
example: made under § 226.18(l) may reflect this present obligation constitutes a security
[• Interest charges for any period after alternative. For example, stating that the interest and must be disclosed. (Such
prepayment in full is made.]fli. Charges charge in the event of a late payment is security interests may be known as
determined by treating the loan balance 5% of the late amount, not to exceed ‘‘spreader’’ or ‘‘dragnet’’ clauses, or as
as outstanding for a period after $5.00, is sufficient. Many creditors also ‘‘cross-collateralization’’ clauses.) A
prepayment in full and applying the permit a grace period during which no specific identification of that collateral
interest rate to such ‘‘balance.’’fi (See late charge will be assessed; this fact is unnecessary but a reminder of the
the commentary to § 226.17(a)(1) may be disclosed as directly related interest arising from the prior
regarding disclosure of information. (See the commentary to indebtedness is required. The disclosure
[interest]flsuchfi charges assessed for § 226.17(a).) may be made by using language such as
periods after prepayment in full as [Paragraph ]18(m) Security interest. ‘‘collateral securing other loans with us
directly related informationfl, for 1. Purchase money transactions. may also secure this loan.’’ At the
transactions not secured by real When the collateral is the item creditor’s option, a more specific
property or a dwellingfi.) purchased as part of, or with the description of the property involved
[•]flii.fi A minimum finance charge proceeds of, the credit transaction, may be given.
in a simple-interest transaction. (See the section 226.18(m) requires only a 6. Terms used in disclosure. No
commentary to § 226.17(a)(1) regarding general identification such as ‘‘the specified terminology is required in
the disclosure of a minimum finance property purchased in this transaction.’’ disclosing a security interest. Although
charge as directly related information.) However, the creditor may identify the the disclosure may, at the creditor’s
Items which are not penalties include, property by item or type instead of option, use the term security interest,
for example[:]fl,fi identifying it more generally with a the creditor may designate its interest by
[• L]fllfioan guarantee feesfl.fi phrase such as ‘‘the property purchased using, for example, pledge, lien, or
[• Interim interest on a student loan.] in this transaction.’’ For example, a mortgage.
Paragraph 18(k)(2). creditor may identify collateral as ‘‘a 7. Collateral from third party. In
1. Rebate of finance charge. This motor vehicle,’’ or as ‘‘the property certain transactions, the consumer’s
applies to any finance charges that do purchased in this transaction.’’ Any obligation may be secured by collateral
not take account of each reduction in transaction in which the credit is being belonging to a third party. For example,
the principal balance of an obligation. used to purchase the collateral is a loan to a student may be secured by
This category includes, for example: considered a purchase money an interest in the property of the
[•]fli.fi Precomputed finance transaction and the abbreviated student’s parents. In such cases, the
charges such as add-on charges. identification may be used, whether the security interest is taken in connection
[•]flii.fi Charges that take account of obligation is treated as a loan or a credit with the transaction and must be
some but not all reductions in principal, sale. disclosed, even though the property
such as mortgage guarantee insurance 2. Nonpurchase money transactions. encumbered is owned by someone other
assessed on the basis of an annual In nonpurchase money transactions, the than the consumer.
18(n) Insurancefl,fi [and] debt impairment of the lender’s security, and § 226.18(r). This exception applies
cancellation fl, and debt suspensionfi. execution of an assumption agreement whether the deposit is held by the
1. Location. This disclosure may, at by the subsequent borrower. In cases creditor or by a third party.
the creditor’s option, appear apart from where uncertainty exists as to the future 5. [Morris Plan
the other disclosures. It may appear assumability of a mortgage, the transactions]flDeposits applied solely
with any other information, including disclosure under § 226.18(q) should to pay obligationfi. A deposit [under a
the amount financed itemization, any reflect that fact. In making disclosures Morris Plan, in which]fltofi a deposit
information prescribed by State law, or in such cases, the creditor may use account [is] created for the sole purpose
other supplementary material. When phrases such as ‘‘subject to conditions,’’ of accumulating payments and [this is]
this information is disclosed with the ‘‘under certain circumstances,’’ or applied to satisfy entirely the
other segregated disclosures, however, ‘‘depending on future conditions.’’ The consumer’s obligation in the
no additional explanatory material may creditor may provide a brief reference to transaction[,] is not a required deposit.
be included. more specific criteria such as a due-on- [6.] Examples of amounts excluded.
2. Debt cancellation fland debt sale clause, although a complete The following are among the types of
suspensionfi. Creditors may use the explanation of all conditions is not deposits that need not be treated as
model credit-insurance disclosures only appropriate. For example, the disclosure required deposits:
if the debt-cancellation flor debt may state, ‘‘Someone buying your home [•]fli.fi Requirement that a borrower
suspensionfi coverage constitutes may be allowed to assume the mortgage be a customer or a member even if that
insurance under State law. Otherwise, on its original terms, subject to certain involves a fee or a minimum balance.
they may provide a parallel disclosure conditions, such as payment of an [•]flii.fi Required property
that refers to debt-cancellation flor debt assumption fee.’’ See comment 17(a)(1)– insurance escrow on a mobile home
suspensionfi coverage. 5 for an example of a reference to a due- transaction.
[Paragraph ]18(o) Certain security on-sale clause. [•]fliii.fi Refund of interest when
interest charges. 2. Original terms. The phrase original the obligation is paid in full.
1. Format. No special format is terms for purposes of § 226.18(q) does [•]fliv.fi Deposits that are
required for these disclosures; under not preclude the imposition of an immediately available to the consumer.
§ 226.4(e), taxes and fees paid to assumption fee, but a modification of [•]flv.fi Funds deposited with the
government officials with respect to a the basic credit agreement, such as a creditor to be disbursed (for example,
security interest may be aggregated, or change in the contract interest rate, for construction) before the loan
may be broken down by individual represents different terms.] proceeds are advanced.
charge. For example, the disclosure [Paragraph ]18(r) Required deposit. [•]flvi.fi Escrow of condominium
could be labeled ‘‘filing fees and taxes’’ 1. Disclosure required. The creditor fees.
and all funds disbursed for such must inform the consumer of the [•]flvii.fi Escrow of loan proceeds to
purposes may be aggregated in a single existence of a required deposit. be released when the repairs are
disclosure. This disclosure may appear, (Appendix H provides a model clause completed.
at the creditor’s option, apart from the that may be used in making that
§ 226.19—Certain Mortgage and
other required disclosures. The disclosure.) [Footnote 45 describes
Variable-Rate Transactions.
inclusion of this information on a three]fl§ 226.18(r)(1) and (2) describe
statement required under the Real Estate twofi types of deposits that need not be fl19 Coverage.
Settlement Procedures Act is sufficient considered required deposits. Use of the 1. General. Section 226.19 applies to
disclosure for purposes of Truth in phrase ‘‘need not’’ permits creditors to transactions secured by real property or
Lending. include the disclosure even in cases a dwelling, other than home equity lines
[Paragraph ]18(p) Contract reference. where there is doubt as to whether the of credit subject to § 226.5b. Creditors
1. Content. Creditors may substitute, deposit constitutes a required deposit. must make the disclosures required by
for the phrase ‘‘appropriate contract [2. Pledged-account mortgages. In § 226.19 even if the transaction is not
document,’’ a reference to specific these transactions, a consumer pledges subject to the Real Estate Settlement
transaction documents in which the as collateral funds that the consumer Procedures Act (RESPA), 12 U.S.C. 2602
additional information is found, such as deposits in an account held by the et seq., and its implementing Regulation
‘‘promissory note’’ or ‘‘retail installment creditor. The creditor withdraws sums X, 24 CFR 3500.1 et seq., administered
sale contract.’’ A creditor may, at its from that account to supplement the by the Department of Housing and
option, delete inapplicable items in the consumer’s periodic payments. Urban Development (HUD). For
contract reference, as for example when Creditors may treat these pledged example, disclosures are required for
the contract documents contain no accounts as required deposits or they construction loans that are not covered
information regarding the right of may treat them as consumer buydowns by RESPA or Regulation X because they
acceleration. in accordance with the commentary to are not considered ‘‘federally related
[18(q) Assumption policy section 226.17(c)(1).] mortgage loans.’’ See 12 U.S.C. 2602(1);
1. Policy statement. In many 3. Escrow accounts. The escrow 15 CFR 3500.2(b). However, § 226.19
mortgages, the creditor cannot exception in [footnote only applies to transactions that are
determine, at the time disclosure must 45]fl§ 226.18(r)(1)fi applies, for offered or extended to a consumer
be made, whether a loan may be example, to accounts for such items as primarily for personal, family, or
assumable at a future date on its original maintenance fees, repairs, or household purposes, even if the
terms. For example, the assumption improvements, whether in a realty or a transactions are secured by real property
clause commonly used in mortgages nonrealty transaction. (See the or a dwelling. TILA and Regulation Z do
sold to the Federal National Mortgage commentary to section 226.17(c)(1) not apply to transactions that are
Association and the Federal Home Loan regarding the use of escrow accounts in primarily for business, commercial, or
Mortgage Corporation conditions an consumer buydown transactions.) agricultural purposes. See 15 U.S.C.
assumption on a variety of factors such 4. Interest-bearing accounts. When a 1603(1); § 226.3(a)(2). See also
as the creditworthiness of the deposit earns at least 5 percent interest § 226.2(a)(12) and (b)(2). Section
subsequent borrower, the potential for per year, no disclosure is required under 226.19(a)(4) contains special disclosure
timing requirements for mortgage the contingencies that may affect the [§ 226.18(c)]fl§ 226.38(j)fi will contain
transactions secured by a consumer’s actual terms, in accordance with the items, such as origination fees or points,
interest in a timeshare plan described in commentary to § 226.17(a)(1)[.]fland that also must be disclosed as part of the
11 U.S.C. 101(53(D)).fi § 226.37. The disclosures required by good faith estimates of settlement costs
19(a)(1)(i) Time of disclosure. § 226.19(a)(2) may not contain required under RESPA. Creditors
[1. Coverage. This section requires estimates, however, with limited furnishing the RESPA good faith
early disclosure of credit terms in exceptions. See the commentary on estimates need not give consumers any
mortgage transactions that are secured § 226.19(a)(2) for a discussion of itemization of the amount financedfl,
by a consumer’s dwelling (other than limitations on estimates in disclosures whether or not a transaction is subject
home equity lines of credit subject to made under that subsection.fi to RESPAfi.
§ 226.5b or mortgage transactions [3.]fl2.fi Written application. 19(a)(1)(ii) Imposition of fees.
secured by an interest in a timeshare Creditors may rely on RESPA and 1. Timing of fees. The consumer must
plan) that are also subject to the Real Regulation X (including any receive the disclosures required by this
Estate Settlement Procedures Act interpretations issued by HUD) in section before paying or incurring any
(RESPA) and its implementing deciding whether a ‘‘written fee imposed by a creditor or other
Regulation X, administered by the application’’ has been received. In person in connection with the
Department of Housing and Urban general, Regulation X defines an consumer’s application for a mortgage
Development (HUD). To be covered by ‘‘application’’ to mean the submission of transaction that is subject to
§ 226.19, a transaction must be a a borrower’s financial information in § 226.19(a)(1)(i), except as provided in
Federally related mortgage loan under anticipation of a credit decision relating § 226.19(a)(1)(iii). If the creditor delivers
RESPA. ‘‘Federally related mortgage to a [F]flffiederally related mortgage the disclosures to the consumer in
loan’’ is defined under RESPA (12 loan. See 24 CFR 3500.2(b). flCreditors person, a fee may be imposed anytime
U.S.C. 2602) and Regulation X (24 CFR may rely on RESPA and Regulation X after delivery. If the creditor places the
3500.2), and is subject to any even for a transaction not subject to disclosures in the mail, the creditor may
interpretations by HUD.] RESPA.fi An application is received impose a fee after the consumer receives
[2.]fl1.fi Timing and use of when it reaches the creditor in any of the disclosures or, in all cases, after
estimates. The disclosures required by the ways applications are normally midnight [on the third business day]
§ 226.19(a)(1)(i) must be delivered or transmitted—by mail, hand delivery, or following fl the third business day
mailed not later than three business through an intermediary agent or broker. afterfi mailing of the disclosures.
days after the creditor receives the (See [comment 19(b)–3]flthe flCreditors that use electronic mail or
consumer’s written application. The commentary on § 19(d)(3)fi for a courier to provide disclosures may
general definition of ‘‘business day’’ in guidance in determining whether or not also follow this approach. Whatever
§ 226.2(a)(6)—a day on which the the transaction involves an intermediary method is used to provide disclosures,
creditor’s offices are open to the public agent or broker.) If an application creditors may rely on documentation of
for substantially all of its business reaches the creditor through an receipt in determining when a fee may
functions—is used for purposes of intermediary agent or broker, the be imposed.fi For purposes of
§ 226.19(a)(1)(i). See comment 2(a)(6)–1. application is received when it reaches § 226.19(a)(1)(ii), the term ‘‘business
This general definition is consistent the creditor, rather than when it reaches day’’ means all calendar days except
with the definition of ‘‘business day’’ in the agent or broker. Sundays and legal public holidays
HUD’s Regulation X—a day on which [4.]fl3.fi Denied or withdrawn referred to in § 226.2(a)(6). See
the creditor’s offices are open to the application. The creditor may determine [C]flcfiomment 2(a)(6)–2. For
public for carrying on substantially all within the three-business-day period example, assuming that there are no
of its business functions. See 24 CFR that the application will not or cannot intervening legal public holidays, a
3500.2. Accordingly, the three-business- be approved on the terms requested, as, creditor that receives the consumer’s
day period in § 226.19(a)(1)(i) for for example, when a consumer applies written application on Monday and
making early disclosures coincides with for a type or amount of credit that the mails the early mortgage loan disclosure
the time period within which creditors creditor does not offer, or the on Tuesday may impose a fee on the
[subject to RESPA] must provide good consumer’s application cannot be consumer [after midnight on
faith estimates of settlement costs flfor approved for some other reason. In that Friday]flon Saturdayfi.
transactions subject to RESPAfi. If the case, or if the consumer withdraws the 19(a)(2) Waiting period(s) required
creditor does not know the precise application within the three-business- 1. Business day definition. For
credit terms, the creditor must base the day waiting period, the creditor need purposes of § 226.19(a)(2), ‘‘business
disclosures flrequired by not make the disclosures under this day’’ means all calendar days except
§ 226.19(a)(1)(i)fi on the best section. If the creditor fails to provide Sundays and the legal public holidays
information reasonably available and early disclosures and the transaction is referred to in § 226.2(a)(6). See comment
indicate that the disclosures are later consummated on the original 2(a)(6)–2.
estimates under § 226.17(c)(2). If many terms, the creditor will be in violation 2. Consummation after [both]flall fi
of the disclosures are estimates, the of this provision. If, however, the waiting periods expire. Consummation
creditor may include a statement to that consumer amends the application may not occur until both the seven-
effect (such as ‘‘all numerical because of the creditor’s unwillingness business-day waiting period and the
disclosures [except the late-payment to approve it on its original terms, no three-business-day waiting
disclosure] are estimates’’) instead of violation occurs for not providing periodfl(s)fi have expired. For
separately labelling each estimate. In the disclosures based on the original terms. example, assume a creditor delivers the
alternative, the creditor may label as an But the amended application is a new early disclosures to the consumer in
estimate only the items primarily application subject to § 226.19(a)(1)(i). person or places them in the mail on
affected by unknown information. (See [5.]fl4.fi Itemization of amount Monday, June 1, and the creditor then
the commentary to § 226.17(c)(2).) The financed. In many mortgage transactions delivers [corrected]flnewfi disclosures
creditor may provide explanatory flsubject to RESPAfi, the itemization in person to the consumer on
material concerning the estimates and of the amount financed required by Wednesday, June 3. Although Saturday,
June 6 is the third business day after the and mortgage insurance premiums affect i. On Thursday, June 11, the annual
consumer received the those disclosures. percentage rate will be 7.10%. The
[corrected]flnewfi disclosures, 4. Timing. The creditor must provide creditor is not required to make
consummation may not occur before final disclosures so that the consumer corrected disclosures under
Tuesday, June 9, the seventh business receives them not later than the third § 226.19(a)(2).
day following delivery or mailing of the business day before consummation. For ii. On Thursday, June 11, the annual
early disclosures. example, for consummation to occur on percentage rate will be 7.15%. The
19(a)(2)(i) Seven-business-day waiting Thursday, June 11, the consumer must creditor must make corrected
period. receive the disclosures on or before disclosures so that the consumer
1. Timing. The disclosures required Monday, June 8.fi receives them on or before Monday,
by § 226.19(a)(1)(i) must be delivered or June 8.
ALTERNATIVE 1—PARAGRAPH
placed in the mail no later than the 2. Content of new disclosures. If
19(a)(2)(iii)
seventh business day before redisclosure is required, the creditor
consummation. The seven-business-day fl19(a)(2)(iii) Corrected disclosures. may provide a complete set of new
waiting period begins when the creditor 1. Conditions for corrected disclosures, or may redisclose only the
delivers the early disclosures or places disclosures. A disclosed annual changed terms. If the creditor chooses to
them in the mail, not when the percentage rate is accurate for purposes provide a complete set of new
consumer receives or is deemed to have of § 226.19(a)(2)(iii) if the disclosure is disclosures, the creditor may but need
received the early disclosures. For accurate under § 226.19(a)(2)(iv). If a not highlight the new terms, provided
example, if a creditor delivers the early change occurs that does not render the that the disclosures comply with the
disclosures to the consumer in person or annual percentage rate inaccurate, the format requirements of § 226.17(a). If the
places them in the mail on Monday, creditor must disclose the changed new creditor chooses to disclose only
June 1, consummation may occur on or terms before consummation, consistent the new terms, all the new terms must
after Tuesday, June 9, the seventh with § 226.17(f). be disclosed. For example, a different
business day following delivery or 2. Content of corrected disclosures. annual percentage rate will almost
mailing of the early disclosures. Disclosures made under always produce a different finance
fl19(a)(2)(ii) Three-business-day § 226.19(a)(2)(iii) must contain each of charge, and often a new schedule of
waiting period. the applicable disclosures required by payments; all of these changes would
1. New disclosures in all cases. The § 226.38. have to be disclosed. If, in addition,
creditor must provide new disclosures 3. Estimates. In disclosures provided unrelated terms such as the amount
under § 226.38 so that the consumer under § 226.19(a)(2)(iii), only the financed or prepayment penalty vary
receives them not later than the third disclosures required by from those originally disclosed, the
business day before consummation, §§ 226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C), accurate terms must be disclosed.
even if the new disclosures are identical 226.38(c)(6)(i) and 226.38(e)(5)(i) may However, no new disclosures are
to the early disclosures provided under be estimates. See comment 19(a)(2)(ii)-3 required if the only inaccuracies involve
§ 226.19(a)(1)(i). for a discussion of which of the estimates other than the annual
2. Content of disclosures. Disclosures disclosures required under § 226.38 percentage rate, and no variable-rate
made under § 226.19(a)(2)(ii) must creditors may estimate. feature has been added. See § 226.17(f).
contain each of the applicable 4. Timing. The creditor must provide For a discussion of the requirement to
disclosures required by § 226.38. the corrected disclosures so that the redisclose when a variable-rate feature
3. Estimates. Section 226.19(a)(2)(ii) consumer receives them not later than is added, see comment 17(f)-2. For a
provides that only the disclosures the third business day before discussion of redisclosure requirements
required by §§ 226.38(c)(3)(i)(C), consummation. For example, for in general, see the commentary on
226.38(c)(3)(ii)(C), 226.38(c)(6)(i), and consummation to occur on Saturday, § 226.17(f).
226.38(e)(5)(i) may be estimated June 13, the consumer must receive the 3. Timing. When redisclosures are
disclosures. Because estimated amounts disclosures on or before Wednesday, necessary because the annual
of escrowed taxes and insurance June 10.fi percentage rate has become inaccurate,
premiums and mortgage insurance [19(a)(2)(ii) Three-business-day they must be received by the consumer
premiums disclosed (as applicable) waiting period. no later than the third business day
under §§ 226.38(c)(3)(i)(C), 1. Conditions for redisclosure. If, at before consummation. (For
226.38(c)(3)(ii)(C), and 226.38(c)(6)(i) the time of consummation, the annual redisclosures triggered by other events,
are components of the total periodic percentage rate disclosed is accurate the creditor must provide corrected
payments disclosure required by under § 226.22, the creditor does not disclosures before consummation. See
§§ 226.38(c)(3)(i)(D) and have to make corrected disclosures § 226.17(f).) If the creditor delivers the
226.38(c)(3)(ii)(D) and the total under § 226.19(a)(2). If, on the other corrected disclosures to the consumer in
payments disclosure required by hand, the annual percentage rate person, consummation may occur any
§ 226.38(e)(5)(i), those disclosures are disclosed is not accurate under § 226.22, time on the third business day following
estimated disclosures. (A total payments the creditor must make corrected delivery. If the creditor provides the
disclosure is not required for loans with disclosures of all changed terms corrected disclosures by mail, the
a negative amortization feature subject (including the annual percentage rate) consumer is considered to have received
to § 226.38(c)(6).) Creditors may so that the consumer receives them not them three business days after they are
estimate components of the total later than the third business day before placed in the mail, for purposes of
periodic payments disclosures required consummation. For example, assume determining when the three-business-
by §§ 226.38(c)(3)(i)(C), consummation is scheduled for day waiting period required under
226.38(c)(3)(ii)(C) and 226.38(c)(6)(i) Thursday, June 11 and the early § 226.19(a)(2)(ii) begins. Creditors that
and the total payment disclosure disclosures for a regular mortgage use electronic mail or a courier other
required by § 226.38(e)(5)(i) only to the transaction disclose an annual than the postal service may also follow
extent the estimated escrowed amounts percentage rate of 7.00%. this approach.
4. Basis for annual percentage rate must make corrected disclosures of all corrected disclosures to the consumer in
comparison. To determine whether a changed terms (including the annual person, consummation may occur any
creditor must make corrected percentage rate) so that the consumer time on the third business day following
disclosures under § 226.22, a creditor receives them no later than the third delivery. If the creditor provides the
compares (a) what the annual business day before consummation. For corrected disclosures by mail, the
percentage rate will be at consummation example, assume consummation is consumer is considered to have received
to (b) the annual percentage rate stated scheduled for Thursday, June 11 and the them three business days after they are
in the most recent disclosures the early disclosures for a regular mortgage placed in the mail, for purposes of
creditor made to the consumer. For transaction disclose an annual determining when the three-business-
example, assume consummation for a percentage rate of 7.00%:] day waiting periods required under
regular mortgage transaction is i. On Thursday, June 11, the annual § 226.19(a)(2)(ii) begins. Creditors that
scheduled for Thursday, June 11, the percentage rate will be 7.10%. The use electronic mail or a courier other
early disclosures provided in May stated creditor is not required to make than the postal service may also follow
an annual percentage rate of 7.00%, and corrected disclosures under this approach.]
corrected disclosures received by the § 226.19(a)(2). fl3. Estimates. In disclosures
consumer on Friday, June 5 stated an ii. On Thursday, June 11, the annual provided under § 226.19(a)(2)(iii), only
annual percentage rate of 7.15%: percentage rate will be 7.15%. The the disclosures required by
1. On Thursday, June 11, the annual creditor must make corrected §§ 226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C),
percentage rate will be 7.25%, which disclosures so that the consumer 226.38(c)(6)(i) and 226.38(e)(5)(i) may
exceeds the most recently disclosed receives them on or before Monday, be estimates. See comment 19(a)(2)(ii)–
annual percentage rate by less than the June 8. 3 for a discussion of which of the
applicable tolerance. The creditor is not 2. Content of [new]flcorrectedfi disclosures required under § 226.38
required to make additional corrected disclosures. If redisclosure is required creditors may estimate.fi
disclosures or wait an additional three flunder § 226.19(a)(2)(iii)fi, the 4. Basis for annual percentage rate
business days under § 226.19(a)(2). creditor may provide a complete set of comparison. To determine whether a
ii. On Thursday, June 11, the annual new disclosures, or may redisclose only creditor must make corrected
percentage rate will be 7.30%, which the changed terms. If the creditor disclosures under
exceeds the most recently disclosed chooses to provide a complete set of [§ 226.22]fl§ 226.19(a)(2)(iii)fi, a
annual percentage rate by more than the new disclosures, the creditor may but creditor compares (a) what the annual
applicable tolerance. The creditor must need not highlight the new terms, percentage rate will be at consummation
make corrected disclosures such that the provided that the disclosures comply to (b) the annual percentage rate stated
consumer receives them on or before with the format requirements of in the most recent disclosures the
Monday, June 8.] § 226.17(a) fland § 226.37fi. If the new creditor made to the consumer. For
creditor chooses to disclose only the example, assume consummation for a
ALTERNATIVE 2—PARAGRAPH new terms, all the new terms must be
19(a)(2)(iii) regular mortgage transaction is
disclosed. For example, a different scheduled for Thursday, June 11, the
fl19(a)(2)(iii) Corrected disclosures. annual percentage rate will almost early disclosures provided in May stated
1. Conditions for corrected always produce [a different finance an annual percentage rate of 7.00%, and
disclosures. If the annual percentage charge, and often a new schedule of [corrected]flnewfi disclosures
rate disclosed under § 226.19(a)(2)(ii) payments]fldifferent interest and received by the consumer on Friday,
changes so that it is not accurate under settlement charges, and often a new June 5 stated an annual percentage rate
§ 226.19(a)(2)(iv) or an adjustable-rate payment summaryfi; all of these of 7.15%:
feature is added (see comment 17(f)–2), changes would have to be disclosed. If, i. On Thursday, June 11, the annual
the creditor must make corrected in addition, unrelated terms such as the percentage rate will be 7.25%, which
disclosures of all changed terms amount financed or prepayment penalty exceeds the most recently disclosed
(including the annual percentage rate) vary from those originally disclosed annual percentage rate by less than the
so that the consumer receives them not flor an adjustable-rate feature is added applicable tolerance. The creditor is not
later than the third business day before (see comment 17(f)–2)fi, the accurate required to make additional corrected
consummation. (If a change occurs that terms must be disclosed. [However, no disclosures or wait an additional three
does not render the annual percentage new disclosures are required if the only business days under § 226.19(a)(2).
rate on the early disclosures inaccurate, inaccuracies involve estimates other ii. On Thursday, June 11, the annual
the creditor must disclose the changed than the annual percentage rate, and no percentage rate will be 7.30%, which
terms before consummation, consistent variable-rate feature has been added. For exceeds the most recently disclosed
with § 226.17(f).) For example, assume a discussion of the requirement to annual percentage rate by more than the
consummation is scheduled for redisclose when a variable-rate feature applicable tolerance. The creditor must
Thursday, June 11 and the early is added, see comment 17(f)–2. For a make corrected disclosures such that the
disclosures for a regular mortgage discussion of redisclosure requirements consumer receives them on or before
transaction disclose an annual in general, see the commentary on Monday, June 8.
percentage rate of 7.00%:fi § 226.17(f).] fl19(a)(2)(iv) Annual percentage rate
[19(a)(2)(ii) Three-business-day [3. Timing. When redisclosures are accuracy.
waiting period. 1. Conditions for necessary because the annual 1. Other changed terms. If a change
redisclosure. If, at the time of percentage rate has become inaccurate, occurs that does not render the APR
consummation, the annual percentage they must be received by the consumer inaccurate under § 226.19(a)(iv), the
rate disclosed is accurate under no later than the third business day creditor must disclose the changed
§ 226.22, the creditor does not have to before consummation. (For terms before consummation, consistent
make corrected disclosures under redisclosures triggered by other events, with § 226.17(f).
§ 226.19(a)(2). If, on the other hand, the the creditor must provide corrected 19(a)(2)(v) Timing.
annual percentage rate disclosed is not disclosures before consummation. See 1. General. If the creditor delivers the
accurate under § 226.22, the creditor § 226.17(f).) If the creditor delivers the disclosures required by § 226.19(a)(2)(ii)
or (a)(2)(iii) to the consumer in person, early disclosures inaccurate under U.S.C. 101(53D), [that is also a Federally
consummation may occur any time on § 226.22, the creditor must disclose the related mortgage loan under RESPA] is
the third business day following changed terms before consummation, subject to the requirements of
delivery. If the creditor provides the consistent with § 226.17(f). Disclosure of § 226.19(a)[(5)]fl(4)fi instead of the
disclosures required by § 226.19(a)(2)(ii) the changed terms does not trigger the requirements of § 226.19(a)(1) through
or (a)(2)(iii) of this section by mail, the additional waiting period, and the § 226.19(a)[(4)]fl(3)fi. See comment
consumer is considered to have received transaction may be consummated on 19(a)(1)(i)–1. Early disclosures for
them three business days after they are June 5 without the consumer giving the transactions subject to
placed in the mail, for purposes of creditor an additional modification or § 226.19(a)[(5)]fl(4)fi must be given (a)
determining when the three-business- waiver.] before consummation or (b) within three
day waiting periods required under [3. Examples of waivers made after business days after the creditor receives
§ 226.19(a)(2)(ii) and (iii) begin. the seven-business-day waiting period. the consumer’s written application,
Creditors that use electronic mail or a Assume the early disclosures are whichever is earlier. The general
courier to provide disclosures may also delivered to the consumer in person on definition of ‘‘business day’’ in
follow this approach. Whatever method Monday, June 1 and consummation is § 226.2(a)(6)—a day on which the
is used to provide disclosures, creditors scheduled for Friday, June 19.]fl2. creditor’s offices are open to the public
may rely on documentation of receipt in Examples. Assume consummation is for substantially all of its business
determining when the three-business- scheduled for Friday, June 19, the functions—applies for purposes of
day waiting period begins.fi disclosures required by § 226.19(a)(1)(i) § 226.19(a)(5)(ii). See comment 2(a)(6)–
19(a)(3) Consumer’s waiver of waiting are delivered to the consumer in person 1. These timing requirements are
period before consummation. on Monday, June 1, and the consumer different from the timing requirements
1. Modification or waiver. A consumer receives the disclosures required by under § 226.19(a)(1)(i). Timeshare
may modify or waive the right to a § 226.19(a)(2)(ii) on Monday, June 15.fi transactions covered by § 226.19(a)[(5)]
waiting period required by On Wednesday, June 17, a change in the may be consummated any time after the
§ 226.19(a)(2) only after the creditor annual percentage rate occurs: disclosures required by
makes the disclosures required by i. If the annual percentage rate on the § 226.19(a)[(5)]fl(4)fi(ii) are provided.
[§ 226.18]fl§ 226.38. A separate waiver [early] disclosures flrequired by
2. Use of estimates. If the creditor
is required for each waiting period to be § 226.19(a)(2)(ii)fi is [inaccurate under
does not know the precise credit terms,
waived.fi The consumer must have a § 226.22]flnot accurate under § 226.22
the creditor must base the disclosures
bona fide personal financial emergency nor accurate under § 226.19(a)(2)(iv)fi,
on the best information reasonably
that necessitates consummating the the creditor must provide a corrected
available and indicate that the
credit transaction before the end of the disclosure before consummation, which
disclosures are estimates under
waiting period. Whether these triggers the three-business-day-waiting
§ 226.17(c)(2). If many of the disclosures
conditions are met is determined by the period in § 226.19(a)(2)fl(iii)fi. After
are estimates, the creditor may include
facts surrounding individual situations. the consumer receives the corrected
The imminent sale of the consumer’s a statement to that effect (such as ‘‘all
disclosure, the consumer must execute
home at foreclosure, where the numerical disclosures [except the late-
a waiver of the three-business-day
foreclosure sale will proceed unless the payment disclosure] are estimates’’)
waiting period in order to consummate
loan proceeds are made available to the instead of separately labelling each
the transaction on Friday, June 19.
consumer during the waiting period, is ii. If a change occurs that does not estimate. In the alternative, the creditor
one example of a bona fide personal render the annual percentage rate on the may label as an estimate only the items
financial emergency. Each consumer [early] disclosures flrequired by primarily affected by unknown
who is primarily liable on the legal § 226.19(a)(2)(ii)fi inaccurate under information. (See the commentary to
obligation must sign the written § 226.22, the creditor must disclose the § 226.17(c)(2).) The creditor may
statement for the waiver to be effective. changed terms before consummation, provide explanatory material
[2. Examples of waivers within the consistent with § 226.17(f). Disclosure of concerning the estimates and the
seven-business-day waiting period. the changed terms does not trigger an contingencies that may affect the actual
Assume the early disclosures are additional waiting period, and the terms, in accordance with the
delivered to the consumer in person on transaction may be consummated on commentary to § 226.17(a)(1)[.]fland
Monday, June 1, and at that time the Friday, June 19 without the consumer § 226.37. The disclosures required by
consumer executes a waiver of the giving the creditor an additional § 226.19(a)(2) may not contain
seven-business-day waiting period modification or waiver. estimates, however, with limited
(which would end on Tuesday, June 9) [19(a)(4) Notice. exceptions. See the commentary on
so that the loan can be consummated on 1. Inclusion in other disclosures. The § 226.19(a)(2) for a discussion of
Friday, June 5: notice required by § 226.19(a)(4) must limitations on estimates in disclosures
i. If the annual percentage rate on the be grouped together with the disclosures made under that subsection.fi
early disclosures is inaccurate under required by § 226.19(a)(1)(i) or 3. Written application. For timeshare
§ 226.22, the creditor must provide a § 226.19(a)(2). See comment 17(a)(1)–2 transactions, creditors may rely on
corrected disclosure to the consumer for a discussion of the rules for comment 19(a)(1)(i)–[3]fl2fi in
before consummation, which triggers segregating disclosures. In other cases, determining whether a ‘‘written
the three-business-day waiting period in the notice set forth in § 226.19(a)(4) may application’’ has been received.
§ 226.19(a)(2)(ii). After the consumer be disclosed together with or separately 4. Denied or withdrawn applications.
receives the corrected disclosure, the from the disclosures required under For timeshare transactions, creditors
consumer must execute a waiver of the § 226.18. See comment 17(a)(1)–5(xvi).] may rely on comment 19(a)(1)(i)–
three-business-day waiting period in 19(a)[(5)]fl(4)fi(ii) Time of [4]fl3fi in determining that disclosures
order to consummate the transaction on disclosures for timeshare plans. are not required by
Friday, June 5. 1. Timing. A mortgage transaction § 226.19(a)[(5)]fl(4)fi(ii) because the
ii. If a change occurs that does not secured by a consumer’s interest in a consumer’s application will not or
render the annual percentage rate on the ‘‘timeshare plan,’’ as defined in 11 cannot be approved on the terms
requested or the consumer has the general coverage of those sections.) must include the early disclosures
withdrawn the application. For purposes of this section, the term of required under this section with the
5. Itemization of amount financed. a variable-rate demand loan is application that is sent to the consumer.
For timeshare transactions, creditors determined in accordance with the iii. Mail solicitations. In cases where
may rely on comment 19(a)(1)(i)– commentary to § 226.17(c)(5). In the creditor solicits applications
[5]fl4fi in determining whether determining whether a construction through the mail, the creditor must also
providing the good faith estimates of loan that may be permanently financed send the disclosures required under this
settlement costs required by RESPA by the same creditor is covered under section if an application form is
satisfies the requirement of § 226.18(c) this section, the creditor may treat the included with the solicitation.
to provide an itemization of the amount construction and the permanent phases iv. Conversion.]fl2. Disclosure at the
financed. as separate transactions with distinct time of conversion.fi In cases where an
19(a)[(5)]fl(4)fi(iii) Redisclosure for terms to maturity or a single combined open-end credit account will convert to
timeshare plans. transaction. For purposes of the a closed-end transaction subject to this
1. Consummation or settlement. For disclosures required under § 226.18, the section under a written agreement with
extensions of credit secured by a creditor may nevertheless treat the two the consumer, disclosures under this
consumer’s timeshare plan, when phases either as separate transactions or section [may be given at the time of
corrected disclosures are required, they as a single combined transaction in conversion.]flmust be given at or before
must be given no later than accordance with § 226.17(c)(6). Finally, the time of conversion.fi (See the
‘‘consummation or settlement.’’ in any assumption of a variable-rate commentary to § 226.20(a) for
‘‘Consummation’’ is defined in transaction secured by the consumer’s information on the timing requirements
§ 226.2(a). ‘‘Settlement’’ is defined in principal dwelling with a term greater for § 226.19(b)[(2)] disclosures when [a
Regulation X (24 CFR 3500.2(b)) and is than one year, disclosures need not be variable-rate]flan adjustable-ratefi
subject to any interpretations issued by provided under §§ 226.18(f)(2)(ii) or feature is later added to a transaction.)
HUD. In some cases, a creditor may 226.19(b).] [v. Form of electronic disclosures
delay redisclosure until settlement, fl1. Coverage. Section 226.19(b) provided on or with electronic
which may be at a time later than applies to all closed-end adjustable-rate applications. Creditors must provide the
consummation. If a creditor chooses to mortgages described in § 226.38(a)(i) disclosures required by this section
redisclose at settlement, disclosures that are secured by real property or a (including the brochure) on or with a
may be based on the terms in effect at dwelling. Closed-end adjustable-rate blank application that is made available
settlement, rather than at transactions that are not secured by real to the consumer in electronic form, such
consummation. For example, in a property or a dwelling are subject to the as on a creditor’s Internet Web site.
variable-rate transaction, a creditor may disclosure requirements of § 226.18(f) Creditors have flexibility in satisfying
choose to base disclosures on the terms rather than those of § 226.19(b). In this requirement. Methods creditors
in effect at settlement, despite the determining whether a construction could use to satisfy the requirement
general rule in comment [17(c)(1)– loan that may be permanently financed include, but are not limited to, the
8]fl§ 226.17(c)(1)(iii)fi that variable- by the same creditor is covered under following examples:
rate disclosures flgenerallyfi should this section, the creditor may treat the A. The disclosures could
be based on the terms in effect at construction and the permanent phases automatically appear on the screen
consummation. as separate transactions with distinct when the application appears;
2. Content of new disclosures. terms to maturity or a single combined B. The disclosures could be located
Creditors may rely on comment transaction. See comment 17(c)(6)–2. In on the same web page as the application
19(a)(2)(ii)–2 in determining the content any assumption of an adjustable-rate (whether or not they appear on the
of corrected disclosures required under transaction secured by real property or initial screen), if the application
§ 226.19(a)[(5)]fl(4)fi(iii). a dwelling, disclosures need not be contains a clear and conspicuous
19(b) [Certain variable-rate provided under § 226.19(b).fi reference to the location of the
transactions]flAdjustable-rate [2. Timing. A creditor must give the disclosures and indicates that the
mortgagesfi. disclosures required under this section disclosures contain rate, fee, and other
[1. Coverage. Section 226.19(b) at the time an application form is cost information, as applicable;
applies to all closed-end variable-rate provided or before the consumer pays a C. Creditors could provide a link to
transactions that are secured by the nonrefundable fee, whichever is earlier. the electronic disclosures on or with the
consumer’s principal dwelling and have i. Intermediary agent or broker. In application as long as consumers cannot
a term greater than one year. The cases where a creditor receives a written bypass the disclosures before submitting
requirements of this section apply not application through an intermediary the application. The link would take the
only to transactions financing the initial agent or broker, however, footnote 45b consumer to the disclosures, but the
acquisition of the consumer’s principal provides a substitute timing rule consumer need not be required to scroll
dwelling, but also to any other closed- requiring the creditor to deliver the completely through the disclosures; or
end variable-rate transaction secured by disclosures or place them in the mail D. The disclosures could be located
the principal dwelling. Closed-end not later than three business days after on the same web page as the application
variable-rate transactions that are not the creditor receives the consumer’s without necessarily appearing on the
secured by the principal dwelling, or are written application. (See comment initial screen, immediately preceding
secured by the principal dwelling but 19(b)–3 for guidance in determining the button that the consumer will click
have a term of one year or less, are whether or not the transaction involves to submit the application.
subject to the disclosure requirements of an intermediary agent or broker.) This Whatever method is used, a creditor
§ 226.18(f)(1) rather than those of three-day rule also applies where the need not confirm that the consumer has
§ 226.19(b). (Furthermore, ‘‘shared- creditor takes an application over the read the disclosures.
equity’’ or ‘‘shared-appreciation’’ telephone. 3. Intermediary agent or broker. In
mortgages are subject to the disclosure ii. Telephone request. In cases where certain transactions involving an
requirements of § 226.18(f)(1) rather the consumer requests an application ‘‘intermediary agent or broker,’’ a
than those of § 226.19(b) regardless of form over the telephone, the creditor creditor may delay providing
disclosures. A creditor may not delay § 226.19(b), by virtue of footnote 45a, loans, nor are the following provisions
providing disclosures in transactions and are exempt from the requirements to the extent they relate to the
involving either a legal agent (as of § 226.20(c), by virtue of footnote 45c. determination of the interest rate by the
determined by applicable law) or any Those variable-rate regulations include addition of a margin, changes in the
other third party that is not an the regulations issued by the Federal interest rate, or interest rate discounts:
‘‘intermediary agent or broker.’’ In Home Loan Bank Board and those Section 226.19(b)(2)(i), (iii), (iv), (v),
determining whether or not a issued by the Department of Housing (vi), (vii), (viii), and (ix).] (See
transaction involves an ‘‘intermediary and Urban Development. The exception comments 20(c)-2 and 30–1 regarding
agent or broker’’ the following factors in footnotes 45a and 45c is also the inapplicability of variable-rate
should be considered: available to creditors that are required adjustment notices and interest rate
• The number of applications by State law to comply with the federal limitations to price-level-adjusted or
submitted by the broker to the creditor variable-rate regulations noted above similar mortgages.)
as compared to the total number of and to creditors that are authorized by [(ii)]fl(iv)fi Graduated-payment
applications received by the creditor. title VIII of the Depository Institutions mortgages and step-rate transactions
The greater the percentage of total loan Act of 1982 (12 U.S.C. 3801 et seq.) to without flan adjustable-rate
applications submitted by the broker in make loans in accordance with those feature.fi[a variable-rate feature are not
any given period of time, the less likely regulations. Creditors using this considered variable-rate transactions].
it is that the broker would be considered exception should comply with the [Paragraph 19(b)(1).
an ‘‘intermediary agent or broker’’ of the timing requirements of those regulations 1. Substitute. Creditors who wish to
creditor during the next period. rather than the timing requirements of use publications other than the
• The number of applications Regulation Z in making the variable-rate Consumer Handbook on Adjustable
submitted by the broker to the creditor disclosures. Rate Mortgages must make a good faith
as compared to the total number of 5. Examples of variable-rate determination that their brochures are
applications received by the broker. transactions. suitable substitutes to the Consumer
(This factor is applicable only if the (i) The following transactions, if they Handbook. A substitute is suitable if it
creditor has such information.) The have a term greater than one year and is, at a minimum, comparable to the
greater the percentage of total loan are secured by the consumer’s principal Consumer Handbook in substance and
applications received by the broker that dwelling, constitute variable-rate comprehensiveness. Creditors are
is submitted to a creditor in any given mortgages subject to the disclosure permitted to provide more detailed
period of time, the less likely it is that requirements of § 226.19(b).] information than is contained in the
the broker would be considered an fl3. Non-adjustable-rate mortgages. Consumer Handbook.
‘‘intermediary agent or broker’’ of the The following transactions, if they are 2. Applicability. The Consumer
creditor during the next period. secured by real property or a dwelling, Handbook need not be given for
• The amount of work (such as do not constitute adjustable-rate variable-rate transactions subject to this
document preparation) the creditor mortgages subject to the disclosure section in which the underlying interest
expects to be done by the broker on an requirements of § 226.19(b).fi rate is fixed. (See comment 19(b)–5 for
application based on the creditor’s prior [(A)]fl(i)fi Renewable balloon- an example of a variable-rate transaction
dealings with the broker and on the payment instruments [where]flthat where the underlying interest rate is
creditor’s requirements for accepting have a fixed rate of interest, even iffi fixed.)]
applications, taking into consideration the creditor is both unconditionally [Paragraph 19(b)(2).
the customary practice of brokers in a obligated to renew the balloon-payment 1.]fl4. fi Disclosure for each
particular area. The more work that the loan at the consumer’s option (or is [variable]fladjustablefi-rate mortgage
creditor expects the broker to do on an obligated to renew subject to conditions program. A creditor must provide
application, in excess of what is usually within the consumer’s control) and has disclosures to the consumer that [fully]
expected of a broker in that area, the the option of increasing the interest rate describe each of the creditor’s
less likely it is that the broker would be at the time of renewal. (See comment [variable]fladjustablefi-rate mortgage
considered an ‘‘intermediary agent or [17(c)(1)–11]fl17(c)(1)(iii)–4fi for a programs in which the consumer
broker’’ of the creditor. An example of discussion of conditions within a expresses an interest. If a program is
an ‘‘intermediary agent or broker’’ is a consumer’s control in connection with made available only to certain
broker who, customarily within a brief renewable balloon-payment loans.) customers of an institution, a creditor
period of time after receiving an [(B)]fl(ii)fi Preferred-rate loans need not provide disclosures for that
application, inquires about the credit where the terms of the legal obligation program to other consumers who
terms of several creditors with whom provide that the initial underlying rate express a general interest in a creditor’s
the broker does business and submits is fixed but will increase upon the ARM programs. [Disclosures must be
the application to one of them. The occurrence of some event, such as an given at the time an application form is
broker is responsible for only a small employee leaving the employ of the provided or before the consumer pays a
percentage of the applications received creditor, and the note reflects the nonrefundable fee, whichever is earlier.
by that creditor. During the time the preferred rate. [The disclosures under If program disclosures cannot be
broker has the application, it might §§ 226.19(b)(1) and 226.19(b)(2)(v), provided because a consumer expresses
request a credit report and an appraisal (viii), (ix), and (xii) are not applicable to an interest in individually negotiating
(or even prepare an entire loan package such loans.] loan terms that are not generally offered,
if customary in that particular area). [(C)]fl(iii)fi ‘‘Price-level-adjusted disclosures reflecting those terms may
4. Other variable-rate regulations. mortgages’’ or other indexed mortgages be provided as soon as reasonably
Transactions in which the creditor is that have a fixed rate of interest but possible after the terms have been
required to comply with and has provide for periodic adjustments to decided upon, but not later than the
complied with the disclosure payments and the loan balance to reflect time a non-refundable fee is paid. If a
requirements of the variable-rate changes in an index measuring prices or consumer who has received program
regulations of other Federal agencies are inflation. [The disclosures under disclosures subsequently expresses an
exempt from the requirements of § 226.19(b)(1) are not applicable to such interest in other available variable-rate
mortgage programs subject to differences in the following loan permit the creditor, after consummation
226.19(b)(2), or the creditor and features: of the transaction, to increase (or
consumer decide on a program for A. The amount of a discount flor decrease) the interest rate, payment, or
which the consumer has not received premiumfi. term of the loan initially disclosed to
disclosures, the creditor must provide B. The amount of a margin. the consumer. For example, the
appropriate disclosures as soon as [3. Form of program disclosures. A disclosures for a variable-rate mortgage
reasonably possible. The creditor, of creditor may provide separate program loan program in which the interest rate
course, is permitted to give the disclosure forms for each ARM loan and payment (but not loan term) can
consumer information about additional program it offers or a single disclosure change might read, ‘‘Your interest rate
programs subject to § 226.19(b) form that describes multiple programs. and payment can change yearly.’’ In
initially.] A disclosure form may consist of more transactions where the term of the loan
[2. Variable-rate loan program than one page. For example, a creditor may change due to rate fluctuations, the
disclosure defined.]fl5. Adjustable-rate may attach a separate page containing creditor must state that fact.
mortgage loan program defined. fi i. the historical payment example for a Paragraph 19(b)(2)(ii).
Generally, if the identification, the particular program. A disclosure form 1. Identification of index or formula.
presence or absence, or the exact value describing more than one program need If a creditor ties interest rate changes to
of a loan feature must be disclosed not repeat information applicable to a particular index, this fact must be
under this section, each program that is described. For disclosed, along with a source of
[variable]fladjustablefi-rate mortgage example, a form describing multiple information about the index. For
loans that differ as to such features programs may disclose the information example, if a creditor uses the weekly
constitute separate loan programs. For applicable to all of the programs in one average yield on U.S. Treasury
example, separate loan programs would place with the various program features Securities adjusted to a constant
exist based on differences in any of the (such as options permitting conversion maturity as its index, the disclosure
following loan features: to a fixed rate) disclosed separately. The might read, ‘‘Your index is the weekly
A. The index or other formula used to form, however, must state if any average yield on U.S. Treasury
calculate interest rate adjustments. program feature that is described is Securities adjusted to a constant
B. The rules relating to changes in the available only in conjunction with maturity of one year published weekly
index value, interest rate, flandfi certain other program features. Both the in the Wall Street Journal.’’ If no
payments[, and loan balance]. separate and multiple program particular index is used, the creditor
C. The presence or absence of, and the disclosures may illustrate more than one must briefly describe the formula used
amount of, rate or payment caps. loan maturity or payment to calculate interest rate changes.
D. The presence of a demand feature. amortization—for example, by including 2. Changes at creditor’s discretion. If
E. The possibility of negative multiple payment and loan balance interest rate changes are at the creditor’s
amortization. columns in the historical payment discretion, this fact must be disclosed.
F. The possibility of interest rate example. Disclosures may be inserted or If an index is internally defined, such as
carryover. printed in the Consumer Handbook (or by a creditor’s prime rate, the creditor
G. The frequency of interest rate and a suitable substitute) as long as they are should either briefly describe that index
payment adjustments. identified as the creditor’s loan program or state that interest rate changes are at
H. The presence of a discount flor disclosures. the creditor’s discretion.
premiumfi feature. 4. As applicable. The disclosures Paragraph 19(b)(2)(iii).
I. [In addition, if a loan feature must required by this section need only be 1. Determination of interest rate and
be taken into account in preparing the made as applicable. Any disclosure not payment. This provision requires an
disclosures required by relevant to a particular transaction may explanation of how the creditor will
§ 226.19(b)(2)(viii), variable-rate be eliminated. For example, if the determine the consumer’s interest rate
mortgage loans that differ as to that transaction does not contain a demand and payment. In cases where a creditor
feature constitute separate programs feature, the disclosure required under bases its interest rate on a specific index
under § 226.19(b)(2).]flThe presence of § 226.19(b)(2)(x) need not be given. As and adjusts the index through the
a prepayment penalty provision. used in this section, payment refers only addition of a margin, for example, the
J. The possibility of making interest- to a payment based on the interest rate, disclosure might read, ‘‘Your interest
only payments. loan balance and loan term, and does rate is based on the index plus a margin,
K. The presence of a balloon payment not refer to payment of other elements and your payment will be based on the
feature. such as mortgage insurance premiums.] interest rate, loan balance, and
L. The presence of a shared-equity or fl6. Payment. As used in this section, remaining loan term.’’ In transactions
shared-appreciation feature. payment refers only to a payment based where paying the periodic payments
M. The possibility of providing less on the interest rate, loan balance and will not fully amortize the outstanding
than full documentation of income or loan term, and does not refer to payment balance at the end of the loan term and
assets. of other elements such as mortgage where the final payment will equal the
N. The presence of a demand insurance premiums.fi periodic payment plus the remaining
feature.fi [5.]fl7.fi Revisions. A creditor must unpaid balance, the creditor must
ii. If, however, [a representative value revise the disclosures required under disclose this fact. For example, the
may be given for a loan feature or the this section [once a year] as soon as disclosure might read, ‘‘Your periodic
feature need not be disclosed under reasonably possible [after the new index payments will not fully amortize your
§ 226.19(b)(2), variable-rate]fla feature value becomes available. Revisions to loan and you will be required to make
is not required or permitted to be the disclosures also are required] when a single payment of the periodic
disclosed under § 226.19(b), adjustable- the loan program changes. payment plus the remaining unpaid
ratefi mortgage loans that differ as to [Paragraph 19(b)(2)(i). balance at the end of the loan term.’’
such features do not constitute separate 1. Change in interest rate, payment, or The creditor, however, need not reflect
loan programs. For example, separate term. A creditor must disclose the fact any irregular final payment in the
programs would not exist based on that the terms of the legal obligation historical example or in the disclosure
of the initial and maximum rates and § 226.19(b)(2)(viii) for a discussion of monthly on the Web site of the San
payments. If applicable, the creditor how to reflect the discount or premium Francisco FHLB.’’
should also disclose that the rate and in the historical example or the 2. Changes at creditor’s discretion. If
payment will be rounded. maximum rate and payment interest rate changes are at the creditor’s
Paragraph 19(b)(2)(iv). disclosure).] discretion, this fact must be disclosed.
1. Current margin value and interest [Paragraph 19(b)(2)(vi)]flParagraph If an index is internally defined, such as
rate. Because the disclosures can be 19(b)(1)(ii)fi. by a creditor’s prime rate, the creditor
prepared in advance, the interest rate 1. Frequency. The frequency of should either briefly describe that index
and margin may be several months old interest rate and payment adjustments or state that interest rate changes are at
when the disclosures are delivered. A must be disclosed. If interest rate the creditor’s discretion.fi
statement, therefore, is required alerting changes will be imposed more [Paragraph 19(b)(2)(vii)]flParagraph
consumers to the fact that they should frequently or at different intervals than 19(b)(1)(iv)fi.
inquire about the current margin value payment changes, a creditor must 1. Rate and payment caps. The
applied to the index and the current disclose the frequency and timing of creditor must disclose limits on changes
interest rate. For example, the both types of changes. For example, in (increases or decreases) in the interest
disclosure might state, ‘‘Ask us for our [a variable]flan adjustablefi-rate rate or payment. If an initial discount is
current interest rate and margin.’’] mortgage transaction where interest rate not taken into account in applying
fl19(b)(1) Interest rate and payment changes are made monthly, but payment overall or periodic rate limitations, that
disclosures fact must be disclosed. If separate
changes occur on an annual basis, this
1. As applicable. The disclosures overall or periodic limitations apply to
fact must be disclosed. In certain ARM
required by § 226.19(b)(1) need only be interest rate increases resulting from
transactions, the interval between loan
made as applicable. Any disclosure not other events, such as [the exercise of a
relevant to a particular loan program closing and the initial adjustment is not
fixed-rate conversion option or] leaving
may be omitted.fi known and may be different than the
the creditor’s employ, those limitations
[Paragraph 19(b)(2)(v).]flParagraph regular interval for adjustments. In such
must also be stated. flIf separate overall
19(b)(1)(i)fi cases, the creditor may disclose the
periodic limitations apply to interest
1. Discounted and premium interest initial adjustment period as a range of
rate increases resulting from the
rate. In some [variable]fladjustablefi- the minimum and maximum amount of
consumer’s exercise of a fixed-rate
rate mortgage loan transactions, time from consummation or closing. For conversion option, those limitations
creditors may set an initial interest rate example, the creditor might state: ‘‘The must be stated with the disclosures
that is not determined by the index or first adjustment to your interest rate and about the option required by
formula used to make later interest rate payment will occur no sooner than 6 § 226.19(b)(1)(v).fi Limitations do not
adjustments. Typically, this initial rate months and no later than 18 months include legal limits in the nature of
charged to consumers is lower than the after closing. Subsequent adjustments usury or rate ceilings under State or
rate would be if it were calculated using may occur once each year after the first Federal statutes or regulations. (See
the index or formula. However, in some adjustment.’’ [(See comments § 226.30 for the rule requiring that a
cases the initial rate may be higher. If 19(b)(2)(viii)(A)–7 and 19(b)(2)(viii)(B)– maximum interest rate be included in
the initial interest rate will be a 4 for guidance on other disclosures certain [variable]fladjustablefi-rate
discount or a premium rate, creditors when this alternative disclosure rule is mortgage transactions.) The creditor
must alert the consumer to this fact. For used.)] need not disclose each periodic or
example, if a creditor discounted a flParagraph 19(b)(1)(iii). overall rate limitation that is currently
consumer’s initial rate, the disclosure 1. Identification of index or formula. available. As an alternative, the creditor
might state, [‘‘Your initial interest rate is If a creditor ties interest rate changes to may disclose the range of the lowest and
not based on the index used to make a particular index, this fact must be highest periodic and overall rate
later adjustments.’’]fl‘‘The interest rate disclosed, along with a source of limitations that may be applicable to the
is discounted and will stay the same for information about the index. If no creditor’s ARM transactions. For
a 5-year introductory period. After this particular index is used, the creditor example, the creditor might state:
initial period, the interest rate will must briefly describe the formula used fl‘‘Your interest rate can increase
increase, even if market rates do not to calculate interest rate changes. To between 1 and 2 percentage points in
change.’’fi (See the commentary to describe the index used, the disclosure any one year and between 4 and 7
§ 226.17(c)(1) for a further discussion of might state, for example: percentage points over the life of the
discounted and premium variable-rate i. ‘‘Your interest rate will be based on loan.fi[‘‘The limitation on increases to
transactions.) [In addition, the the ‘1-year CMT’ (Constant Maturity your interest rate at each adjustment
disclosure must suggest that consumers Treasury) index plus a margin we will be set at an amount in the following
inquire about the amount that the determine upon application. That index range: Between 1 and 2 percentage
program is currently discounted. For is published weekly in the Wall Street points at each adjustment. The
example, the disclosure might state, Journal and is available on the Web site limitation on increases to your interest
‘‘Ask us for the amount our adjustable of the Federal Reserve Board.’’ rate over the term of the loan will be set
rate mortgages are currently ii. ‘‘Your interest rate is based on the at an amount in the following range:
discounted.’’] In a transaction with a 1-year LIBOR Index plus a margin that Between 4 and 7 percentage points
consumer buydown or with a third- is determined at application. This index above the initial interest rate.’’ A
party buydown that will be incorporated is published daily in the Wall Street creditor using this alternative rule must
in the legal obligation, the creditor Journal.’’ include a statement in its program
should disclose the program as a iii. ‘‘The interest rate is based on the disclosures suggesting that the
discounted [variable]fladjustablefi- 11th District COFI Index (Cost of Funds consumer ask about the overall rate
rate mortgage transaction, but need not Index for 11th District Federal Home limitations currently offered for the
disclose additional information Loan Bank (FHLB)) plus a margin creditor’s ARM loan programs. (See
regarding the buydown in its program determined upon application. The 11th comments 19(b)(2)(viii)(A)–6 and
disclosures. [(See the commentary to District COFI Index is published 19(b)(2)(viii)(B)–3 for an explanation of
the additional requirements for a whether or not the underlying rate is years, beginning with the rates in 1977.
creditor using this alternative rule for fixed or variable. In these transactions, In giving this history, the creditor need
disclosure of periodic and overall rate the creditor must disclose the event that only go back as far as the creditor’s rates
limitations.) would allow the creditor to increase the can reasonably be determined.
2. Negative amortization and interest rate such as that the rate may increase 2. Selection of index values. The
rate carryover. A creditor must disclose, if the employee leaves the creditor’s historical example must reflect the
where applicable, the possibility of employ. The creditor must also disclose method by which index values are
negative amortization. For example, the the rules relating to termination of the determined under the program. If a
disclosure might state, ‘‘If any of your preferred rate, such as that fees may be creditor uses an average of index values
payments is not sufficient to cover the charged when the rate is changed and or any other index formula, the history
interest due, the difference will be how the new rate will be determined. given should reflect those values. The
added to your loan amount.’’ Loans that Paragraph 19(b)(2)(viii). creditor should select one date or, when
provide for more than one way to trigger 1. Historical example and initial and an average of single values is used as an
negative amortization are separate maximum interest rates and payments. index, one period and should base the
variable-rate mortgage programs A creditor may disclose both the example on index values measured as of
requiring separate disclosures. (See the historical example and the initial and that same date or period for each year
commentary to § 226.19(b)(2) for a maximum interest rates and payments. shown in the history. A date or period
discussion on the definition of a Paragraph 19(b)(2)(viii)(A). at any time during the year may be
variable-rate mortgage loan program and 1. Index movement. This section selected, but the same date or period
the format for disclosure.) If a consumer requires a creditor to provide an must be used for each year in the
is given the option to cap monthly historical example, based on a $10,000 historical example. For example, a
payments that may result in negative loan amount originating in 1977, creditor could use values for the first
amortization, the creditor must fully showing how interest rate changes business day in July or for the first week
disclose the rules relating to the option, implemented according to the terms of ending in July for each of the 15 years
including the effects of exercising the the loan program would have affected shown in the example.
option (such as negative amortization payments and the loan balance at the 3. Selection of margin. For purposes
will occur and the principal loan end of each year during a 15-year of the disclosure required under
balance will increase); however, the period. (In all cases, the creditor need § 226.19(b)(2)(viii)(A), a creditor may
disclosure in § 226.19(b)(2)(viii) need only calculate the payments and loan select a representative margin that has
not be provided. balance for the term of the loan. For been used during the six months
3. Conversion option. If a loan example, in a five-year loan, a creditor preceding preparation of the
program permits consumers to convert would show the payments and loan disclosures, and should disclose that the
their variable-rate mortgage loans to balance for the five-year term, from 1977 margin is one that the creditor has used
fixed-rate loans, the creditor must to 1981, with a zero loan balance recently. The margin selected may be
disclose that the interest rate may reflected for 1981. For the remaining ten used until a creditor revises the
increase if the consumer converts the years, 1982–1991, the creditor need only disclosure form.
loan to a fixed-rate loan. The creditor show the remaining index values, 4. Amount of discount or premium.
must also disclose the rules relating to margin and interest rate and must For purposes of the disclosure required
the conversion feature, such as the continue to reflect all significant loan under § 226.19(b)(2)(viii)(A), a creditor
period during which the loan may be program terms such as rate limitations may select a discount or premium
converted, that fees may be charged at affecting them.) Pursuant to this section, (amount and term) that has been used
conversion, and how the fixed rate will the creditor must provide a history of during the six months preceding
be determined. The creditor should index values for the preceding 15 years. preparation of the disclosures, and
identify any index or other measure or Initially, the disclosures would give the should disclose that the discount or
formula used to determine the fixed rate index values from 1977 to the present. premium is one that the creditor has
and state any margin to be added. In Each year thereafter, the revised used recently. The discount or premium
disclosing the period during which the program disclosures should include an should be reflected in the historical
loan may be converted and the margin, additional year’s index value until 15 example for as long as the discount or
the creditor may use information years of values are shown. If the values premium is in effect. A creditor may
applicable to the conversion feature for an index have not been available for assume that a discount that would have
during the six months preceding 15 years, a creditor need only go back been in effect for any part of a year was
preparation of the disclosures and state as far as the values are available in in effect for the full year for purposes of
that the information is representative of giving a history and payment example. reflecting it in the historical example.
conversion features recently offered by In all cases, only one index value per For example, a 3-month discount may
the creditor. The information may be year need be shown. Thus, in be treated as being in effect for the
used until the program disclosures are transactions where interest rate entire first year of the example; a 15-
otherwise revised. Although the rules adjustments are implemented more month discount may be treated as being
relating to the conversion option must frequently than once per year, a creditor in effect for the first two years of the
be disclosed, the effect of exercising the may assume that the interest rate and example. In illustrating the effect of the
option should not be reflected payment resulting from the index value discount or premium, creditors should
elsewhere in the disclosures, such as in chosen will stay in effect for the entire adjust the value of the interest rate in
the historical example or in the year for purposes of calculating the loan the historical example, and should not
calculation of the initial and maximum balance as of the end of the year and for adjust the margin or index values. For
interest rate and payments. reflecting other loan program terms. In example, if during the six months
4. Preferred-rate loans. Section cases where interest rate changes are at preceding preparation of the disclosures
226.19(b) applies to preferred-rate loans, the creditor’s discretion (see the the fully indexed rate would have been
where the rate will increase upon the commentary to § 226.19(b)(2)(ii)), the 10% but the first year’s rate under the
occurrence of some event, such as an creditor must provide a history of the program was 8%, the creditor would
employee leaving the creditor’s employ, rates imposed for the preceding 15 discount the first interest rate in the
historical example by 2 percentage interest rate (index value plus margin payments upon the earliest possible first
points. adjusted by the amount of any discount adjustment disclosed under
5. Term of the loan. In calculating the or premium) in effect as of an identified § 226.19(b)(2)(vi). (See comment
payments and loan balances in the month and year for the loan program 19(b)(2)(viii)(A)–7 for an explanation of
historical example, a creditor need not disclosure. (See comment 19(b)(2)–5 on how to disclose the historical example
base the disclosures on each term to revisions to the loan program when the initial adjustment period is
maturity or payment amortization that it disclosure.) In calculating the maximum not known.)
offers. Instead, disclosures for ARMs payment under this paragraph, a 5. Periodic payment statement. The
may be based upon terms to maturity or creditor should assume that the interest statement that the periodic payment
payment amortizations of 5, 15 and 30 rate increases as rapidly as possible may increase or decrease substantially
years, as follows: ARMs with terms or under the loan program, and the may be satisfied by the disclosure in
amortizations from over 1 year to 10 maximum payment disclosed should paragraph 19(b)(2)(vi) if it states for
years may be based on a 5-year term or reflect the amortization of the loan example, ‘‘your monthly payment can
amortization; ARMs with terms or during this period. Thus, in a loan with increase or decrease substantially based
amortizations from over 10 years to 20 2 percentage point annual (and 5 on annual changes in the interest rate.’’
years may be based on a 15-year term or percentage point overall) interest rate Paragraph 19(b)(2)(ix).
amortization; and ARMs with terms or limitations or ‘‘caps,’’ the maximum 1. Calculation of payments. A creditor
amortizations over 20 years may be interest rate would be 5 percentage is required to include a statement on the
based on a 30-year term or amortization. points higher than the initial interest disclosure form that explains how a
Thus, disclosures for ARMs offered with rate disclosed. Moreover, the loan consumer may calculate his or her
any term from over 1 year to 40 years would not reach the maximum interest actual monthly payments for a loan
may be based solely on terms of 5, 15 rate until the fourth year because of the amount other than $10,000. The
and 30 years. Of course, a creditor may 2 percentage point annual rate example should be based upon the most
always base the disclosures on the limitations, and the maximum payment recent payment shown in the historical
actual terms or amortizations offered. If disclosed would reflect the amortization example or upon the initial interest rate
the creditor bases the disclosures on of the loan during this period. If the reflected in the maximum rate and
5-, 15- or 30-year terms or payment loan program includes a discounted or payment disclosure. In transactions in
amortization as provided above, the premium initial interest rate, the initial which the latest payment shown in the
term or payment amortization used in interest rate should be adjusted by the historical example is not for the latest
making the disclosure must be stated. amount of the discount or premium. year of index values shown (such as in
6. Rate caps. A creditor using the 2. Term of the loan. In calculating the a five-year loan), a creditor may provide
alternative rule described in comment initial and maximum payments, the additional examples based on the initial
19(b)(2)(vii)–1 for disclosure of rate creditor need not base the disclosures and maximum payments disclosed
limitations must base the historical on each term to maturity or payment under § 226.19(b)(2)(viii)(B). The
example upon the highest periodic and amortization offered under the program. creditor, however, is not required to
overall rate limitations disclosed under Instead, the creditor may follow the calculate the consumer’s payments. (See
section 226.19(b)(2)(vii). In addition, the rules set out in comment the model clauses in appendix H–4(C).)
creditor must state the limitations used 19(b)(2)(viii)(A)–5. If a historical Paragraph 19(b)(2)(x).
in the historical example. (See comment example is provided under 1. Demand feature. If a variable-rate
19(b)(2)(viii)(B)–3 for an explanation of § 226.19(b)(2)(viii)(A), the terms to mortgage loan subject to § 226.19(b)
the use of the highest rate limitation in maturity or payment amortization used requirements contains a demand feature
other disclosures.) in the historical example must be used as discussed in the commentary to
7. Frequency of adjustments. In in calculating the initial and maximum § 226.18(i), this fact must be disclosed.
certain transactions, creditors may use payment. In addition, creditors must (Pursuant to § 226.18(i), creditors would
the alternative rule described in state the term or payment amortization also disclose the demand feature in the
comment 19(b)(2)(vi)–1 for disclosure of used in making the disclosures under standard disclosures given later.)
the frequency of rate and payment this section. Paragraph 19(b)(2)(xi).
adjustments. In such cases, the creditor 3. Rate caps. A creditor using the 1. Adjustment notices. A creditor
may assume for purposes of the alternative rule for disclosure of interest must disclose to the consumer the type
historical example that the first rate limitations described in comment of information that will be contained in
adjustment occurred at the end of the 19(b)(2)(vii)–1 must calculate the subsequent notices of adjustments and
first full year in which the adjustment maximum interest rate and payment when such notices will be provided.
could occur. For example, in an ARM in based upon the highest periodic and (See the commentary to § 226.20(c)
which the first adjustment may occur overall rate limitations disclosed under regarding notices of adjustments.) For
between 6 and 18 months after closing § 226.19(b)(2)(vii). In addition, the example, the disclosure might state,
and annually thereafter, the creditor creditor must state the rate limitations ‘‘You will be notified at least 25, but no
may assume that the first adjustment used in calculating the maximum more than 120, days before the due date
occurred at the end of the first year in interest rate and payment. (See of a payment at a new level. This notice
the historical example. (See comment comment 19(b)(2)(viii)(A)–6 for an will contain information about the
19(b)(2)(viii)(B)–4 for an explanation of explanation of the use of the highest rate index and interest rates, payment
how to compute the maximum interest limitation in other disclosures.) amount, and loan balance.’’ In
rate and payment when the initial 4. Frequency of adjustments. In transactions where there may be interest
adjustment period is not known.) certain transactions, a creditor may use rate adjustments without accompanying
Paragraph 19(b)(2)(viii)(B). the alternative rule for disclosure of the payment adjustments in a year, the
1. Initial and maximum interest rates frequency of rate and payment disclosure might read, ‘‘You will be
and payments. The disclosure form adjustments described in comment notified once each year during which
must state the initial and maximum 19(b)(2)(vi)–1. In such cases, the interest rate adjustments, but no
interest rates and payments for a creditor must base the calculations of payment adjustments, have been made
$10,000 loan originated at an initial the initial and maximum rates and to your loan. This notice will contain
information about the index and interest the outset, but also to transactions that i. The disclosures could automatically
rates, payment amount, and loan convert to a demand status after a stated appear on the screen when the
balance.’’ period. application appears;
Paragraph 19(b)(2)(xii). 2. Covered demand features. See ii. The disclosures could be located
1. Multiple loan programs. A creditor comment 18(i)–2 for examples of on the same web page as the application
that offers multiple variable-rate covered demand features. (whether or not they appear on the
mortgage loan programs is required to 19(c) Conversion to closed-end credit. initial screen), if the application
have disclosures for each variable-rate contains a clear and conspicuous
1. Disclosure at the time of
mortgage loan program subject to reference to the location of the
conversion. In cases where an open-end
§ 226.19(b)(2). Unless disclosures for all disclosures and indicates that the
credit account will convert to a closed-
of its variable-rate programs are disclosures contain rate, fee, and other
end transaction under a written
provided initially, the creditor must cost information, as applicable;
agreement with the consumer, iii. Creditors could provide a link to
inform the consumer that other closed- disclosures are not required under
end variable-rate programs exist, and the electronic disclosures on or with the
§ 226.19(c). By contrast, disclosures are application as long as consumers cannot
that disclosure forms are available for required in such cases under
these additional loan programs. For bypass the disclosures before submitting
§ 226.19(b). See comment 19(b)–2. the application. The link would take the
example, the disclosure form might
19(d) Timing of disclosures. consumer to the disclosures, but the
state, ‘‘Information on other adjustable
rate mortgage programs is available 19(d)(1) General timing. consumer need not be required to scroll
upon request.’’] 1. Oral application. Creditors may completely through the disclosures; or
fl19(b)(2) Key questions about risk. rely on RESPA and Regulation X iv. The disclosures could be located
19(b)(2)(i) Required disclosures. (including any interpretations issued by on the same web page as the application
1. Disclosure of first rate or payment HUD) in deciding whether they have without necessarily appearing on the
increase. The requirement under made a written record of a consumer’s initial screen, immediately preceding
§ 226.19(b)(2)(i)(A) and (B) to disclose oral application, even for a transaction the button that the consumer will click
when the first interest rate or payment not subject to RESPA. In general, to submit the application.fi
increase may occur refers to the time Regulation X defines ‘‘application’’ to flParagraph 19(d)(2)(ii)fi
period in which the increase may occur, mean the submission of a borrower’s [ii. In contrast, if]fl1. Electronic
not the exact calendar date. For financial information in anticipation of disclosures optional. Iffi a consumer is
example, the disclosure may state, a credit decision relating to a federally physically present in the creditor’s
‘‘Your interest rate may increase at the related mortgage loan and states that an office, and accesses an ARM loan
end of the 3-year introductory period.’’ application may either be in writing or application electronically, such as via a
19(b)(2)(i)(C) Prepayment penalty as electronically submitted, including a terminal or kiosk (or if the consumer
risk factor. written record of an oral application. uses a terminal or kiosk located on the
1. Coverage. See comment 38(a)(5)–1 See 24 CFR 3500.2(b).fi premises of an affiliate or third party
to determine whether there is a [19(c)]fl19(d)(2)fi Electronic that has arranged with the creditor to
prepayment penalty. disclosures. provide applications to consumers), the
2. Penalty. See comment 38(a)(5)–2 flParagraph 19(d)(2)(i).fi creditor may provide disclosures in
for examples of charges that are either electronic or paper form,
[1. Form of disclosures. Whether
prepayment penalties. provided the creditor complies with the
disclosures must be in electronic form
3. Not penalty. See comment 38(a)(5)– timing, delivery, and retainability
depends upon the following:]
3 for examples of charges that are not requirements of the regulation.
[i.]fl1. Electronic disclosures flParagraph 19(d)(3)
prepayment penalties.
19(b)(2)(ii) Additional disclosures. required.fi If a consumer accesses [an 1. Telephone request. Where a
1. As applicable. The disclosures ARM]flafi loan application creditor takes a written application by
required by § 226.19(b)(2)(ii) need only electronically (other than as described telephone, the creditor must deliver the
be made as applicable. Any disclosure under [ii. below]fl§ 226.19(d)(ii)fi), disclosures or place them in the mail
not relevant to a particular loan program such as online at a home computer, the not later than three business days after
may be omitted. creditor must provide the disclosures in the creditor receives the consumer’s
19(b)(2)(ii)(C) Balloon payment. electronic form (such as with the written application. In cases where the
1. Coverage. The creditor must make application form on its Web site) in consumer only requests an application
the disclosure required by order to meet the requirement to over the telephone, the creditor must
§ 226.19(b)(ii)(B) if the loan program provide disclosures in a timely manner include the early disclosures required
includes a payment schedule with on or with the application. If the under this section with the application
regular periodic payments that when creditor instead mailed paper that is sent to the consumer.
aggregated do not fully amortize the disclosures to the consumer, this 2. Mail solicitations. In cases where
outstanding principal balance. requirement would not be met. the creditor solicits applications
2. Time period. The requirement to fl2. Timing of electronic disclosures through the mail, the creditor must also
disclose when the balloon payment is provided on or with electronic send the disclosures required under
due refers to the time period when it is applications. Creditors have flexibility § 226.19(b) and (c) if an application
due, not the exact calendar date. For in satisfying the requirement under form is included with the solicitation.
example, the disclosure may state, ‘‘You § 226.19(d) (subject to § 226.19(d)(1)(ii)) 3. Intermediary agent or broker. i.
would owe a balloon payment due in to provide disclosures required by Where a creditor receives a written
seven years.’’ § 226.19(b) and (c) in electronic form if application through an intermediary
19(b)(2)(ii)(D) Demand feature. a consumer accesses an application agent or broker the creditor must deliver
1. Disclosure requirements. The electronically. Methods creditors could the disclosures or place them in the
disclosure requirements of use to satisfy the requirement include, mail not later than three business days
§ 226.19(b)(2)(ii)(D) apply not only to but are not limited to, the following after the creditor receives the
transactions payable on demand from examples: consumer’s written application.
However, a creditor must provide 1. Definition. A refinancing is a new 4. Unearned finance charge. In a
disclosures at the time an application transaction requiring a complete new set transaction involving precomputed
form is provided or the consumer pays of disclosures. Whether a refinancing finance charges, the creditor must
a non-refundable fee, whichever is has occurred is determined by reference include in the finance charge on the
earlier, in a transaction that involves a to whether the original obligation has refinanced obligation any unearned
legal agent, as determined under been satisfied or extinguished and portion of the original finance charge
applicable law, or any other third party replaced by a new obligation, based on that is not rebated to the consumer or
that is not an ‘‘intermediary agent or the parties’ contract and applicable law. credited against the underlying
broker.’’ In determining whether or not The refinancing may involve the obligation. For example, in a transaction
a transaction involves an ‘‘intermediary consolidation of several existing with an add-on finance charge, a
agent or broker’’ the creditor should obligations, disbursement of new money creditor advances new money to a
consider the following factors: to the consumer or on the consumer’s consumer in a fashion that extinguishes
A. The number of applications behalf, or the rescheduling of payments the original obligation and replaces it
submitted by the broker to the creditor under an existing obligation. In any with a new one. The creditor neither
as compared to the total number of form, the new obligation must refunds the unearned finance charge on
applications received by the creditor. completely replace the prior one. the original obligation to the consumer
The greater the percentage of total loan i. Changes in the terms of an existing nor credits it to the remaining balance
applications submitted by the broker in obligation, such as the deferral of on the old obligation. Under these
any given period of time, the less likely individual installments, will not circumstances, the unearned finance
it is that the broker would be considered constitute a refinancing unless charge must be included in the finance
an ‘‘intermediary agent or broker’’ of the accomplished by the cancellation of that charge on the new obligation and
creditor during the next period. obligation and the substitution of a new reflected in the annual percentage rate
B. The number of applications obligation. disclosed on refinancing. Accrued but
submitted by the broker to the creditor ii. A substitution of agreements that unpaid finance charges are included in
as compared to the total number of meets the refinancing definition will the amount financed in the new
applications received by the broker. require new disclosures, even if the obligation.
(This factor is applicable only if the substitution does not substantially alter 5. Coverage. Section 226.20(a) applies
creditor has such information.) The the prior credit terms. only to refinancings undertaken by the
greater the percentage of total loan 2. Exceptions. A transaction is subject original creditor or a holder or servicer
applications received by the broker that to § 226.20(a) only if it meets the general of the original obligation. A
is submitted to a creditor in any given definition of a refinancing. Section ‘‘refinancing’’ by any other person is a
period of time, the less likely it is that 226.20(a) (1) through (5) lists 5 events new transaction under the regulation,
the broker would be considered an that are not treated as refinancings, even not a refinancing under this section.
‘‘intermediary agent or broker’’ of the if they are accomplished by cancellation Paragraph 20(a)(1).
creditor during the next period. of the old obligation and substitution of 1. Renewal. This exception applies
C. The amount of work (such as a new one. both to obligations with a single
document preparation) the creditor 3. Variable-rate. i. If a variable-rate payment of principal and interest and to
expects to be done by the broker on an feature was properly disclosed under obligations with periodic payments of
application based on the creditor’s prior the regulation, a rate change in accord interest and a final payment of
dealings with the broker and on the with those disclosures is not a principal. In determining whether a new
creditor’s requirements for accepting refinancing. For example, no new obligation replacing an old one is a
applications, taking into consideration disclosures are required when the renewal of the original terms or a
the customary practice of brokers in a variable-rate feature is invoked on a refinancing, the creditor may consider it
particular area. The more work that the renewable balloon-payment mortgage a renewal even if:
creditor expects the broker to do on an that was previously disclosed as a i. Accrued unpaid interest is added to
application, in excess of what is usually variable-rate transaction. the principal balance.
expected of a broker in that area, the ii. Even if it is not accomplished by ii. Changes are made in the terms of
less likely it is that the broker would be the cancellation of the old obligation renewal resulting from the factors listed
considered an ‘‘intermediary agent or and substitution of a new one, a new in § 226.17(c)(3).
broker’’ of the creditor. transaction subject to new disclosures iii. The principal at renewal is
ii. An example of an ‘‘intermediary results if the creditor either: reduced by a curtailment of the
agent or broker’’ is a broker who, A. Increases the rate based on a obligation.
customarily within a brief period of variable-rate feature that was not Paragraph 20(a)(2).
time after receiving an application, previously disclosed; or 1. Annual percentage rate reduction.
inquires about the credit terms of B. Adds a variable-rate feature to the A reduction in the annual percentage
several creditors with whom the broker obligation. A creditor does not add a rate with a corresponding change in the
does business and submits the variable-rate feature by changing the payment schedule is not a refinancing.
application to one of them. The broker index of a variable-rate transaction to a If the annual percentage rate is
is responsible for only a small comparable index, whether the change subsequently increased (even though it
percentage of the applications received replaces the existing index or remains below its original level) and the
by that creditor. During the time the substitutes an index for one that no increase is effected in such a way that
broker has the application, it might longer exists. the old obligation is satisfied and
request a credit report and an appraisal iii. If either of the events in paragraph replaced, new disclosures must then be
(or even prepare an entire loan package 20(a)3.ii.A. or ii.B. occurs in a made.
if customary in that particular area).fi transaction secured by a principal 2. Corresponding change. A
dwelling with a term longer than one corresponding change in the payment
§ 226.20—Subsequent Disclosure year, the disclosures required under schedule to implement a lower annual
Requirements. § 226.19(b) also must be given at that percentage rate would be a shortening of
20(a) Refinancings. time. the maturity, or a reduction in the
payment amount or the number of one consumer and not to the other determining the amount of the finance
payments of an obligation. The consumer. In that case, the creditor charge and the annual percentage rate to
exception in § 226.20(a)(2) does not must look to the assuming consumer in be disclosed, the creditor should
apply if the maturity is lengthened, or determining whether a residential disregard any prepaid finance charges
if the payment amount or number of mortgage transaction exists. To paid by the original obligor, but must
payments is increased beyond that illustrate: include in the finance charge any
remaining on the existing transaction. i. The original consumer obtained a prepaid finance charge imposed in
Paragraph 20(a)(3). mortgage to purchase a home for connection with the assumption.
1. Court agreements. This exception vacation purposes. The loan was not a iii. If the creditor requires the
includes, for example, agreements such residential mortgage transaction as to assuming consumer to pay any charges
as reaffirmations of debts discharged in that consumer. The mortgage is assumed as a condition of the assumption, those
bankruptcy, settlement agreements, and by a consumer who will use the home sums are prepaid finance charges as to
post-judgment agreements. (See the as a principal dwelling. As to that that consumer, unless exempt from the
commentary to § 226.2(a)(14) for a consumer, the loan is a residential finance charge under § 226.4. If a
discussion of court-approved mortgage transaction. For purposes of transaction involves add-on or discount
agreements that are not considered § 226.20(b), the assumed loan is an finance charges, the creditor may make
‘‘credit.’’) ‘‘existing residential mortgage abbreviated disclosures, as outlined in
Paragraph 20(a)(4). transaction’’ requiring disclosures, if the section 226.20(b)(1) through (5).
1. Workout agreements. A workout other criteria for an assumption are [Creditors providing disclosures
agreement is not a refinancing unless met.] pursuant to this section for assumptions
the annual percentage rate is increased [3.]fl2.fi Express agreement. of variable-rate transactions secured by
or additional credit is advanced beyond Expressly agrees means that the the consumer’s principal dwelling with
amounts already accrued plus insurance creditor’s agreement must relate a term longer than one year need not
premiums. specifically to the new debtor and must provide new disclosures under sections
Paragraph 20(a)(5). unequivocally accept that debtor as a 226.18(f)(2)(ii) or. In such transactions,
1. Insurance renewal. The renewal of primary obligor. The following events a creditor may disclose the variable-rate
optional insurance added to an existing are not construed to be express feature solely in accordance with
credit transaction is not a refinancing, agreements between the creditor and the section 226.18(f)(1).
assuming that appropriate Truth in subsequent consumer: 7. Abbreviated disclosures. The
Lending disclosures were provided for i. Approval of creditworthiness. abbreviated disclosures permitted for
the initial purchase of the insurance. ii. Notification of a change in records. assumptions of transactions involving
20(b) Assumptions. iii. Mailing of a coupon book to the add-on or discount finance charges must
1. General definition. An assumption subsequent consumer. be made clearly and conspicuously in
as defined in § 226.20(b) is a new iv. Acceptance of payments from the writing in a form that the consumer may
transaction and new disclosures must be new consumer. keep. However, the creditor need not
made to the subsequent consumer. An [4.]fl3.fi Retention of original comply with the segregation
assumption under the regulation consumer. The retention of the original requirement of § 226.17(a)(1). The terms
requires the following three elements: consumer as an obligor in some capacity annual percentage rate and total of
i. [A residential mortgage does not prevent the change from being payments, when disclosed according to
transaction.]flA closed-end credit an assumption, provided the new § 226.20(b)(4) and (5), are not subject to
transaction secured by real property or consumer becomes a primary obligor. the description requirements of § 226.18
a dwelling.fi But the mere addition of a guarantor to (e) and (h). The term annual percentage
ii. An express acceptance of the an obligation for which the original rate disclosed under § 226.20(b)(4) need
subsequent consumer by the creditor. consumer remains primarily liable does not be more conspicuous than other
iii. A written agreement. not give rise to an assumption. disclosures.
The assumption of a nonexempt However, if neither party is designated Paragraph 20(c) Variable-rate
consumer credit obligation requires no as the primary obligor but the creditor adjustments]fl20(c) Rate
disclosures unless all three elements are accepts payment from the subsequent adjustments.fi
present. For example, an automobile consumer, an assumption exists for 1. [Timing of adjustment
dealer need not provide Truth in purposes of § 226.20(b). notices]flGeneralfi. This section
Lending disclosures to a customer who [5.]fl4.fi Status of parties. Section requires a creditor (or a subsequent
assumes an existing obligation secured 226.20(b) applies only if the previous holder) to provide certain disclosures in
by an automobile. However, [a debtor was a consumer and the cases where an adjustment to the
residential mortgage obligation is assumed by another interest rate is made in an [variable-rate]
transaction]flclosed-end credit consumer. It does not apply, for fladjustable-ratefi mortgage
transaction secured by real property or example, when an individual takes over transaction subject to § 226.19(b). [There
a dwellingfi with the elements the obligation of a corporation. are two timing rules, depending on
described in § 226.20(b) is an [6.]fl5.fi Disclosures. For whether payment changes accompany
assumption that calls for new transactions that are assumptions within interest rate changes. A creditor is
disclosures; the disclosures must be this provision, the creditor must make required to provide at least one notice
given whether or not the assumption is disclosures based on the ‘‘remaining each year during which interest-rate
accompanied by changes in the terms of obligation.’’ For example: adjustments have occurred without
the obligation. [(See comment 2(a)(24)– i. The amount financed is the accompanying payment adjustments.
5 for a discussion of assumptions that remaining principal balance plus any For payment adjustments, a creditor
are not considered residential mortgage arrearages or other accrued charges from must deliver or place in the mail notices
transactions.)] the original transaction. to borrowers at least 25, but not more
[2. Existing residential mortgage ii. If the finance charge is computed than 120, calendar days before a
transaction. A transaction may be a from time to time by application of a payment at a new level is due. The
residential mortgage transaction as to percentage rate to an unpaid balance, in timing rules also apply to the notice
required to be given in connection with [Paragraph 20(c)(2). required simply because a loan calls for
the adjustment to the rate and payment 1. Current and prior index values. non-amortizing or partially amortizing
that follows conversion of a transaction This section requires disclosure of the payments. For example, in a transaction
subject to § 226.19(b) to a fixed-rate index or formula values used to with a five-year term and payments
transaction.]flThis section also requires compute the current and prior interest based on a longer amortization
that notice be given where a transaction rates disclosed in § 226.20(c)(1). The schedule, and where the final payment
subject to § 226.19(b) is converted to a creditor need not disclose the margin will equal the periodic payment plus
fixed-rate transaction.fi (In cases where used in computing the rates. If the prior the remaining unpaid balance, the
an open-end account is converted to a interest rate was not based on an index creditor would not have to disclose the
closed-end transaction subject to or formula value, the creditor also need payment necessary to fully amortize the
§ 226.19(b), the requirements of this not disclose the value of the index that loan in the remainder of the five-year
section do not apply until adjustments would otherwise have been used to term. A disclosure is required, however,
are made following conversion.) compute the prior interest rate.] if the flnewfi payment disclosed
2. [Exceptions.]flNot applicable.fi [Paragraph 20(c)(3)]flParagraph under [§ 226.20(c)(4)]
Section 226.20(c) does not apply to 20(c)(2)(iv)fi. fl§ 226.20(c)(2)(ii)(C)fi is not sufficient
[‘‘shared-equity,’’ ‘‘shared- 1. Unapplied index increases. The to prevent negative amortization in the
appreciation,’’ or] ‘‘price level adjusted’’ requirement that the consumer receive loan. The adjustment notice must state
or similar mortgagesfl, because such information about the extent to which the payment required to prevent
mortgages are not adjustable-rate the creditor has foregone any increase in negative amortization. (This paragraph
mortgages subject to the disclosure the interest rate fland the earliest date does not apply if the payment disclosed
requirements of § 226.19(b). See a creditor may apply foregone interest to in [§ 226.20(c)(4)]
comment 19(b)–3fi. future adjustments, subject to rate fl§ 226.20(c)(2)(ii)(C)fi is sufficient to
3. Basis of disclosures. The caps,fi is applicable only to those prevent negative amortization in the
disclosures required under this section transactions permitting interest rate loan but the final payment will be a
shall reflect the terms of the parties’ carryover. The amount of increase that different amount due to rounding.)
legal obligation, as required under is foregone at an adjustment is the fl2. Effect on loan term. The creditor
§ 226.17(c)(1). amount that, subject to rate caps, can be must disclose any change in the term or
fl20(c)(1) Timing of disclosures. applied to future adjustments maturity of the loan if the change
1. When required. Payment changes independently to increase, or offset resulted from the rate adjustment. The
due to changes in property tax decreases in, the rate that is determined creditor need not make that disclosure
obligations or mortgage-related according to the index or formula. if the loan term or maturity has not
insurance premiums do not trigger the [Paragraph 20(c)(4).
1. Contractual effects of the changed.
requirement to make disclosures under 20(c)(2)(vii) Loan balance in payment
§ 226.20(c)(1)(i).fi adjustment. The contractual effects of
change notice.
[Paragraph 20(c)(1)]flParagraph an interest rate adjustment must be 1. Basis of disclosure. A statement of
20(c)(2)(ii)fi. disclosed including the payment due the loan balance must be disclosed. The
1. Current and [prior]flnewfi after the adjustment is made whether or balance required to be disclosed is the
interest rates. The requirements under not the payment has been adjusted. A
this paragraph are satisfied by balance on which the new adjusted
contractual effect of a rate adjustment payment is based.
disclosing the interest rate used to would include, for example, disclosure Paragraph 20(c)(3)(iii).
compute the new adjusted payment of any change in the term or maturity of 1. Unapplied index increases.
amount [(‘‘current rate’’)]fl(‘‘new the loan if the change resulted from the Creditors may rely on comment
rate’’)fi and the adjusted interest rate rate adjustment. In transactions where 20(c)(2)(iv)–1 in determining which
that was disclosed in the last adjustment paying the periodic payments will not transactions the requirement to disclose
notice[, as well as all other interest rates fully amortize the outstanding balance foregone interest increases applies to
applied to the transaction in the period at the end of the loan term and where and how to disclose such increases.
since the last notice (‘‘prior the final payment will equal the Although creditors must disclose the
rates’’)]fl(‘‘current rate’’)fi. (If there periodic payment plus the remaining earliest date the creditor may apply
has been no prior adjustment notice, the unpaid balance, the amount of the foregone interest to future adjustments
[prior rates are]flcurrent rate isfi the adjusted payment must be disclosed if under § 226.20(c)(2)(iv), creditors need
interest rate applicable to the such payment has changed as a result of not disclose this information in the
transaction at consummationfl.)fi[, as the rate adjustment. A statement of the disclosures required by
well as all other interest rates applied to loan balance also is required. The § 226.20(c)(3)(iv), which are made when
the transaction in the period since balance required to be disclosed is the interest rate changes do not cause
consummation.) If no payment balance on which the new adjusted payment changes during a year.
adjustment has been made in a year, the payment is based. If no payment Paragraph 20(c)(3)(v).
current rate is the new adjusted interest adjustment is disclosed in the notice, 1. Basis of disclosure. A statement of
rate for the transaction, and the prior the balance disclosed should be the loan the loan balance must be disclosed. The
rates are the adjusted interest rate balance on which the payment balance required to be disclosed is the
applicable to the loan at the time of the disclosed under § 226.20(c)(5) is based, balance on the last day of the period for
last adjustment notice, and all other if applicable, or the balance at the time which the creditor discloses the highest
rates applied to the transaction in the the disclosure is prepared.] and lowest interest rates.
period between the current and last Paragraph 20(c)(5)]flParagraph 20(d) Periodic statement.
adjustment notices. In disclosing all 20(c)(2)(vi)fi. 20(d)(1) Timing and content of
other rates applied to the transaction 1. Fully-amortizing payment. This disclosures.
during the period between notices, a paragraph requires a disclosure flof the 1. Timing and content. Creditors must
creditor may disclose a range of the fully amortizing paymentfi only when provide payment summary tables under
highest and lowest rates applied during negative amortization occurs as a result § 226.20(d) starting with the first period
that period.] of the adjustment. A disclosure is not after consummation, even if the initial
payments required do not negatively period if such charge is not prohibited whether those increases are tied to an
amortize the loan. However, payment by applicable State or other law.fi index or formula or are within a
summary tables need contain only those * * * * * creditor’s discretion. The section
disclosures that apply to payment applies to credit sales as well as loans.
options actually available to a § 226.24—Advertising. Examples of credit obligations subject to
consumer. For example, if a consumer * * * * * this section include:
has been making the minimum required 24(c) Advertisement of rate of finance [•]flA.fi Dwelling-secured credit
payments but must begin making fully charge. obligations that require variable-rate
amortizing payments because the * * * * * disclosures under the regulation
creditor has recast the loan, the payment 4. Discounted variable-rate because the interest rate may increase
summary table need not disclose transactions. The advertised annual during the term of the obligation.
payments other than the fully percentage rate for discounted variable- [•]flB.fi Dwelling-secured open-end
amortizing payment. rate transactions must be determined in credit plans entered into before
2. Assumptions. Creditors may base accordance with comment [17(c)(1)–10] November 7, 1989 (the effective date of
all disclosures on the assumption that fl17(c)(1)(iii)–3fi regarding the basis of the home equity rules) that are not
payments will be made on time and in transactional disclosures for such considered variable-rate obligations for
the amounts required by the terms of the financing. purposes of disclosure under the
legal obligation, disregarding any * * * * * regulation but where the creditor
possible inaccuracies resulting from ii. Limits or caps on periodic rate or reserves the contractual right to increase
consumers’ payment patterns. See payment adjustments need not be the interest rate—periodic rate and
comment 17(c)(1)–1 and comment stated. To illustrate using the second corresponding annual percentage rate—
17(c)(2)(i)–3. Creditors may not assume example in comment [17(c)(1)–10] during the term of the plan.
that consumers make payments greater fl17(c)(1)(iii)–3fi, the fact that the rate flii.fi In contrast, credit obligations
than the minimum payment required by is presumed to be 11 percent in the in which there is no contractual right to
the legal obligation. That is, creditors second year and 12 percent for the increase the interest rate during the term
may not base disclosures for loans with remaining 28 years need not be of the obligation are not subject to this
a payment option that results in included in the advertisement. section. Examples include:
negative amortization on the fully * * * * * [•]flA.fi ‘‘Shared-equity’’ or
amortizing, interest-only, or other ‘‘shared-appreciation’’ mortgage loans
payment unless that payment is the Subpart D—Miscellaneous that have a fixed rate of interest and a
amount the consumer is required to pay shared-appreciation feature based on the
under the terms of the legal obligation. § 226.25—Record Retention.
consumer’s equity in the mortgaged
20(d)(1)(i) Payment. 25(a) General rule. property. (The appreciation share is
1. Payment type. Creditors may rely * * * * * payable in a lump sum at a specified
on comment 38(c)(5)–1 to determine fl5. Prohibited payments to loan time.)
whether a payment is a regular periodic originators. For each transaction secured [•]flB.fi Dwelling-secured fixed-rate
payment or a balloon payment. by real property or a dwelling subject to closed-end balloon-payment mortgage
20(d)(1)(ii) Effects. the loan originator compensation loans and dwelling-secured fixed-rate
1. Legal obligation. The disclosures provisions in § 226.36(d)(1), a creditor open-end plans with a stated term that
required by § 226.20(d) must reflect the should maintain records of the the creditor may renew at maturity.
terms of the legal obligation. For compensation it provided to the loan (Contrast with the renewable balloon-
example, the disclosures may not state originator for the transaction as well as payment mortgage instrument described
that making fully amortizing payments the compensation agreement in effect on in comment [17(c)(1)–
on an interest-only loan will reduce a the date the interest rate was set for the 11.)]fl17(c)(1)(iii)–4.fi
consumer’s loan balance if the creditor transaction. See § 226.35(a) and [•]flC.fi Dwelling-secured fixed rate
will not apply payments that exceed the comment 35(a)(2)–3 for additional closed-end multiple advance
interest-only payment to principal. guidance on when a transaction’s rate is transactions in which each advance is
20(e) Creditor-placed property set. Where a loan originator is a disclosed as a separate transaction.
insurance. mortgage broker, a copy of the HUD–1 [•]flD.fi ‘‘Price level adjusted
1. Notice period timing and charges. settlement statement required by the mortgages’’ or other indexed mortgages
The notice period begins on the day that Real Estate Settlement Procedures Act that have a fixed rate of interest but
the creditor mails or delivers the notice (RESPA) would be presumed to be a provide for periodic adjustments to
to the consumer and expires 45 days record of the amount actually paid to payments and the loan balance to reflect
later. The creditor may begin to charge the loan originator in connection with changes in an index measuring prices or
the consumer for creditor-placed the transaction.fi inflation.
property insurance on the 46th calendar * * * * * fliii.fi The requirement of this
day after sending the notice if the section does not apply to credit
creditor has fulfilled the requirements of § 226.30—Limitation on Rates.
obligations entered into prior to
section 226.20(e)(1)–(3). For example, a 1. Scope of coverage. fli.fi The December 9, 1987. Consequently, new
creditor that mails the required notice requirement of this section applies to advances under open-end credit plans
on January 2, 2011, may begin to charge consumer credit obligations secured by existing prior to December 9, 1987, are
the consumer for the cost of the a dwelling (as dwelling is defined in not subject to this section.
creditor-placed property insurance on § 226.2(a)(19)) in which the annual
February 18, 2011. After expiration of percentage rate may increase after * * * * *
the 45-day notice period, a creditor may consummation (or during the term of Subpart E—Special Rules for Certain
retroactively charge a consumer for the the plan, in the case of open-end credit) Home Mortgage Transactions
cost of any required property insurance as a result of an increase in the interest
obtained during the 45-day notice rate component of the finance charge— * * * * *
§ 226.32—Requirements for Certain nor presented in any particular manner. commentary under Regulation C, the
Closed-End Home Mortgages. The disclosures need not be a part of the Board’s A Guide to HMDA Reporting:
* * * * * note or mortgage document.] Getting it Right!, and the relevant
[32(b) Definitions. * * * * * ‘‘Frequently Asked Questions’’ on
Paragraph 32(b)(1)(i). 32(c)(5) Amount borrowed. HMDA compliance posted on the
1. General. Section 226.32(b)(1)(i) 1. Optional insurance; debt- FFIEC’s Web site at http://ffiec.gov/
includes in the total ‘‘points and fees’’ cancellation flor debt- hmda.fi
items defined as finance charges under suspensionficoverage. This disclosure * * * * *
§§ 226.4(a) and 226.4(b). Items excluded is required when the amount borrowed
§ 226.36—Prohibited Acts or Practices
from the finance charge under other in a refinancing includes premiums or
in Connection with Credit Secured by
provisions of § 226.4 are not included in other charges for credit life, accident,
flReal Property or a Dwellingfi [a
the total ‘‘points and fees’’ under health, or loss-of-income
Consumer’s Principal Dwelling].
paragraph 32(b)(1)(i), but may be insurancefl;fi[or] debt-cancellation
included in ‘‘points and fees’’ under coverage (whether or not the debt- * * * * *
cancellation coverage is insurance 36(a) flLoan originator andfi
paragraphs 32(b)(1)(ii) and 32(b)(1)(iii).
under applicable law) that provides for mortgage broker defined.
Interest, including per-diem interest, is 1. Meaning of flloan originatorfi
excluded from ‘‘points and fees’’ under cancellation of all or part of the
consumer’s liability in the event of the [mortgage broker]. Section 226.36(a)
§ 226.32(b)(1). provides that a flloan originatorfi
Paragraph 32(b)(1)(ii). loss of life, health, or income or in the
case of accidentfl; or debt-suspension [mortgage broker] is any person who for
1. Mortgage broker fees. In compensation or other monetary gain
determining ‘‘points and fees’’ for coverage that provides for suspension of
the obligation to make one or more arranges, negotiates, or otherwise
purposes of this section, compensation obtains an extension of consumer credit
paid by a consumer to a mortgage broker payments on the date(s) otherwise
required by the credit agreement in the for another person. flThe term ‘‘loan
(directly or through the creditor for originator’’ includes employees of the
delivery to the broker) is included in the event of loss of life, health, or income
or in the case of accidentfi. See creditorfi [but is not an employee of a
calculation whether or not the amount creditor]. In addition, this definition
is disclosed as a finance charge. comment 4(d)(3)–2 and comment app. G
and H–2 regarding terminology for debt- expressly includes any flcreditorfi
Mortgage broker fees that are not paid [person] that satisfies this definition but
by the consumer are not included. cancellation fland debt-suspensionfi
coverage. makes use of ‘‘table funding.’’ Table
Mortgage broker fees already included funding occurs when a transaction is
in the calculation as finance charges * * * * * consummated with the debt obligation
under § 226.32(b)(1)(i) need not be initially payable by its terms to one
§ 226.35—Prohibited Acts or Practices
counted again under § 226.32(b)(1)(ii). person, but another person provides the
in Connection With Higher-Priced
2. Example. Section 226.32(b)(1)(iii) funds for the transaction at
Mortgage Loans.
defines ‘‘points and fees’’ to include all consummation and receives an
items listed in § 226.4(c)(7), other than 35(a) Higher-priced mortgage loans. immediate assignment of the note, loan
amounts held for the future payment of Paragraph 35(a)(2).
contract, or other evidence of the debt
taxes. An item listed in § 226.4(c)(7) * * * * * obligation. Although § 226.2(a)(17)(i)(B)
may be excluded from the ‘‘points and 4. Board table. The Board publishes provides that a person to whom a debt
fees’’ calculation, however, if the charge on the flFFIEC’s Web site,fi [Internet,] obligation is initially payable on its face
is reasonable, the creditor receives no in table form, average prime offer rates generally is a creditor, § 226.36(a)
direct or indirect compensation from the for a wide variety of transaction types. provides that, solely for the purposes of
charge, and the charge is not paid to an flSee http://www.ffiec.gov/hmda.fi § 226.36, such a person is flalso
affiliate of the creditor. For example, a The Board calculates an annual considered a loan originatorfi
reasonable fee paid by the consumer to percentage rate, consistent with [considered a mortgage broker]. flThe
an independent, third-party appraiser Regulation Z (see § 226.22 and appendix creditor is not considered a loan
may be excluded from the ‘‘points and J), for each transaction type for which originator unless table funding
fees’’ calculation (assuming no pricing terms are available from a occurs.fi In addition, although
compensation is paid to the creditor). A survey. The Board estimates annual consumers themselves often arrange,
fee paid by the consumer for an percentage rates for other types of negotiate, or otherwise obtain
appraisal performed by the creditor transactions for which direct survey extensions of consumer credit on their
must be included in the calculation, data are not available based on the loan own behalf, they do not do so for
even though the fee may be excluded pricing terms available in the survey compensation or other monetary gain or
from the finance charge if it is bona fide and other information. The Board for another person and, therefore, are
and reasonable in amount. publishes on the flFFIEC’s Web sitefi not flloan originatorsfi [mortgage
Paragraph 32(b)(1)(iv). [Internet] the methodology it uses to brokers] under this section.
1. Premium amount. In determining arrive at these estimates. fl2. Mortgage broker. For purposes of
‘‘points and fees’’ for purposes of this fl5. Additional guidance on § 226.36, with respect to a particular
section, premiums paid at or before determination of average prime offer transaction, the term ‘‘mortgage broker’’
closing for credit insurance are included rates. The average prime offer rate has refers to a loan originator who is not an
whether they are paid in cash or the same meaning in this section as employee of the creditor. Accordingly,
financed, and whether the amount under Regulation C, 12 CFR part 203. the term ‘‘mortgage broker’’ includes
represents the entire premium for the See 12 CFR 203.4(a)(12)(ii). Guidance on companies that engage in the activities
coverage or an initial payment.] the average prime offer rate under described in § 226.36(a) and also
32(c) Disclosures. § 226.35(a)(2), such as when a includes employees of such companies
[1. Format. The disclosures must be transaction’s rate is set and that engage in these activities. Section
clear and conspicuous but need not be determination of the comparable 226.36(d) prohibits certain payments to
in any particular type size or typeface, transaction, is provided in the staff a loan originator. These prohibitions
apply to payments made to all loan compensation happens to vary with the originator could not agree to set the
originators, including payments made to consumer’s credit score as well. originator’s compensation at a higher
mortgage brokers, and payments made 3. Examples of compensation not level and then subsequently lower it in
by a company acting as a mortgage based on transaction terms or selective cases (such as where the
broker to its employees who are loan conditions. Compensation would not be consumer is able to obtain a lower rate
originators.fi based on the transaction’s terms or from another creditor). When the
36(b) Misrepresentation of value of conditions if it were based on, for creditor offers to extend a loan with
consumer’s [principal] dwelling. example: specified terms and conditions (such as
* * * * * i. The loan originator’s overall loan the rate and points) the amount of the
fl36(d) Prohibited payments to loan volume delivered to the creditor. originator’s compensation for that
ii. The long-term performance of the transaction is not subject to change
originators.
originator’s loans. (increase or decrease) based on whether
1. Persons covered. Section 226.36(d) iii. A fixed hourly rate of pay to
prohibits any person (including the different loan terms are negotiated. For
compensate the originator for the actual example, if the creditor agrees to lower
creditor) from paying compensation to a number of hours worked.
loan originator in connection with a the rate that was initially offered, the
iv. Whether the consumer is an new offer may not be accompanied by
covered credit transaction, if the amount existing customer of the creditor or a
of the payment is based on any of the a reduction in the loan originator’s
new customer. compensation.
transaction’s terms or conditions. For 4. Geographic differences. Section
example, a person that purchases a loan 7. Periodic changes in loan originator
226.36(d)(1) does not prohibit the compensation and transactions’ terms
from the creditor may not compensate payment of compensation to a loan and conditions. This section does not
the loan originator in a manner that originator that differs by geographical limit a creditor from periodically
violates this section. area, provided such compensation is not revising the compensation it agrees to
2. Mortgage brokers. The payments based on the transaction’s terms or pay a loan originator. However, the
made by a company acting as a mortgage conditions. Any such arrangement must revised compensation arrangement must
broker to its employees who are loan comply with other applicable laws, such result in payments to the loan originator
originators are subject to the section’s as the Equal Credit Opportunity Act, 15 that do not vary based on the terms or
prohibitions. For example, a mortgage U.S.C. 1691–1691f, and Fair Housing conditions of a credit transaction. A
broker may not pay its employee more Act, 42 U.S.C. 3601–3619. creditor might periodically review
for a transaction with a 7 percent 5. Creditor’s flexibility in setting loan factors such as loan performance,
interest rate than for a transaction with terms. Section 226.36(d)(1) does not transaction volume, as well as current
a 6 percent interest rate. limit the creditor’s ability to offer a market conditions for originator
36(d)(1) Payments based on higher interest rate in a transaction as a compensation, and prospectively revise
transaction terms and conditions. means for the consumer to finance the the compensation it agrees to pay to a
1. Compensation. For purposes of payment of the loan originator’s loan originator. For example, assume
§ 226.36(d)(1) and (e) the term compensation or other costs that the that during the first 6 months of the
‘‘compensation’’ is not limited to consumer would otherwise be required year, a creditor pays $3,000 to a
commissions; it includes salaries and to pay directly (either in cash or out of particular loan originator for each loan
any financial or similar incentive the loan proceeds). Thus, a creditor may delivered, regardless of the loan terms.
provided to a loan originator that is charge a higher interest rate to a After considering the volume of
based on any of the terms and consumer who will pay fewer of the business produced by that originator,
conditions of the loan originator’s costs of the transaction directly, or the the creditor could decide that as of July
transactions. (See comment 36(d)(1)–2 creditor may offer the consumer a lower 1, it will pay $3,250 for each loan
for examples of types of compensation rate if the consumer pays more of the delivered by that particular originator,
that are not covered by § 226.36(d) and costs directly. For example, if the regardless of the loan terms. No
(e)). For example, the term consumer pays half of the transaction violation occurs even if the loans made
‘‘compensation’’ includes: costs directly, the creditor may charge by the creditor after July 1 generally
i. An annual or other periodic bonus; an interest rate of 6% but, if the carry a higher interest rate than loans
or consumer pays none of the transaction made before that date, to reflect the
ii. Awards of merchandise, services, costs directly, may charge an interest higher compensation.
trips, or similar prizes. rate of 6.5%. Section 226.36(d)(1) also 8. Compensation received directly
2. Examples of compensation that is does not limit a creditor from offering or from a consumer. The prohibition in
based on transaction terms or providing different loan terms to the § 226.36(d)(1) does not apply to
conditions. Section 226.36(d)(1) consumer based on the creditor’s transactions in which the loan
prohibits loan originator compensation assessment of the credit risk involved. A originator receives compensation
that is based on a transaction’s terms or creditor also may set loan terms by directly from the consumer, in which
conditions. For example, the rule offering varying interest rates to case no other person may provide any
prohibits compensation based on the different consumers that include a compensation to the loan originator,
transaction’s interest rate, annual constant interest rate premium to directly or indirectly, in connection
percentage rate, loan-to-value ratio, or recoup the loan originator’s with that particular transaction
the existence of a prepayment penalty. compensation through increased pursuant to § 226.36(d)(2).

A consumer’s credit score or similar interest paid by the consumer (such as 9. Record retention. See comment
representation of credit risk is not one by adding a constant 1⁄4 of one percent 25(a)–5 for guidance on complying with
of the transaction’s terms and to the interest rate on each loan). the record retention requirements of
conditions, but a creditor does not 6. Effect of modification of loan terms. § 226.25(a) as they apply to this
necessarily avoid having based a loan Under § 226.36(d)(1), a loan originator’s section.fi
originator’s compensation on the compensation may not vary based on ALTERNATIVE COMMENT 36(d)(1)–
interest rate or the annual percentage any of a credit transaction’s terms and 10, TO ACCOMPANY ALTERNATIVE
rate solely because the originator’s conditions. Thus, a creditor and 2—PARAGRAPH (d):
fl10. Principal loan amount. A loan than it would pay for a loan with an originator. An originator need not
originator’s compensation may be based interest rate of 7 percent. If the loan inform the consumer about a possible
on the loan amount. Thus, an originator may deliver loans to both loan offer if the originator is able to
arrangement that pays a loan originator subsidiaries, they must compensate the make a good faith determination that the
a fixed percentage of the loan amount loan originator in the same manner. consumer is not likely to qualify for the
does not violate this section even Accordingly, if the loan originator loan.
though the dollar amount received by delivers the loan to subsidiary ‘‘B’’ and ii. Section 226.36(e)(1) does not
the originator will vary from transaction the interest rate is 8 percent, the require a loan originator to direct a
to transaction and will be greater as the originator must receive the same consumer to the transaction that will
loan amount increases. Section compensation that would have been result in a creditor paying the least
226.36(d)(1) does not prohibit an paid by subsidiary A for a loan with a amount of compensation to the
arrangement under which a loan rate of either 7 or 8 percent.fi originator. However, if the loan
originator is paid a fixed percentage of COMMENTS 36(e)–1, 36(e)(1)–1 originator reviews possible loan offers
the loan amount, subject to specified THROUGH 36(e)(1)–3, 36(e)(2)–1 AND available from a significant number of
minimum or maximum dollar amount. 36(e)(2)–2, and 36(e)(3)–1 THROUGH the creditors with which the originator
For example, a loan originator’s 36(e)(3)–4, TO ACCOMPANY regularly does business, and the
compensation may be set at one percent OPTIONAL PROPOSAL—PARAGRAPH originator directs the consumer to the
of the principal loan amount but not (e). transaction that will result in the least
less than $1,000 or greater than fl36(e) Prohibition on steering. amount of creditor-paid compensation
$5,000.fi 1. Compensation. See comment for the loan originator, the requirements
fl36(d)(2) Payments by persons other 36(d)(1)–1 for guidance on of § 226.36(e)(1) are deemed to be
than consumer. compensation that is subject to satisfied. A loan originator who is an
1. Compensation in connection with a § 226.36(e). employee of the creditor may not obtain
particular transaction. Under Paragraph 36(e)(1). compensation that is based on the
§ 226.36(d)(2), if a loan originator 1. Steering. For purposes of transaction’s terms or conditions
receives compensation directly from a § 226.36(e), directing or ‘‘steering’’ a pursuant to § 226.36(d)(1), and
consumer in a transaction, no other consumer to a particular credit compliance with that provision by such
person may provide any compensation transaction means advising, counseling, a loan originator also satisfies the
to the loan originator, directly or or otherwise influencing a consumer to requirements of § 226.36(e)(1).
indirectly, in connection with that accept that transaction. For such actions iii. See the commentary under
particular credit transaction. The to constitute steering, the consumer § 226.36(e)(3) for additional guidance on
restrictions imposed under must actually consummate the what constitutes a ‘‘significant number
§ 226.36(d)(2) relate only to payments, transaction in question. Thus of creditors with which a loan originator
such as commissions, that are specific § 226.36(e)(1) does not address the regularly does business’’ and guidance
to, and paid solely in connection with, actions of a loan originator if the on the determination about transactions
the transaction in which the consumer consumer does not actually obtain a for which ‘‘the consumer likely
has paid compensation directly to the loan through that originator. qualifies.’’
loan originator. Thus, compensation 2. Prohibited conduct. Under 3. Examples. Assume the originator
paid by a mortgage broker company to § 226.36(e)(1), a loan originator may not determines that a consumer likely
an employee in the form of a salary or direct or steer a consumer to a loan to qualifies for a loan from Creditor A that
hourly wage, which is not tied increase the amount of compensation has a fixed interest rate of 7.00 percent,
specifically to a single transaction, does that the originator will receive for the but the loan originator directs the
not violate § 226.36(d)(2) even if the transaction unless the loan is in the consumer to a loan from Creditor B
consumer directly pays a broker a fee in consumer’s interest. having a rate of 7.50 percent. If the loan
connection with a specific transaction. i. In determining whether a originator receives more in
2. Compensation received directly consummated transaction is in the compensation from Creditor B than the
from a consumer. Under Regulation X, consumer’s interest, that transaction amount that would have been paid by
which implements the Real Estate must be compared to other possible loan Creditor A, the prohibition in
Settlement Procedures Act (RESPA), a offers available through the originator, § 226.36(e) is violated unless the higher-
yield spread premium paid by a creditor and for which the consumer was likely rate loan is in the consumer’s interest.
to the loan originator may be to qualify, at the time the consummated For example, a higher rate loan might be
characterized on the RESPA disclosures transaction was offered to the consumer. in the consumer’s interest if the lower
as a ‘‘credit’’ that will be applied to Possible loan offers are available rate loan has a prepayment penalty, or
reduce the consumer’s settlement through the loan originator if they could if the lower rate loan requires the
charges, including origination fees. A be obtained from a creditor with which consumer to pay more in up-front
yield spread premium disclosed in this the loan originator regularly does charges that the consumer is unable or
manner is not considered to be received business. Section 226.36(e)(1) does not unwilling to pay or finance as part of
by the loan originator directly from the require a loan originator to establish a the loan amount.
consumer for purposes of business relationship with any creditor 36(e)(2) Permissible transactions.
§ 226.36(d)(2).fi with which the loan originator does not 1. Safe harbors. A loan originator that
fl36(d)(3) Affiliates. already do business. To be considered a complies with § 226.36(e)(2) is deemed

1. For purposes of § 226.36(d), ‘‘possible loan offer,’’ an offer need not to comply with § 226.36(e)(1). A loan
affiliated entities are treated as a single be extended by the creditor; it need only originator that does not comply with
‘‘person.’’ For example, assume a parent be an offer that the creditor likely would § 226.36(e)(2) is not subject to any
company has two mortgage lending extend upon receiving an application presumption regarding the originator’s
subsidiaries. Under § 226.36(d)(1), from a qualified applicant, based on the compliance or noncompliance with
subsidiary ‘‘A’’ could not pay a loan creditor’s current rate sheets or other, § 226.36(e)(1).
originator greater compensation for a similar means of communicating its 2. Minimum number of loan options.
loan with an interest rate of 8 percent current credit terms to the loan To obtain the safe harbor, § 226.36(e)(2)
requires that the loan originator present calendar month that precedes the month together and segregated in a variety of
at least three loan options for each type in which the loan originator accepted ways and need not be given in a
of transaction in which the consumer the consumer’s application. particular type size. In contrast,
expressed an interest. As required by 3. Lowest interest rate. To qualify disclosures required for transactions
§ 226.36(e)(3)(ii), the loan originator under the safe harbor in § 226.36(e)(2), secured by real property or a dwelling,
must have a good faith belief that the for each type of transaction in which the and therefore, also subject to § 226.37,
options presented are loans for which consumer has expressed an interest, the must be segregated from all other
the consumer likely qualifies. If the loan loan originator must present the material and be provided in a minimum
originator is not able to form such a consumer with at least three loans that 10-point font. For such disclosures,
good faith belief for at least three include the loan with the lowest interest creditors must use the standards set
options for a given type of transaction, rate, the loan with the second lowest forth under § 226.37(a) through (d).
the loan originator may satisfy the rate, and the loan with the lowest total 37(a)(1) General.
minimum number of loan options set dollar amount for discount points and 1. Clear and conspicuous standard.
forth in § 226.36(e)(2) by presenting all origination points. To determine the The clear and conspicuous standard
loan options for which the consumer loan with the lowest interest rate, for generally requires that disclosures be in
likely qualifies and that meet the other any loan that has an initial rate that is a reasonably understandable form and
requirements of § 226.36(e)(3). fixed for at least five years, the loan readily noticeable to the consumer.
36(e)(3) Loan options presented. originator shall use the initial rate that 2. Clear and conspicuous standard—
1. Significant number of creditors. A would be in effect at consummation. For readily noticeable. To meet the readily
significant number of the creditors with a loan with an initial rate that is not noticeable standard, disclosures
which a loan originator regularly does fixed for at least five years: required by §§ 226.19, 226.20(c),
business is three or more of those i. If the interest rate varies based on 226.20(d), and 226.38 must be given in
creditors. If the loan originator regularly changes to an index, the originator shall a minimum 10-point font.
does business with fewer than three use the fully-indexed rate that would be 3. Location. The disclosures required
creditors, the originator is deemed to in effect at consummation without under §§ 226.19 or 226.38 must appear
comply by obtaining loan options from regard to any initial discount. on a document separate from all other
all the creditors with which it regularly ii. For a step-rate loan the originator material. The disclosures required
does business. Under § 226.36(e)(3)(i), shall use the highest rate that would under §§ 226.19, 226.20(c), 226.20(d) or
the loan originator must obtain loan apply during the first five years. 226.38 may be made on more than one
options from a significant number of 4. Transactions for which the page, continued from one page to
creditors with which the loan originator consumer likely qualifies. To qualify another, and made on the front or back
regularly does business, but the loan under the safe harbor in § 226.36(e)(2), side of a page, except as otherwise
originator need not present loan options the loan originator must have a good specifically required.
from all such creditors to the consumer faith belief that the loan options 37(a)(2) Grouped and Segregated.
to satisfy § 226.36(e)(2). For example, if presented to the consumer pursuant to 1. Segregation of disclosures. The
three loan options available from one of § 226.36(e)(3) are transactions for which disclosures required by §§ 226.19,
the creditors with which the loan the consumer likely qualifies. The loan 226.20(c), 226.20(d) or 226.38 must be
originator regularly does business originator’s belief that the consumer segregated from other information. The
satisfy § 226.36(e)(3)(i), presenting those likely qualifies should be based on all disclosures under § 226.38 may be
and no options from any other creditor information reasonably available to the grouped together, in accordance with
satisfies § 226.36(e)(2). loan originator at the time the loan the requirements under § 226.38(a)–(j),
2. Creditors with which loan options are being presented. The loan and segregated from other required
originator regularly does business. To originator may rely on information disclosures under § 226.38
qualify for the safe harbor in provided by the consumer, even if it i. By outlining them in a box.
§ 226.36(e)(2), the loan originator must subsequently is determined to be ii. By bold print dividing lines.
obtain and review loan options from a inaccurate. For purposes of iii. By a different color background.
significant number of the creditors with § 226.36(e)(3), a loan originator is not iv. By a different type style.
which the loan originator regularly does expected to know all aspects of each 2. Content of segregated disclosures.
business. For this purpose, a loan creditor’s underwriting criteria. But Section 226.37(a)(2)(i)–(ii) contains
originator regularly does business with pricing or other information that is exceptions to the requirement that the
a creditor if: routinely communicated by creditors to disclosures required under § 226.38 be
i. There is a written agreement loan originators is considered to be grouped together and segregated from
between the originator and the creditor reasonably available to the loan material that is not directly related to
governing the originator’s submission of originator, for example, rate sheets those disclosures. Section 226.37(a)(2)(i)
mortgage loan applications to the showing creditors’ current pricing and lists the items that may be added to the
creditor; the required minimum credit score or segregated disclosures, even though not
ii. The creditor has extended credit other eligibility criteria.fi directly related to those disclosures.
secured by real property or a dwelling flSection 226.37—Special Disclosure Section 226.37(a)(2)(ii) lists the items
to one or more consumers during the Requirements for Closed-End Mortgages required under § 226.38 that may be
current or previous calendar month 37(a) Form of disclosures. deleted from the segregated disclosures
based on an application submitted by 1. Controlling standard. Transactions and appear elsewhere. Any of these
the loan originator; or subject to this part are also subject to the additions or deletions may be combined
iii. The creditor has extended credit clear and conspicuous standard under and appear either together with or
secured by real property or a dwelling § 226.17(a)(1). In some instances, separate from the segregated
25 or more times during the previous § 226.17(a)(1) provides creditors more disclosures.
twelve calendar months based on flexibility in meeting the clear and 3. Directly related. The segregated
applications submitted by the loan conspicuous standard. For example, disclosures may, at the creditor’s option,
originator. For this purpose the previous disclosures for transactions subject only include any information that is directly
twelve calendar months begins with the to § 226.17(a)(1) may be grouped related to those disclosures. The
following is directly related annual percentage rate disclosure in which the annual percentage rate
information: required under §§ 226.37(c)(2) and may change after consummation solely
i. The basis for any estimates used in 226.38(b)(1). because of a shared-equity or shared-
making disclosures. For example, if the iii. the term ‘‘annual percentage rate’’ appreciation feature is not an
maturity date of a loan depends solely must not be more conspicuous than the adjustable-rate mortgage for the
on the occurrence of a future event, the annual percentage rate, expressed as a purposes of this section. See
creditor may indicate that the percentage and disclosed as required § 226.38(d)(2)(vi). Also, a step-rate
disclosures assume that event will occur under §§ 226.37(c)(2) and 226.38(b)(1). mortgage is not an adjustable-rate
at a certain time. iv. the creditor’s identity under mortgage for purposes of this section
ii. An explanation of the use of § 226.38(g)(1) may, but need not, be unless the interest rate or the applicable
pronouns or other references to the more prominently displayed than the period for each interest rate can change
parties to the transaction. For example, annual percentage rate. other than as specified in the terms of
the disclosures may state, ‘‘ ‘You’ refers 4. Making disclosures more the legal obligation between the parties.
to the customer and ‘we’ refers to the conspicuous. The annual percentage See § 226.38(a)(3)(i)(B). A fixed interest
creditor.’’ rate for the loan transaction, expressed rate loan with a renewable balloon
iii. A brief caption identifying the as a percentage, may be made more payment is not an adjustable-rate
disclosures. For example, the conspicuous in any way that highlights mortgage for purposes of this section.
disclosures may bear a general title such it in relation to the other required See comment 38(a)(3)(i)(C)–1(v).
as ‘‘Federal Truth in Lending disclosures. For example, it may be: 2. Examples. The following
Disclosures’’ or a descriptive title such i. Printed in bold print or different transactions, for which the interest rate
as ‘‘Real Estate Loan Disclosures.’’ type face; or is variable, are examples of adjustable-
4. Balloon payment financing with ii. Underlined. rate mortgages for purposes of this
leasing characteristics. See comment 37(d) Specific Formats. section.
17(a)(1)–7. 1. Prominent Location. Disclosures i. the seller or a 3rd party pays an
37(c) Terminology. meet the prominent location standard if amount either to the creditor or to the
1. Consistent Terminology. Language located on the first page and on the front consumer to buy down the interest rate
used in disclosures required by side of the disclosure statement. for all or a portion of the credit term as
§§ 226.19, 226.20(c), 226.20(d), and 2. Close Proximity. If the required described in comment 17(c)(1)(i)–1,
226.38 must be close enough in meaning disclosures are located immediately regardless of whether the disclosures
to enable the consumer to relate the next to or directly above or below each take the buydown into account.
different disclosures; however, the other, without any intervening text or ii. the consumer pays an amount to
language need not be identical, unless graphical displays, the disclosures are the creditor to buy down the interest
the use of specific terminology is deemed to be in close proximity. rate for all or a portion of the credit term
required. as described in comment 17(c)(1)(i)–2.
2. Combining terminology. Where the Section 226.38—Content of Disclosures iii. a third party (such as a seller) and
amounts of several numerical for Closed-End Mortgages a consumer both pay an amount to the
disclosures are the same, creditors may 1. As applicable. The disclosures creditor to buy down the interest rate for
combine the terms, so long as it is done required by this section should be all or a portion of the credit term as
in a clear and conspicuous manner and provided only as applicable. Any described in comment 17(c)(1)(i)–4.
in accordance with the requirements provision not relevant to a particular iv. a rate reduction option permits the
under § 226.38. For example, in a transaction should not be disclosed, consumer to adjust the existing variable
transaction in which the amount except as otherwise required under interest rate to a lower variable interest
financed equals the total payments, the § 226.38(d)(1). rate under certain conditions, in
creditor may disclose a single dollar 2. Format. See the commentary to accordance with the terms of the legal
amount together with the descriptive §§ 226.17(a)(1) and 226.37 for a obligation between the parties.
statement required for total payments discussion of the format to be used in v. the renewable balloon-payment
under § 226.38(e)(5)(i) and an making these disclosures, as well as option permits the consumer to renew
explanation that the figure represents acceptable modifications. the loan as described in comment
both the total payments and the amount 38(a) Loan summary. 17(c)(1)(iii)–4(i).
financed, and is used to calculate the 38(a)(3) Loan type and features. vi. the terms of the legal obligation
annual percentage rate. However, if the 1. General. The disclosure of loan provide that the rate will increase upon
terms are required to be disclosed type and features should reflect the the occurrence of some event, such as
separately, both disclosures must be terms of the legal obligation between the an employee leaving the employ of the
completed even though the same parties. creditor, as described in comment
amount is entered into each space. 38(a)(3)(i) Loan type. 17(c)(1)(iii)–4(ii).
3. When disclosures must be more 1. General. Creditors must identify the vii. the terms of the legal obligation
conspicuous. The following rules apply loan type as required in § 226.38(a)(3)(i). provide for periodic adjustments to
to the requirement that the annual Only one loan type may be disclosed. payments and the loan balance, such as
percentage rate for the loan transaction, The categories used in § 226.38(a)(3)(i) ‘‘price-level-adjusted mortgages’’ or
when disclosed with the term annual are different from the categories in other indexed mortgages that have a
percentage rate, be shown more § 226.18(f) and commentary to variable rate of interest and provide for
conspicuously: § 226.17(c)(1). periodic adjustments to payments and
i. the annual percentage rate, 38(a)(3)(i)(A) Adjustable-rate the loan balance to reflect changes in an
expressed as a percentage, must be more mortgages. index measuring prices or inflation, as
conspicuous only in relation to other 1. General. A transaction is an described in comment 17(c)(1)(iii)–
required disclosures under § 226.38. adjustable-rate mortgage for the 4(iii).
ii. the annual percentage rate, purposes of this section if the annual viii. if the interest rate or the
expressed as a percentage, need not be percentage rate may increase after applicable period for each interest rate
more conspicuous except as part of the consummation. However, a transaction can change other than as specified in
the terms of the legal obligation between under certain conditions, in accordance Paragraphs 38(a)(3)(ii)(B) and (C)
the parties, such as certain step-rate with the terms of the legal obligation 1. ‘‘Payment option’’ and ‘‘negative
mortgages, as described in comment between the parties. amortization’’ features—loans with
38(a)(3)(i)(B)–1. v. the renewable balloon-payment negative amortization.
ix. the terms of the legal obligation option permits the consumer to renew i. Negative amortization occurs when
provide for scheduled adjustments in the loan as described in comment one or more regular periodic payments
payment amounts during the loan term, 17(c)(1)(iii)–4(i). is not sufficient to cover interest
such as certain graduated-payment accrued and the unpaid interest is
adjustable-rate mortgages, as described vi. the terms of the legal obligation
provide that the rate will increase upon added to the loan balance. For purposes
in comment 17(c)(1)(iii)–6. of the loan feature disclosure in
x. the terms of the legal obligation the occurrence of some event, such as
an employee leaving the employ of the § 226.38(a)(3)(ii), features that result in
give the consumer an option to convert
creditor, as described in comment negative amortization are divided into
the variable interest rate into a fixed
17(c)(1)(iii)–4(ii). two types:
interest rate at a designated time or
A. ‘‘Payment option’’ features, in
upon satisfaction of certain conditions. vii. the terms of the legal obligation
38(a)(3)(i)(B) Step-rate mortgages. which the terms of the legal obligation
provide for periodic adjustments to permit the consumer to make payments
1. General. A step-rate mortgage is a payments and the loan balance, such as
transaction for which the annual that result in negative amortization and
‘‘price-level-adjusted mortgages’’ or other types of payments; and
percentage rate will change after other indexed mortgages that have a
consummation, and all of the interest B. ‘‘Negative amortization’’ features,
fixed rate of interest but provide for in which the terms of the legal
rates that will apply throughout the periodic adjustments to payments and
term of the loan, including the obligation require the consumer to make
the loan balance to reflect changes in an payments that result in negative
applicable period for each interest rate, index measuring prices or inflation, as
are specified in the terms of the legal amortization—that is, the legal
described in comment 17(c)(1)(iii)– obligation does not permit the consumer
obligation between the parties. As 4(iii).
discussed in comment 38(a)(3)(i)(A)–1, to make payments that would cover all
if the interest rate or the applicable 38(a)(3)(ii) Loan features. interest accrued or all interest accrued
period for each interest rate can change 1. General. Creditors must indicate and principal.
other than as specified in the terms of whether a loan has the features ii. Under § 226.38(a)(3)(ii)(B) and (C),
the legal obligation between the parties, specified in § 226.38(a)(3)(ii). Under a creditor should disclose the loan
such mortgage is considered an § 226.38(a)(3)(ii), a creditor should feature as either ‘‘payment option’’ or
adjustable-rate mortgage and not a step- disclose no more than two features for ‘‘negative amortization’’ but not both.
rate mortgage for purposes of this a single loan. A loan may have both a Under § 226.38(a)(3)(ii)(A), however, a
section. ‘‘step-payment’’ feature in loan may have both a ‘‘step-payment’’
2. Exclusion. Preferred-rate loans § 226.38(a)(3)(ii)(A) and one of the feature and either a ‘‘payment option’’
where the terms of the legal obligation features in § 226.38(a)(3)(ii)(B)–(D). or a ‘‘negative amortization’’ feature.
provide that the initial interest rate is 2. Consumer’s choice. For a loan to
38(a)(3)(ii)(A) Step-payments. have a ‘‘payment option’’ feature, all
fixed but will increase upon the
occurrence of some event, such as an 1. General. If, under the terms of the periodic payment choices must be
employee leaving the employ of the legal obligation, a periodic monthly specified in the legal obligation and
creditor, as described in comment payment may increase by a set amount must include a choice to make
17(c)(1)(iii)–4, are considered fixed-rate for a specified amount of time, the payments that may result in negative
mortgages and not step-rate mortgages creditor must disclose that the loan has amortization. For example, if the
for purposes of this section. See a ‘‘step-payment’’ feature. For instance, consumer is offered a loan with
comment 38(a)(3)(i)(C)–1(vi). if the consumer is offered a fixed-rate minimum monthly payments that will
38(a)(3)(i)(C) Fixed-rate mortgages. mortgage with 24 monthly payments at not reduce the loan balance to remain
1. Examples. The following $1,000 that will later increase to $1,200 the same (i.e., interest-only payments),
transactions, for which the interest rate and remain at that level for a specified but the terms of the legal obligation do
is fixed, are examples of fixed-rate period of time, and the loan amortizes not prevent the consumer from making
mortgages for purposes of this section. fully over the loan term, the creditor payments that will decrease the loan
i. the seller or a third party pays an would disclose ‘‘Fixed-rate mortgage, balance, such a loan would be disclosed
amount either to the creditor or to the step-payments’’ for the loan type in the as having an ‘‘interest-only’’ feature and
consumer to buy down the interest rate loan summary. See comment not a ‘‘payment option’’ feature for
for all or a portion of the credit term as 17(c)(1)(iii)–5 clarifying that graduated- purposes of this section.
described in comment 17(c)(1)(i)–1, payment mortgages and step-rate
transactions without an adjustable-rate Paragraph 38(a)(3)(ii)(D)
regardless of whether the disclosures
take the buydown into account. mortgage feature are not considered 1. Interest-only feature. The creditor
ii. the consumer pays an amount to adjustable-rate mortgage transactions. must disclose an ‘‘interest-only’’ feature
the creditor to buy down the interest However, if the consumer is offered an if the terms of the legal obligation
rate for all or a portion of the credit term adjustable-rate mortgage loan with permit or require the consumer to make
as described in comment 17(c)(1)(i)–2. scheduled variations in payment one or more regular periodic payments
iii. a third party (such as a seller) and amounts during the loan term, the of interest accrued and no principal,
a consumer both pay an amount to the creditor would disclose ‘‘Adjustable-rate and the legal obligation does not require
creditor to buy down the interest rate for mortgage, step-payments.’’ See comment or permit any payments that would
all or a portion of the credit term as 17(c)(1)(iii)–6 for a discussion of result in negative amortization. Thus, a
described in comment 17(c)(1)(i)–4. graduated-payment adjustable-rate creditor should not disclose both an
iv. a rate reduction option permits the mortgages. Also see comment ‘‘interest-only’’ feature and a ‘‘payment
consumer to adjust the existing fixed 38(a)(3)(ii)–2 regarding loans with option’’ feature or ‘‘negative
interest rate to a lower fixed interest rate multiple features. amortization’’ feature in a single
transaction. Under § 226.38(a)(3)(ii)(A), document releasing the creditor’s amortization, the loan’s balance may be
however, a loan may have both an security interest in the property higher after consummation. For
‘‘interest-only’’ feature and a ‘‘step- securing the loan. example, assume the principal balance
payment’’ feature. 4. As applicable. When the legal of a negatively amortizing loan is
38(a)(4) Total settlement charges. obligation includes a finance charge $200,000 at consummation. The terms
1. Disclosure required. For the good computed from time to time by of the legal obligation allow the creditor
faith estimate required by application of a rate to the unpaid to impose a fee equal to 3% of the
§ 226.19(a)(1)(i), the creditor must principal balance and no penalty may amount prepaid if the consumer prepays
disclose the amount of the ‘‘Total be imposed, disclosures made under during the first three years after
Estimated Settlement Charges’’ as § 226.38(a)(5) need not be made. In such consummation. The legal obligation
disclosed on the Good Faith Estimate a case, however, § 226.38(d)(1)(iii) provides that the interest rate for the
under Regulation X, 12 CFR part 3500, requires the creditor to indicate whether loan is 1.50% for the first month, the
Appendix C. For the final disclosure or not the legal obligation permits the maximum interest rate is 10.50%, and
required by § 226.19(a)(2)(ii), the creditor to impose a prepayment there are no limitations on how much
creditor must disclose the sum of the penalty. the interest rate can increase on any
final settlement charges. For the final 5. Content of disclosure. Section adjustment date. Initial minimum
disclosure, the creditor may use the sum 226.38(a)(5) requires creditors to payment amounts are based on the 1.5%
of the ‘‘Charges That Cannot Increase,’’ disclose the amount of the maximum initial rate. Payment amounts are
‘‘Charges That In Total Cannot Increase penalty, the circumstances under which adjusted yearly, but payments may not
By More Than 10%,’’ and ‘‘Charges That the creditor may impose the penalty, increase by more than 7.5% on any
Can Change’’ as would be disclosed in and the period during which the adjustment date, except that the
the column entitled ‘‘HUD–1’’ on page creditor may impose the penalty. The consumer must make fully amortizing
three of the HUD–1 or on page two of creditor must state the maximum payments starting with the period in
the HUD–1A settlement statement under penalty as a dollar numerical amount. which the principal balance reaches
Regulation X, 12 CFR part 3500, See § 226.2(b)(5) and comment 2(b)(5)– 115% of the original principal balance.
Appendix A. Alternatively, for the final 2. Assuming that the interest rate increases
disclosure, the creditor may provide the 6. Basis of disclosure. The creditor
to 10.50% in the second month and
consumer with the final HUD–1 or should assume that the consumer
remains at that rate and that the
HUD–1A settlement statement. For prepays at a time when the prepayment
consumer makes minimum payments,
transactions in which a Good Faith penalty may be charged. For example, if
the highest principal balance is
Estimate, HUD–1 or HUD–1A are not the prepayment penalty on a negatively
$229,243, reached in the twenty-eighth
required, the creditor may look to such amortizing loan equals 2% of the
month following origination. For
documents for guidance on how to amount prepaid during the first two
purposes of this disclosure, the creditor
comply with the requirements of this years after loan origination, the creditor
should assume the consumer prepays in
section. should disclose the maximum penalty
using the maximum loan balance during the 28th month, and the maximum
38(a)(5) Prepayment penalty. prepayment penalty is $6,877.29.
1. Coverage. Section 226.38 (a)(5) those years even if the loan balance, and
thus the amount prepaid, may increase iv. In some cases, the legal obligation
applies only to those transactions in
thereafter. If more than one type of may allow the creditor to determine the
which the interest calculation takes
prepayment penalty applies, the penalty using a penalty rate that may
account of all scheduled reductions in
creditor should include the maximum change over time (such as where a
principal, as well as transactions in
amount of each type of prepayment prepayment penalty on an adjustable-
which interest calculations are made
penalty in the maximum penalty rate loan equals six months’ interest
daily.
2. Penalty. The term ‘‘penalty’’ as disclosed. payments.) In such cases, the creditor
used in § 226.38(a)(5) encompasses only i. If the legal obligation permits the should disclose (1) the penalty charged
those charges that are assessed solely creditor to treat the loan balance as when the penalty rate is the highest
because of the prepayment in full of a outstanding for a period after possible or (2) the penalty charged when
transaction in which the interest prepayment in full and charge amounts the balance is the highest possible,
calculation takes account of all determined by applying the interest rate whichever is greater. For example,
scheduled reductions in principal. to the ‘‘balance’’ deemed outstanding assume that the interest rate for an
Charges which are penalties include, for during that period, the maximum the adjustable-rate mortgage will remain
example: creditor should include is the maximum fixed for the first 3 years after
i. Charges determined by treating the such charges in calculating the consummation and will adjust annually
loan balance as outstanding for a period maximum prepayment penalty. thereafter. The principal balance will be
after prepayment in full and applying ii. If a minimum finance charge $200,000 at consummation and the loan
the interest rate to such ‘‘balance.’’ applies, the creditor should include the amortizes. The initial interest rate on
ii. A minimum finance charge in a minimum finance charge in calculating the loan is 5.625% and the maximum
simple-interest transaction. the maximum prepayment penalty. amount the interest rate can increase
iii. Fees, such as loan closing costs, iii. If a prepayment penalty is upon any rate adjustment is 2
that are waived unless the consumer determined by applying to the loan percentage points. The terms of the legal
prepays the obligation. balance at the time of prepayment a rate obligation permit the creditor to impose
3. Fees that are not prepayment that does not change, the prepayment a fee equal to 6 months’ interest if the
penalties. Charges which are not penalty amount should be calculated consumer prepays within the first 4
penalties include, for example: assuming the highest balance possible. years. To determine the maximum
i. Loan guarantee fees. For amortizing loans and interest-only prepayment penalty, the creditor must
ii. Fees imposed for preparing and loans, the balance is highest at disclose (1) the penalty when the
providing documents in connection consummation, assuming the consumer balance is highest or (2) the penalty
with prepayment, such as a loan payoff makes timely payments in full. when the penalty rate is highest,
statement, a reconveyance, or other However, for loans with negative whichever is greater. The balance would
be highest at consummation because the expressed as a percentage, must be more rate cap. Thus, the interest rate in effect
loan amortizes. The interest due the 1st conspicuous than the other required for year 4 is 7.625 percent. In year 5 the
month after consummation is $937.50. disclosures and in at least 16 point font. rate adjusts to the fully-indexed rate of
Six times the interest due in the first Paragraph 38(b)(3). 7.75 percent. The creditor should
month is $5,625.00. The penalty rate 1. Applicable average prime offer rate assume that the rate does not increase
would be highest in the 37th month and higher-priced loan threshold. after it reaches the fully-indexed rate.
after consummation, the first time the Creditors must disclose the APR on the The total of payments disclosed under
interest rate may increase during the loan offered, the average prime offer rate § 226.38(e)(5)(i) is $585,778.09. To
period in which a prepayment penalty for a comparable transaction, and the calculate the average per-month savings,
may be charged. Assuming the interest higher priced loan threshold, for the the creditor would assume interest rates
rate increased as much as possible, by week in which the creditor provides the of 4.625 percent for the first 3 years;
2 percentage points, the monthly disclosure. The higher-priced loan 6.625 percent for year 4; and 6.75
interest due in the 37th month is threshold is 1.5 percentage points above percent for the remainder of the loan.
$1,218.69. Six times the interest due in the comparable average prime offer rate Thus, the rates are reduced by 1
the 37th month is $7,312.14. The for first lien loans, and 3.5 percentage percentage point, but the margin,
maximum penalty is the maximum points above the comparable average periodic caps and other loan terms
penalty when the balance is highest, or prime offer rate for subordinate lien remain the same. The hypothetical total
$7,312.14, which is greater than the loans. The Board publishes a table at of payments is $537,087.61. The
maximum penalty when the penalty rate least weekly with average prime offer difference between the total of payments
is highest, or $5,625.00. rates by transaction type and loan term. disclosed under § 226.38(e)(5)(i) and the
7. Timely payment assumed. The Creditors should follow the guidance on hypothetical total of payments is
creditor may assume that the consumer how to determine the average prime $48,690.48. The creditor would divide
makes payments on time and in the offer rate and the higher-priced loan $48,690.48 by the number of periods
amount required by the terms of the threshold in § 226.35(a)(2) and (360) and disclose an average per-
legal obligation and may disregard any comments 35(a)(2)–1 through –4. month savings of $135.
possible differences resulting from the Paragraph 38(b)(4). 38(c) Interest rate and payment
consumer’s payment patterns. See 1. Average per-period saving for 1 summary.
comment 17(c)(2)(i)–3. Where the terms percentage-point reduction in the APR. 1. In general. Section 226.38(c)
of the obligation require a periodic Section 226.38(b)(4) requires creditors prescribes format and content for
payment that is not a fully amortizing to disclose the average per-period disclosure of interest rates and monthly
payment, such as an interest only savings of a 1 percentage-point payments. The information in paragraph
payment or a minimum payment that reduction in the APR disclosed in (c)(2)–(4) is required to be in the form
causes the loan balance to increase, the paragraph (b)(1). The creditor should of a table, except as provided otherwise.
creditor must base disclosures on the base this disclosure on the terms of the The required format and content of the
required periodic payment and may not legal obligation, except that the creditor table vary depending primarily on
assume that the consumer will make must reduce the interest rate by one whether the loan has negative
payments that exceed the required percentage point. If the legal obligation amortization. In all cases, however, the
payment. requires monthly payments, the creditor table should have no more than five
8. Rebate-penalty disclosure. A single should identify the savings as the vertical columns, showing applicable
transaction may involve both a finance ‘‘average per-month’’ savings. interest rates; payments would be
charge computed by application of a 2. Examples. In both examples, shown in horizontal rows. Certain loan
rate to the unpaid balance and a finance assume the loan amount is $200,000 and types and terms are defined for
charge that is precomputed or otherwise the loan has a 30 year term with a total purposes of § 226.38(c) in § 226.38(c)(7).
does not take into account each of 360 payments due monthly. 2. Amortizing loans. Loans described
reduction in the principal balance (for i. Fixed-rate interest-only mortgage. as amortizing in § 226.38(c)(2)(i) and
example, mortgages with mortgage- Assume that the loan is a fixed-rate 226.38(c)(3) include loans with interest-
guarantee insurance for which mortgage with the option to make only features that do not also have
premiums are calculated on an annual interest-only payments for the first 10 negative amortization features. (For
basis and do not take into account years of the loan. The interest rate is 6.5 rules relating to loans with balloon
monthly declines in the principal percent. The total of payments disclosed payments, see § 226.38(c)(5)). If an
balance). See comment 36(j)(6)–1. In under § 226.38(e)(5)(i) is $588,313.89. amortizing loan is an adjustable-rate
these cases, disclosures about both To calculate the average per-month mortgage with an introductory rate (less
prepayment rebates and penalties are savings, the creditor would reduce the than the fully-indexed rate), creditors
required. Sample form H–15 in interest rate to 5.5 percent for the full 30 must provide a special explanation of
appendix H illustrates a mortgage year term of the loan and calculate a introductory rates. See
transaction in which both rebate and hypothetical total of payments of § 226.38(c)(2)(iii).
penalty disclosures are necessary, and $540,627.21. The difference between the 3. Negative amortization. For loans
associated commentary explains the total of payments disclosed under with negative amortization, creditors
assumptions used in generating the § 226.38(e)(5)(i) and the hypothetical should follow the rules in
sample. total of payments is $47,686.68. The §§ 226.38(c)(2)(ii) and 226.38(c)(4) in
38(b) Annual percentage rate. creditor would divide $47,686.68 by the disclosing interest rates and monthly
Paragraph 38(b)(1). number of periods (360) and disclose an payments. Loans with negative
1. Disclosure required. The creditor average per-month savings of $132. amortization also require special
must disclose the cost of the credit as an ii. Adjustable-rate mortgage. Assume explanatory disclosures about rates and
annual rate, expressed as a percentage the loan is an ARM with a three-year payments. See § 226.38(c)(6). Loans
and using the term ‘‘annual percentage introductory rate of 5.625 percent; the with negative amortization include
rate,’’ plus a brief descriptive phrase as fully-indexed rate is 7.75 percent. At the ‘‘payment option’’ loans, in which the
required under § 226.38(b)(1). Under end of the three year period, the interest consumer is permitted to make
§ 226.37(c)(2), the annual rate, rate will adjust, subject to a 2 percent minimum payments that will cover only
some of the interest accruing each 3. Maximum interest rate at any time. consummation of 1.5 percent. One
month. See also comment 17(c)(1)(iii)– The creditor must disclose the month after consummation, the interest
6, regarding graduated-payment maximum rate that could apply at any rate adjusts and will adjust monthly
adjustable-rate mortgages. time during the term of the loan and the thereafter, according to changes in the
38(c)(2) Interest rates. earliest date on which the maximum index. The consumer may make
38(c)(2)(i) Amortizing loans. interest rate could apply. payments that cover only part of the
Paragraph 38(c)(2)(i)(A). i. For an adjustable-rate mortgage, the interest accruing each month, until the
1. Fixed rate loans—payment creditor must take into account any date the principal balance reaches 115
increases. Although the interest rate interest rate caps in disclosing the percent of its original balance, or until
will not change after consummation for maximum possible interest rate. For the 5th year after consummation,
a fixed-rate loan, some fixed-rate loans example, if the legal obligation provides whichever comes first. The maximum
may have periodic payments that that at each annual adjustment the rate possible rate is 10.5 percent. No other
increase after consummation. For may increase by no more than 2 limits on interest rate changes apply.
example, the terms of the legal percentage points, the creditor must The minimum required payment adjusts
obligation may permit the consumer to take this limit into account in each year, and may increase by no more
make interest-only payments for a determining the earliest date on which than 7.5 percent over the previous year’s
specified period such as the first five the maximum possible rate may be payment. The creditor should disclose
years after consummation. In such reached. the transaction as follows. The creditor
cases, the creditor must include the ii. For a step-rate loan, the creditor should disclose the following rates and
increased payment under should disclose the highest rate that the dates when they are scheduled to
§ 226.38(c)(4)(ii)(B) in the payment row, could apply under the terms of the legal occur: a rate of 1.5 percent for the first
obligation. month following consummation and the
and must show the interest rate in the
Paragraph 38(c)(2)(i)(C). minimum payment; a rate of 10.5
column for that payment, even though 1. Payment increases. For some loans,
the rate has not changed since percent, and the corresponding
the payment may increase following minimum payment taking into account
consummation. See also comment consummation for reasons unrelated to
17(c)(1)(iii)–7, regarding growth equity the 7.5 percent limit, at the beginning of
an interest rate adjustment. For the second year; the rate of 10.5 percent
mortgages. example, an adjustable-rate mortgage
Paragraph 38(c)(2)(i)(B). and the corresponding minimum
may have an introductory fixed-rate for payment taking into account the 7.5
1. ARMs and step-rate mortgages. the first five years following
Creditors must disclose more than one percent limit, at the beginning of the
consummation, and permit the borrower third year. The creditor must also
interest rate for ARMs and step-rate to make interest-only payments for the disclose the rate of 10.5 percent, the
mortgages, in accordance with first three years. Under fully amortizing payment, and the date
paragraph (c)(2)(i)(B). Creditors must § 26.38(c)(3)(ii)(B), the creditor must on which the consumer must first make
assume that interest rates rise after disclose the first payment of principal such a payment under the terms of the
consummation, taking into account the and interest. In such a case, the creditor legal obligation.
terms of the legal obligation. must also disclose the interest rate that Paragraph 38(c)(2)(iii).
2. Maximum interest rate at first corresponds to the first payment of 1. Introductory rate. In some
adjustment—adjustable-rate mortgages principal and interest, even though the adjustable-rate mortgages, creditors may
and step-rate mortgages. The creditor interest rate will not adjust after set an initial interest rate that is lower
must disclose the maximum possible consummation. The table would show, than the fully-indexed rate at
rate that could apply at the first from left to right: the interest rate and consummation. For amortizing loans
scheduled adjustment in the interest payment at consummation with the with an introductory rate, creditors
rate. If there are no interest rate caps payment itemized to show that the must disclose the information required
other than the maximum possible rate payment is being applied to interest in 226.38(c)(2)(iii) directly below the
required under § 226.30, then the only; the interest rate and payment table.
creditor should disclose only the rate at when the interest-only option ends; the 38(c)(3) Payments for amortizing
consummation and the maximum maximum interest rate and payment at loans.
possible rate. Such a table would only first adjustment; and the maximum 1. Payments corresponding to interest
have two columns. possible interest rate and payment. rates. Creditors must disclose a payment
i. For an adjustable rate mortgage, the 38(c)(2)(ii) Loans with negative that corresponds to each interest rate
creditor must take into account any amortization. disclosed under § 226.38(c)(2)(i)(A)–(C).
interest rate caps when disclosing the 1. Rate at consummation. In all cases Balloon payments, however, must be
maximum interest rate at the first the interest rate in effect at disclosed as provided in § 226.38(c)(5).
adjustment. The creditor must also consummation must be disclosed, even 2. Principal and interest payment
disclose the date on which the first if it will apply only for a short period amounts; examples.
scheduled adjustment occurs. such as one month. i. For fixed-rate interest-only
ii. If the transaction is a step-rate 2. Rates for adjustable rate mortgages. transactions, § 226.38(c)(3)(ii)(B)
mortgage, the creditor should disclose The creditor must assume that interest requires scheduled increases in the
the rate that will apply after rates rise as quickly as possible after regular periodic payment amounts to be
consummation. For example, the legal consummation, in accordance with any disclosed along with the date of the
obligation may provide that the rate is interest rate caps under the legal increase. For example, in a fixed rate
6 percent for the first two years obligation. For ARMs with no interest interest-only loan, a scheduled increase
following consummation, and then rate caps except a maximum possible in the payment amount from an interest-
increases to 7 percent. The creditor rate cap, creditors must assume that the only payment to a fully amortizing
should disclose the rate at first interest rate reaches the maximum payment must be disclosed. Similarly,
adjustment as 7 percent and the date on possible interest rate at first adjustment. in a fixed-rate balloon loan, the balloon
which the rate is scheduled to increase For example, assume that the legal payment must be disclosed in
to 7 percent. obligation provides for an interest rate at accordance with § 226.38(c)(5).
ii. For adjustable-rate mortgage use the appropriate term such as determining the maximum prepayment
transactions, § 226.38(c)(3)(i)(A) ‘‘quarterly’’ or ‘‘annually.’’ penalty.
requires that for each interest rate 38(c)(4) Payments for negative 5. Timely payment assumed. In
required to be disclosed under amortization loans. accordance with comment 38(a)(5)–7,
§ 226.38(c)(2)(i) (the interest rate at 1. Table. Section 226.38(c)(1) creditors may disregard any possible
consummation, the maximum rate at the provides that tables shall include only differences resulting from the
first adjustment, and the maximum the information required in paragraph consumer’s payment patterns and may
possible rate) a corresponding payment (c)(2)–(4). Thus, a table for a negative base disclosures on the required
amount must be disclosed. amortization loan must contain no more payment and not an amortizing
iii. The format of the payment than two horizontal rows of payments payment, if the loan has a negative
disclosure varies depending on whether and no more than five vertical columns amortization feature.
all regular periodic payment amounts of interest rates. 38(d)(2) Additional disclosures.
will include principal and interest, and Paragraph 38(c)(4)(i). 1. As applicable. The disclosures
whether there will be an escrow account 1. Minimum required payments. In required by § 226.38(d)(2) need only be
for taxes and insurance. one row of the table, the creditor must made as applicable. Any disclosure not
38(c)(3)(i)(C) Estimated amounts for show the minimum required payment in relevant to the loan may be omitted.
taxes and insurance. each column, for each interest rate or 38(d)(2)(iii) Balloon payment.
1. Taxes and insurance. An estimated adjustment required in § 226.38(c)(2)(ii), 1. The creditor must make the balloon
payment amount for taxes and except that under the last column the payment disclosure if the loan program
insurance must be disclosed if the fully amortizing payment must be includes a payment schedule with
creditor will establish an escrow shown and must be identified as the regular periodic payments that when
account for such amounts. The payment ‘‘full payment.’’ The payments in this aggregated do not fully amortize the
amount must include estimated row must be calculated based on an outstanding principal balance.
amounts for property taxes and assumption that the consumer makes 38(d)(2)(iv) Demand feature.
premiums for mortgage-related the minimum required payment for as 1. Disclosure requirements. The
insurance required by the creditor, such long as possible under the terms of the disclosure requirements of
as insurance against loss of or damage legal obligation. This row should be § 226.38(d)(2)(iv) apply not only to
to property, or against liability arising identified as the minimum payment transactions payable on demand from
out of the ownership or use of the option, and the statement required by the outset, but also to transactions that
property, or insurance protecting the § 226.38(c)(4)(i)(C) should be included convert to a demand status after a stated
creditor against the consumer’s default in the heading for the row. period.
or other credit loss. Paragraph 38(c)(4)(iii). 2. Covered demand features. See
2. Mortgage insurance. Payment 1. Fully amortizing payments. In one comment 18(i)–2 for examples of
amounts under § 226.38(c)(3)(i) should row of the table, the creditor must show covered demand features.
reflect the consumer’s mortgage the fully amortizing payment for every 38(e) Information about payments.
insurance payments until the date on interest rate required in 38(e)(1) Rate calculation.
which the creditor must automatically § 226.38(c)(2)(ii). The creditor must 1. Calculation. If the interest rate will
terminate coverage under applicable assume, for purposes of calculating the be calculated based on an index, an
law, even though the consumer may amounts in this row that the consumer identification of the index to which the
have a right to request that the makes only fully amortizing payments. rate is tied, the amount of any margin
insurance be cancelled earlier. The 38(c)(5) Balloon payment. that will be added to the index, and any
payment amount must reflect the terms 1. General. A balloon payment is one conditions or events on which the
of the legal obligation, as determined by that is more than two times the regular increase is contingent must be
applicable State or other law. For periodic payment. A balloon payment disclosed. When no specific index is
example, assume that under applicable must be disclosed in a row under the used, the factors used to determine any
law, mortgage insurance must terminate table, unless the balloon payment rate increase must be disclosed. When
after the 130th scheduled monthly coincides with an interest rate the increase in the rate is discretionary,
payment, and the creditor collects at adjustment or a scheduled payment the fact that any increase is within the
closing and places in escrow two increase. In those cases, the balloon creditor’s discretion must be disclosed.
months of premiums. If, under the legal payment must be disclosed in the table. When the index is internally defined
38(d) Key Questions About Risk.
obligation, the creditor will include 38(d)(1) Required disclosures. (for example, by that creditor’s prime
mortgage insurance premiums in 130 1. Disclosure of first rate or payment rate), the creditor may comply with this
payments and refund the escrowed increase. Under § 226.38(d)(1)(i) and requirement by providing either a brief
payments when the insurance is (ii), the creditor must disclose the description of that index or a statement
terminated, payment amounts disclosed calendar month and year in which the that any increase is in the discretion of
up to the 130th payment should reflect first interest rate or payment increase the creditor.
premium payments. If, under the legal may occur. 38(e)(2) Rate and payment change
obligation, the creditor will apply the 38(d)(1)(iii) Prepayment penalty. limits.
amount escrowed to the two final 1. Coverage. See comment 38(a)(5)–1 1. Limitations on interest rate
insurance payments, payments to determine whether there is a increases. Limitations include any
disclosed up to the 128th payment prepayment penalty. maximum imposed on the amount of an
should reflect premium payments. 2. Penalty. See comment 38(a)(5)–2 increase in the rate at any time, as well
Paragraph 38(c)(3)(i)(D). for examples of charges that are as any maximum on the total increase
1. Total monthly payment. For prepayment penalties. over the loan’s term to maturity.
amortizing loans, each column should 3. Not penalty. See comment 38(a)(5)– 2. Limitations on payment increases;
add up to a total estimated payment. 3 for examples of charges that are not negatively amortizing loans. Limitations
The total estimated payment amount prepayment penalties. include any limit imposed on the
should be labeled. If periodic payments 4. Basis of disclosure. Creditors may change of a minimum payment amount
are not due monthly, the creditor should rely on comment 38(a)(5)–6 in whether or not the change is
accompanied by an adjustment to the 2. Loan premiums and buydowns. In mortgage broker meets the definition of
interest rate. Any conditions on the a mortgage transaction, the creditor may a loan originator under the Secure and
limitation on payment increases must offer a premium in the form of cash or Fair Enforcement for Mortgage
also be disclosed. For example, some merchandise to prospective borrowers. Licensing Act of 2008, Section 1503(3),
loan programs provide that the Similarly, a third party, such as a real 12 U.S.C. 5102(3), the identifiers for the
minimum payment will not increase by estate developer or other seller, may broker and for its employee originator
more than a certain percentage, offer to pay some portion of the meeting that definition must be
regardless of the corresponding increase consumer’s costs of the credit disclosed.
in the interest rate. However, there may transaction or to pay the creditor to 38(h) Credit insurance and debt
be exceptions to the limitation on the ‘‘buy down’’ the consumer’s interest cancellation and debt suspension
payment increase, such as if the rate. Such premiums and buydowns coverage.
consumer’s principal balance reaches a must be reflected in accordance with the 1. Location. This disclosure may, at
certain threshold, or if the legal terms of the legal obligation between the the creditor’s option, appear apart from
obligation sets out a scheduled time creditor and consumer. See the other disclosures. It may appear
when payment increases will not be § 226.17(c)(1) and comments 17(c)(1)–1, with any other information, including
limited. –2 and 17(c)(1)(i)–1 through –4. Thus, if the amount financed itemization, any
38(e)(5)(i) Total payments. the creditor is legally obligated by the information prescribed by State law, or
1. Calculation of total payments terms of the credit obligation to charge other information. When this
scheduled. Creditors should use the a reduced interest rate or reduced costs information is disclosed with the other
rules under § 226.18(g) and associated as a consequence of the premium or segregated disclosures, however, no
commentary, and comments buydown, regardless of its source, the additional explanatory material may be
17(c)(1)(iii)–1 and –3 for adjustable-rate disclosures, including the amount included.
transactions, to calculate the total financed, should reflect those credit Paragraph 38(h)(5).
payments amount, except that the terms. Otherwise, the disclosures 1. Compliance. If, based on the
calculation of the total payments should be calculated without regard to creditor’s review of the consumer’s age
amount must include any amount and/or employment status at the time of
any such premium or buydown.
required to be disclosed under 3. Disclosure required. The net enrollment in the product, the consumer
§ 226.38(c)(3)(i)(C). amount of credit extended must be would not be eligible to receive the
2. Number of payments. See comment disclosed using the term ‘‘amount benefits of the product, then providing
18(g)–3. financed’’ together with a descriptive the disclosure required under
3. Demand obligations. In demand statement as required by § 226.38(h)(5) would not comply with
obligations with no alternate maturity § 226.38(e)(5)(iii). this provision. That is, if the consumer
date, the creditor must make disclosure 38(f)(4) Tax deductibility. does not meet the age and/or
of total payments scheduled described 1. Example. The creditor can use the employment eligibility criteria, then the
in § 226.17(c)(5). following language to satisfy the creditor cannot state that the consumer
38(e)(5)(ii) Interest and settlement requirements of this section: ‘‘If you may be eligible to receive benefits and
charges. borrow more than your home is worth, cannot comply with this requirement. If
1. Calculation of interest and the interest on the extra amount may not the creditor offers a bundled product
settlement charges. The interest and be deductible for federal income tax (such as credit life insurance combined
settlement charges disclosure is purposes. Consult a tax advisor to find with credit involuntary unemployment
identical to the finance charge, as out whether the interest you pay is insurance) and the consumer is not
calculated under § 226.4. deductible.’’ eligible for all of the bundled products,
2. Disclosure required. The creditor 2. Applicability. If the creditor is not then providing the disclosure required
must disclose the interest and certain at the time of application under § 226.38(h)(5) would not comply
settlement charges as a dollar amount, whether the credit extended may exceed with this provision. However, the
using the term interest and settlement the fair market value of the dwelling, disclosure still satisfies the
charges, together with a brief statement the creditor may, at its discretion, requirements of this section if an event
as required by § 226.38(e)(5)(ii). The provide the disclosure required by this subsequent to enrollment, such as the
interest and settlement charges must be section in connection with all consumer passing the age limit of the
disclosed only as a total amount; the applications for closed-end credit product, makes the consumer ineligible
components of the interest and secured by a dwelling or real property. for the product based on the product’s
settlement charges amount may not be 38(g) Identification of loan originator age or employment eligibility
itemized in the segregated disclosures, and creditor. restrictions.
except as permitted under 38(g)(1) Creditor. 2. Reasonably reliable evidence. A
§ 226.38(a)(4), although the regulation 1. Identification of creditor. The disclosure under § 226.38(h)(5) shall be
does not prohibit itemization elsewhere. creditor making the disclosures must be deemed to comply with this section if
38(e)(5)(iii) Amount financed. identified. Use of the creditor’s name is the creditor used reasonably reliable
1. Principal loan amount. In a sufficient, but the creditor may also evidence to determine whether the
mortgage transaction subject to § 226.38, include an address and/or telephone consumer met the age or employment
the principal loan amount is the same number. In transactions with multiple eligibility criteria of the product.
as the loan amount disclosed under creditors, any one of them may make the Reasonably reliable evidence of a
§ 226.38(a)(1). As provided in that disclosures; the one doing so must be consumer’s age would include using the
section, the loan amount is the principal identified. date of birth on the consumer’s credit
amount the consumer will borrow 38(g)(2) Loan originator. application, on the driver’s license or
reflected in the loan contract. Thus the 1. Multiple loan originators. In other government-issued identification,
principal loan amount includes all transactions with multiple loan or on the credit report. Reasonably
amounts financed as part of the originators, each loan originator’s reliable evidence of a consumer’s
transaction, whether they are finance unique identifier must be disclosed. For employment status would include a
charges or not. example, in a transaction where a consumer’s statement on a credit
application form, an Internal Revenue complying with § 226.38(j)(1). Under all those categories, and the other
Service Form W–2, tax returns, payroll three alternatives, the itemization (or its categories may be eliminated.
receipts, or other written evidence such substitute) must be provided at the same 2. Amounts appropriate to more than
as a letter or e-mail from the consumer time as the other disclosures required by one category. When an amount may
or the consumer’s employer. § 226.38, although separate from those appropriately be placed in any of
38(i) Required deposit. disclosures. The three alternatives are as several categories and the creditor does
1. Disclosure required. The creditor follows: not wish to revise the categories shown
must inform the consumer of the i. The creditor may provide an in § 226.38(j)(1)(i), the creditor has
existence of a required deposit. itemization as a matter of course, considerable flexibility in determining
(Appendix H provides a model clause without notifying the consumer of the where to reflect the amount. For
that may be used in making that right to receive the itemization. example, in a mortgage transaction to
disclosure.) Section 226.38(i)(1) and (2) ii. The creditor may inform the refinance an existing mortgage held by
describe two types of deposits that need consumer, as part of the segregated the same creditor with additional
not be considered required deposits. disclosures, that a written itemization of proceeds paid to the consumer, the
Use of the phrase ‘‘need not’’ permits the amount financed will be provided portion of the proceeds used to pay off
creditors to include the disclosure even on request, furnishing the itemization the existing mortgage debt may be
in cases where there is doubt as to only if the consumer in fact requests it. treated as either an amount paid to the
whether the deposit constitutes a iii. The creditor may substitute the consumer or an amount paid on the
required deposit. GFE or HUD–1 settlement statement for consumer’s account. If the existing
2. Pledged-account mortgages. In the itemization. See comment mortgage is held by another creditor, the
these transactions, a consumer pledges 38(j)(1)(iii)–1 for additional guidance on portion of the proceeds used to pay it
as collateral funds that the consumer this alternative. off may be treated as either an amount
deposits in an account held by the Paragraph 38(j)(1)(i). paid to the consumer or an amount paid
creditor. The creditor withdraws sums 1. Additional information. Section to others on the consumer’s behalf.
from that account to supplement the 226.38(j)(1)(i) establishes a minimum Paragraph 38(j)(1)(i)(A).
consumer’s periodic payments. standard for the information to be 1. Amounts paid to consumer. This
Creditors may treat these pledged included in the itemization of the category encompasses funds given to the
accounts as required deposits or they amount financed. Creditors have consumer in the form of cash or a check,
may treat them as consumer buydowns considerable flexibility in revising or including joint proceeds checks, as well
in accordance with the commentary to supplementing the information listed in as funds placed in an asset account. It
§ 226.17(c)(1). § 226.38(j)(1)(i). The creditor may, for may include money in an interest-
3. Escrow accounts. The escrow example, do one or more of the bearing account even if that amount is
exception in § 226.38(i) applies, for following: considered a required deposit under
example, to accounts for such items as i. Include amounts that reflect § 226.38(i). For example, in a
maintenance fees, repairs, or payments not part of the amount transaction with total loan proceeds of
improvements. (See the commentary to financed. For example, costs of the $50,000, assume the consumer receives
§ 226.17(c)(1) regarding the use of transaction that the consumer pays a check for $30,000 and $20,000 is
escrow accounts in consumer buydown directly, rather than out of loan required by the creditor to be put into
transactions.) proceeds, may be included. an interest-bearing account. Whether or
4. Interest-bearing accounts. When a ii. Organize the categories in any not the $20,000 is a required deposit, it
deposit earns at least 5 percent interest order. For example, the creditor may is part of the amount financed. At the
per year, no disclosure is required. This rearrange the terms in a mathematical creditor’s option, it may be broken out
exception applies whether the deposit is progression that depicts the arithmetic and labeled in the itemization of the
held by the creditor or by a third party. relationship of the terms. amount financed.
5. Examples of amounts excluded. iii. Further itemize each category. For Paragraph 38(j)(1)(i)(B).
The following are among the types of example, the amount paid directly to 1. Amounts credited to consumer’s
deposits that need not be treated as the consumer may be subdivided into account. The term consumer’s account
required deposits: the amount given by check and the refers to an account in the nature of a
i. Requirement that a borrower be a amount credited to the consumer’s debt with that creditor. It may include,
customer or a member even if that savings account. for example, an unpaid balance on a
involves a fee or a minimum balance. iv. Label categories with different prior loan or other amounts owing to
ii. Required property insurance language from that shown in that creditor. It does not include asset
escrow on a mobile home transaction. § 226.38(j)(1)(i). For example, an amount accounts of the consumer such as
iii. Refund of interest when the paid on the consumer’s account may be savings or checking accounts.
obligation is paid in full. revised to identify the account Paragraph 38(j)(1)(i)(C).
iv. Deposits that are immediately 1. Amounts paid to others. This
specifically as ‘‘your existing mortgage
available to the consumer.
loan with us.’’ category includes, for example, title
v. Funds deposited with the creditor
v. Delete, leave blank, mark ‘‘N/A,’’ or fees; amounts paid to insurance
to be disbursed (for example, for
construction) before the loan proceeds otherwise note inapplicable categories companies for insurance premiums;
are advanced. in the itemization. For example, in a security interest fees; and amounts paid
vi. Escrow of condominium fees. mortgage transaction to finance the to credit bureaus, appraisers, and public
vii. Escrow of loan proceeds to be purchase of a dwelling with no proceeds officials. When several types of
released when the repairs are distributed directly to the consumer or insurance premiums are financed, they
completed. amount credited to the consumer’s may, at the creditor’s option, be
38(j) Separate disclosures. account with the creditor, the amount combined and listed in one sum, labeled
38(j)(1) Itemization of amount financed may consist of only the ‘‘insurance’’ or similar term. This
financed. amounts paid to others and the prepaid includes, but is not limited to, different
1. Compliance alternatives. The finance charge. In this case, the types of insurance premiums paid to
creditor has three alternatives in itemization may be composed of only one company and different types of
insurance premiums paid to different when redisclosure is required under ii. Fees imposed for actual collection
companies. Except for insurance § 226.19(a)(2), however, the statement costs, such as repossession charges or
companies and other categories noted in must be provided to the consumer at the attorney’s fees.
§ 226.38(j)(1)(i)(C), third parties must be time required by that section. iii. Deferral and extension charges.
identified by name. 38(j)(2) Rebate. iv. The continued accrual of simple
Paragraph 38(j)(1)(i)(D). 1. Disclosure required. The creditor interest at the contract rate after the
1. Prepaid finance charge. Prepaid must give a definitive statement of payment due date. However, an increase
finance charges that are subtracted from whether or not a rebate will be given. If in the interest rate is a late payment
the loan amount to calculate the amount a refund is possible for one type of charge to the extent of the increase.
financed, under § 226.38(e)(5)(iii), must prepayment, even though not for all, a 2. Content of disclosure. Many State
be disclosed under § 226.38(j)(1)(i)(D). positive disclosure is required. This laws authorize the calculation of late
The prepaid finance charges must be applies to any type of prepayment, charges on the basis of either a
shown as a total amount but, at the whether voluntary or involuntary as in percentage or a specified dollar amount,
creditor’s option, also may be further the case of prepayments resulting from and permit imposition of the lesser or
itemized and described. All amounts acceleration. greater of the 2 charges. The disclosure
must be reflected in this total, even if 2. Rebate-penalty disclosure. made under § 226.38(j)(3) may reflect
portions of the prepaid finance charge Creditors may rely on comment this alternative. For example, stating
are also reflected elsewhere. For 38(a)(5)–8 in determining how to that the charge in the event of a late
example, if at consummation the disclose both a prepayment penalty and payment is 5% of the late amount, not
creditor collects interim interest of $30 a rebate in a single transaction. Sample to exceed $5.00, is sufficient.
and an underwriting fee of $100, a total form H–15 in Appendix H illustrates a 38(j)(5) Contract reference.
prepaid finance charge of $130 must be mortgage transaction in which both 1. Content. Creditors may substitute,
shown. At the creditor’s option, the rebate and penalty disclosures are for the phrase ‘‘loan contract,’’ a
underwriting fee paid to a third party necessary. reference to specific transaction
also may be shown elsewhere as an 3. Prepaid finance charge. The documents in which the additional
amount included in § 226.38(j)(1)(i)(C). existence of a prepaid finance charge in information is found, such as
The creditor also may further describe a transaction does not, by itself, require ‘‘promissory note.’’ A creditor may, at
the two components of the prepaid a disclosure under § 226.38(j)(2). A its option, delete inapplicable items in
finance charge, although no itemization prepaid finance charge is not considered the contract reference.
of this element is required by a rebate under § 226.38(j)(2). At its 38(j)(6) Assumption policy.
§ 226.38(j)(1)(i)(D). option, however, a creditor may 1. Policy statement. In many
2. Prepaid finance charges placed in consider a prepaid finance charge to be mortgages, the creditor cannot
escrow. RESPA requires creditors to give a rebate under § 226.38(j)(2). If a determine, at the time disclosure must
consumers a settlement statement disclosure is made under § 226.38(j)(2) be made, whether a loan may be
disclosing the costs associated with with respect to a prepaid finance charge assumable at a future date on its original
mortgage loan transactions. Included on or other finance charge, the creditor may terms. For example, the assumption
the settlement statement are payments further identify that finance charge. For clause commonly used in mortgages
into an escrow account for items that are example, the disclosure may state that sold to the Federal National Mortgage
prepaid finance charges. In calculating the borrower ‘‘will not be entitled to a Association and the Federal Home Loan
the total amount of prepaid finance refund of the prepaid finance charge’’ or Mortgage Corporation conditions an
charges, creditors should use the some other term that describes the assumption on a variety of factors such
amounts listed on the respective lines of finance charge. as the creditworthiness of the
the settlement statement for each of 4. Rebate of finance charge. This subsequent borrower, the potential for
those items, without adjustment, even if applies to any finance charges that do impairment of the lender’s security, and
the actual amount collected at not take account of each reduction in execution of an assumption agreement
settlement may vary because of RESPA’s the principal balance of an obligation. by the subsequent borrower. In cases
escrow accounting rules. Figures for i. This category includes, for example: where uncertainty exists as to the future
such items disclosed in conformance A. Precomputed finance charges such assumability of a mortgage, the
with RESPA shall be deemed to be as add-on charges. disclosure under § 226.38(j)(6) should
accurate for purposes of Regulation Z. B. Charges that take account of some reflect that fact. In making disclosures
Paragraph 38(j)(1)(iii). but not all reductions in principal, such in such cases, the creditor may use
1. RESPA disclosures. RESPA requires as mortgage guarantee insurance phrases such as ‘‘subject to conditions,’’
creditors to provide a good faith assessed on the basis of an annual ‘‘under certain circumstances,’’ or
estimate of closing costs and a declining balance, when the principal is ‘‘depending on future conditions.’’ The
settlement statement listing the amounts reduced on a monthly basis. creditor may provide a brief reference to
paid by the consumer. For transactions ii. No description of the method of more specific criteria such as a due-on-
subject to § 226.38, whether or not they computing earned or unearned finance sale clause, although a complete
are subject to RESPA, the creditor can charges is required or permitted as part explanation of all conditions is not
satisfy § 226.38(j)(1) if the creditor of the segregated disclosures under this appropriate. For example, the disclosure
complies with RESPA’s requirements section. may state, ‘‘If you sell your home after
for a good faith estimate and settlement 38(j)(3) Late payment. you take out this loan, we may permit
statement. The itemization of the 1. Definition. This paragraph requires the new buyer to take over the payments
amount financed need not be given, a disclosure only if charges are added to on your mortgage, subject to certain
even though the content of the good individual delinquent installments by a conditions, such as payment of an
faith estimate and HUD–1 settlement creditor who otherwise considers the assumption fee.’’ See comment 17(a)(1)–
statement under RESPA differs from the transaction ongoing on its original 5 for an example of a reference to a due-
requirements of § 226.38(j)(1)(i). If a terms. Late payment charges do not on-sale clause.
creditor chooses to substitute RESPA’s include: 2. Original terms. The phrase
settlement statement for the itemization i. The right of acceleration. ‘‘original terms’’ for purposes of section
226.38(j)(6) does not preclude the to characterize debt cancellation flor • Deleting captions for disclosures.
imposition of an assumption fee, but a debt suspensionfi fees as insurance • Using a symbol, such as an asterisk, for
modification of the basic credit premiums for purposes of this estimated disclosures, instead of an ‘‘e.’’
agreement, such as a change in the • Adding a signature line to the insurance
regulation. Creditors may provide a
disclosures to reflect joint policies.
contract interest rate, represents disclosure that refers to debt • Separately itemizing the filing fees.
different terms. cancellation flor debt suspensionfi • Revising the late charge disclosure in
* * * * * coverage whether or not the coverage is accordance with the commentary to
considered insurance. Creditors may use § 226.18(l).
Appendices G and H—Open-End and the model credit insurance disclosures 2. Model H–3. flExcept as otherwise
Closed-End Model Forms and Clauses only if the debt cancellation flor debt specifically provided,fi[C]flcfireditors
1. Permissible Changes. Although use suspensionfi coverage constitutes have considerable flexibility in filling out
of the model forms and clauses is not model H–3 (itemization of the amount
insurance under State law.
financed). Appropriate revisions, such as
required, creditors using them properly * * * * * those set out in the commentary to section
will be deemed to be in compliance 226.18(c)fl, or section 226.38(j)(1) for
with the regulation with regard to those Appendix H—Closed-End Model Forms
transactions secured by real property or a
disclosures. Creditors may make certain and Clauses dwellingfi, may be made to this form
changes in the format or content of the 1. Models H–1 and H–2. Creditors may without loss of protection from civil liability
forms and clauses and may delete any make several types of changes to closed-end for proper use of the model forms.
disclosures that are inapplicable to a model forms H–1 (credit sale) and H–2 (loan) 3. Models H–4fl(A)fi[ through]fl, H–4(C),
transaction or a plan without losing the and still be deemed to be in compliance with H–4(H), H–5,fi H–7fl, H–16, H–17(A), H–
act’s protection from liabilityfl.fi[, the regulation, provided that the required 17(C), H–18, and H–20 through H–23fi. The
disclosures are made clearly and model clauses are not included in the model
except] flHowever,fi formatting
conspicuously. Permissible changes include forms although they are mandatory for
changes may not be made to flto the certain transactions. Creditors using the
the addition of the information permitted by
followingfi model formsfl, model [footnote 37 to] section 226.17 and ‘‘directly model clauses when applicable to a
clauses,fi and samplesfl in related’’ information as set forth in the transaction are deemed to be in compliance
Appendices G and H:fi G–2[(A)], G– commentary to section 226.17(a). with the regulation with regard to that
3[(A)], G–4[(A)], G–10(A)–(E), flG– The creditor may also delete, or on multi- disclosure.
14(A)–(E), G–15(A)–(D),fi G–17(A)–(D), purpose forms, indicate inapplicable 4. Model H–4(A). This model contains the
G–18(A) (except as permitted pursuant disclosures, such as: variable-rate model clauses applicable to
to § 226.7(b)(2)), G–18(B)–(C), G–19, G– • The itemization of the amount financed transactions subject to section 226.18(f)[(1)]
option (See sample[s] H–12[ through H–15].) and is intended to give creditors considerable
20, [and]G–21fl, G–22(A)–(B), G–
• The credit [life and disability] flexibility in structuring variable-rate
23(A)–(B), G–24(A) (except as permitted insurancefl or debt cancellation or debt disclosures to fit individual plans. The
pursuant to § 226.7(a)(2)), G–25, and G– suspension coveragefi disclosures (See information about circumstances, limitations,
26; and H–4(B) through H–4(L), H–17(A) flmodel clauses andfi samples H- and effects of an increase may be given in
through (D), H–19(A)–(I), and H–20 [11]fl17(A) and H–17(C)fi and H- terms of the contract interest rate or the
through H–22.fi The rearrangement of [12]fl17(B) and H–17(D)fi.) annual percentage rate. Clauses are shown for
the model forms and clauses may not be • The property insurance disclosures (See hypothetical examples based on the specific
so extensive as to affect the substance, flmodel clause H–18, and fisamples H–10 amount of the transaction and based on a
clarity, or meaningful sequence of the through H–12[, and H–14].) representative amount. Creditors may
• The ‘‘filing fees’’ and ‘‘nonfiling preprint the variable-rate disclosures based
forms and clauses. Creditors making
insurance’’ disclosures (See samples H–11 on a representative amount for similar types
revisions with that effect will lose their and H–12.) of transactions, instead of constructing an
protection from civil liability. Except as • The prepayment penalty or rebate individualized example for each transaction.
otherwise specifically required, disclosures (See sample[s] H–12[ and H–14].) In both representative examples and
acceptable changes include, for • The total sale price (See samples H–11 transaction-specific examples, creditors may
example: through H-[15]fl12fi.) refer either to the incremental change in rate,
i. Using the first person, instead of the Other permissible changes include: payment amount, or number of payments, or
second person, in referring to the • Adding the creditor’s address or to the resulting rate, payment amount, or
borrower. telephone number. (See the commentary to number of payments. For example, creditors
ii. Using ‘‘borrower’’ and ‘‘creditor’’ § 226.18(a).) may state that the rate will increase by 2
instead of pronouns. • Combining required terms where several percent, with a corresponding $150 increase
iii. Rearranging the sequences of the numerical disclosures are the same, for in the payment, or creditors may state that
instance, if the ‘‘total of payments’’ equals the rate will increase to 16 percent, with a
disclosures. the ‘‘total sale price.’’ (See the commentary corresponding payment of $850.
iv. Not using bold type for headings. to § 226.18.) 5. Model H–4(B)fl and Samples H–4(D)
v. Incorporating certain state ‘‘plain • Rearranging the sequence or location of through (F)fi. [This model clause illustrates
English’’ requirements. the disclosures—for instance, by placing the the variable-rate disclosure required under
vi. Deleting inapplicable disclosures descriptive phrases outside the boxes section 226.18(f)(2), which would alert
by whiting out, blocking out, filling in containing the corresponding disclosures, or consumers to the fact that the transaction
‘‘N/A’’ (not applicable) or ‘‘0,’’ crossing by grouping the descriptors together as a contains a variable-rate feature and that
out, leaving blanks, checking a box for glossary of terms in a separate section of the disclosures were provided earlier]flModel
applicable items, or circling applicable segregated disclosures; by placing the H–4(B) illustrates, in the tabular format, the
items. (This should permit use of payment schedule at the top of the form; or disclosures required under section 226.19(b)
multipurpose standard forms flfor by changing the order of the disclosures in for adjustable-rate transactions secured by
the boxes, including the annual percentage real property or a dwelling. The model form
transactions not secured by real rate and finance charge boxes. alerts consumers to risky features of the
property or a dwellingfi.) • Using brackets, instead of checkboxes, to specific adjustable-rate mortgage program,
[vii. Using a vertical, rather than a indicate inapplicable disclosures. and includes information on how the interest
horizontal, format for the boxes in the • Using a line for the consumer to initial, rate is determined and how it can change
closed-end disclosures.] rather than a checkbox, to indicate an over time. The model form also directs the
2. Debt cancellation coverage. This election to receive an itemization of the consumer to a Web site to obtain additional
regulation does not authorize creditors amount financed. information on adjustable-rate programs or to
find a list of licensed housing counselors. parenthetical is not optional. See the § 226.32(c)(1) through (5). The sample
Samples H–4(D) through (F) illustrate how to commentary to section 226.2(a)(25) regarding illustratesfl notices,fi the amount
adapt the model form and clauses contained the specificity of the security interest borrowedfl,fi and the disclosures about
in appendix H–4(B) and H–4(C) to the disclosure for model form H–9. The prior optional insurance that are required for
creditor’s own particular adjustable-rate version of model form H–9 is substantially mortgage refinancings under § 226.32(c)(5).
program. Except as otherwise permitted, similar to the current version and creditors The sample also includes disclosures
disclosures must be substantially similar in may continue to use it, as appropriate. required under § 226.32(c)(3) when the legal
sequence and format to Model H–4(B). See Creditors are encouraged, however, to use the obligation includes a balloon
comment app. H–18 regarding formatting current version when reordering or reprinting payment.fi[This sample illustrates a
details for samples H–4(D) through H–4(F).fi forms. mortgage with a demand feature. The loan
6. Model H–4(C). Th[is]flefi model 12. Sample forms. [The sample amount is $44,900, payable in 360 monthly
clauseflsfi illustrate[s] flcertainfi[the] forms]flSamplesfi [(]flH–4(D) through H- installments at a simple interest rate of
early disclosures required generally under (F), H4(I) and H–4(J),fiH–10 through H- 14.75%. The 15 days of interim interest
226.19(b). [It]flTheyfi include[s] [15]fl12, H–17(B) and H–17(D), and H–19(D) ($294.34) is collected as a prepaid finance
information on how the consumer’s interest through (I)fi[)] serve a different purpose than charge at the time of consummation of the
rate is determined and how it can change the model formsfl and model clausesfi. The loan (April 15, 1981). In calculating the
over the term of the loanfl when there is samples illustrate various ways of adapting disclosure amounts, the minor irregularities
carryover interest, a conversion feature, or a the model forms to the individual provision in § 226.17(c)(4) has been used.
preferred ratefi[, and explains changes that transactions described in the commentary to The property insurance premiums are not
may occur in the borrower’s monthly appendix H. The deletions and included in the payment schedule. This
payment. It contains an example of how to rearrangements shown relate only to the disclosure statement could be used for notes
disclose historical changes in the index or specific transactions described. As a result, with the 7-year call option required by the
formula values used to compute interest rates the samples do not provide the general Federal National Mortgage Association
for the preceding 15 years. The model clause protection from civil liability provided by the (FNMA) in states where due-on-sale clauses
also illustrates the disclosure of the initial model forms and clauses. are prohibited.]
and maximum interest rates and payments 13. Sample H–10. This sample illustrates 18. [Sample H–14]flModels H–19(A)
based on an initial interest rate (index value an automobile credit sale. The cash price is through H–19(C)fi. fli. These model forms
plus margin, adjusted by the amount of any $7,500 with a downpayment of $1,500. There illustrate, in the tabular format, the
discount or premium) in effect as of an is an 8% add-on interest rate and a term of disclosures required generally under
identified month and year for the loan 3 years, with 36 equal monthly payments. § 226.38(a) through 226.38(j) for transactions
program disclosure and illustrates how to The credit life insurance premium and the secured by real property or a dwelling.
provide consumers with a method for filing fees are financed by the creditor. There Creditors can use model H–19(A) for fixed-
calculating the monthly payment for the loan is a $25 credit report fee paid by the rate mortgage loans subject to § 226.38;
amount to be borrowed]. consumer before consummation, which is a model H–19(B) for adjustable-rate mortgages
7. Modelflsfi H–4[D]fl(G), (H), and (K), prepaid finance charge. subject to § 226.38; and model H–19(C) for
and Samples H–4(I) and (J)fi. [This 14. Sample H–11. This sample illustrates mortgages that are negatively amortizing and
model]flModel H–4(G), andfi model an installment loan. The amount of the loan subject to § 226.38.
clausefls contained in H–4(H),fi is $5,000. There is a 12% simple interest rate ii. Except as otherwise permitted,
illustrate[s]fl, in the tabular format, the and a term of 2 years. The date of the disclosures must be substantially similar in
disclosuresfi [the adjustment notice] transaction is expected to be April 15, 1981, sequence and format to model forms H–19(A)
required under section 226.20(c) [and with the first payment due on June 1, 1981. through (C), as applicable.
provides] flregarding interest rate The first payment amount is labelled as an iii. Although creditors are not required to
adjustment notices for adjustable rate estimate since the transaction date is use a certain paper size in disclosing the
transactions secured by real property or a uncertain. The odd days’ interest ($26.67) is §§ 226.19(b), 226.20(c), 226.20(d) or 226.38
dwelling. Model H–4(K) illustrates an annual collected with the first payment. The disclosures, samples H–4(D) through H–(F),
notice of interest rate change without any remaining 23 monthly payments are equal. and H–19(D) through H–19(I) are designed to
corresponding change to payment. Samples 15. Sample H–12. This sample illustrates a be printed on an 8 × 111⁄2 sheet of paper. In
H–4(I) and (J) providefi examples of refinancing and consolidation loan. The addition, the following formatting techniques
payment-change notices [and annual notices amount of the loan is $5,000. There is a 15% were used in presenting the information in
of interest-rate changes]fl for an interest- simple interest rate and a term of 3 years. The the sample forms to ensure that the
only, adjustable rate transaction and a hybrid date of the transaction is April 1, 1981, with information is readable:
adjustable rate transaction, respectively. the first payment due on May 1, 1981. The A. A readable font style and font size (10-
Except as otherwise permitted, disclosures first 35 monthly payments are equal, with an point Arial font style, except for the annual
must be substantially similar in sequence and odd final payment. The credit disability percentage rate which is shown in 16-point
format to Models H–4(G) or H–4(K).fi insurance premium is financed. In type);
8. Model H–5. This contains the demand calculating the annual percentage rate, the B. Sufficient spacing between lines of the
feature clause. U.S. Rule has been used. Since an text;
9. Model H–6. [This contains the itemization of the amount financed is C. Standard spacing between words and
assumption clause.]flReservedfi included with the disclosures, the statement characters. In other words, the text was not
10. Model H–7. This contains the required regarding the consumer’s option to receive an compressed to appear smaller than 10-point
deposit clause. itemization is deleted. type, except the headings in the tabular
11. Models H–8 and H–9. These models 16. Samples H–[13]fl19(D)fi through H– format used to provide the interest rate and
contain the rescission notices for a typical [15]fl19(I)fi. These samples illustrate payment disclosures required under
closed-end transaction and a refinancing, various mortgage transactions. They assume § 226.38(c), which are shown in 9-point type;
respectively. The last paragraph of each that the mortgages are subject to the Real D. Sufficient white space around the text
model form contains a blank for the date by Estate Settlement Procedures Act (RESPA). of the information in each row, by providing
which the consumer’s notice of cancellation As a result, no option regarding the sufficient margins above, below and to the
must be sent or delivered. A parenthetical is itemization of the amount financed has been sides of the text;
included to address the situation in which included in the samples, because providing E. Sufficient contrast between the text and
the consumer’s right to rescind the the good faith estimates of settlement costs the background. Generally, black text was
transaction exists beyond 3 business days required by RESPA satisfies Truth in used on white paper.
following the date of the transaction, for Lending’s amount financed itemization iv. The Board is not requiring creditors to
example, where the notice or material requirement. (See [footnote 39 to § 226.18(c) use the above formatting techniques in
disclosures are delivered late or where the ]fl§ 226.38(j)(1)(iii)fi.) presenting information in the tabular format
date of the transaction in paragraph 1 of the 17. Sample H–[13]fl16fi. flThis sample or scaled graph (except for the 10-point and
notice is an estimate. The language of the illustrates the disclosures required under 16-point minimum font requirements);
however, the Board encourages creditors to with a 5-year graduation period and a 71⁄2 transaction is February 26, 2009, and the
consider these techniques when disclosing percent yearly increase in payments. The sample assumes the average prime offer rate
information in the table or scaled graph to loan amount is $44,900, payable in 360 for the week of February 23, 2009 is 6.50%.
ensure that the information is presented in a monthly installments at a simple interest rate The taxes and property insurance premiums
readable format.fi[This sample disclosure of 14.75%. Two points ($898), as well as an are escrowed, and therefore, are shown as
form illustrates the disclosures under initial mortgage guarantee insurance included in the total estimated monthly
§ 226.19(b) for a variable-rate transaction premium of $225.00, are included in the payment in interest rate and payment
secured by the consumer’s principal dwelling prepaid finance charge. The mortgage summary table required under § 226.38(c).
with a term greater than one year. The guarantee insurance premiums are calculated 23. Sample H–19(H). This sample
sample form shows a creditor how to adapt on the basis of 1⁄4 of 1% of the outstanding illustrates the disclosures under § 226.38 for
the model clauses in appendix H–4(C) to the principal balance under an annual reduction a hybrid adjustable rate mortgage. The loan
creditor’s own particular variable-rate plan. The abbreviated disclosure permitted has an interest only payment option for the
program. The sample disclosure form under § 226.18(g)(2) is used for the payment first 5 years, and a prepayment penalty that
describes the features of a specific variable- schedule for years 6 through 30. The is in effect for the first 2 years. The loan
rate mortgage program and alerts the prepayment disclosure refers to both amount is $200,000, payable in 360 monthly
consumer to the fact that information on the penalties and rebates because information installments, with an initial discounted rate
creditor’s other closed-end variable-rate about penalties is required for the simple of 6.875% that is fixed for the first 5 years.
programs is available upon request. It interest portion of the obligation and The date of the transaction is February 26,
includes information on how the interest rate information about rebates is required for the 2009, and the sample assumes the average
is determined and how it can change over mortgage insurance portion of the obligation.] prime offer rate for the week of February 23,
time. Section 226.19(b)(2)(viii) permits 20. Sample H–[16]fl19(E)fi. flThis 2009 is 4.00%. The taxes, property insurance
creditors the option to provide either a sample illustrates the disclosures under and private mortgage insurance premiums
historical example or an initial and § 226.38 for a fixed rate mortgage with are escrowed, and therefore, are included in
maximum interest rates and payments interest-only payments for the first 10 years. the interest rate and payment summary table
disclosure; both are illustrated in the sample The loan amount is $200,000, payable in 360 required under § 226.38(c).
disclosure. The historical example explains monthly installments, at a simple interest 24. Sample H–19(I). This sample illustrates
how the monthly payment can change based rate of 6.50%. The date of the transaction is the disclosures under § 226.38 for an
on a $10,000 loan amount, payable in 360 February 26, 2009, and the sample assumes adjustable-rate mortgage with payment
monthly installments, based on historical the average prime offer rate for the week of options. The loan amount is $200,000 and
changes in the values for the weekly average February 23, 2009 is 6.19%. The taxes and payable in 360 monthly installments. The
yield on U.S. Treasury Securities adjusted to property insurance premiums are escrowed, loan has an initial 1-month introductory rate
a constant maturity of one year. Index values and therefore, are shown as included in the of 1.5% that adjusts to the maximum of
are measured for 15 years, as of the first week total estimated monthly payment in the 10.5% in the second month of the loan. The
ending in July. This reflects the requirement interest rate and payment summary table date of the transaction is February 4, 2009,
that the index history be based on values for required under § 226.38(c).fi[This sample and the sample assumes the average prime
the same date or period each year in the illustrates the disclosures required under offer rate for the week of February 2, 2009 is
example. The sample disclosure also § 226.32(c). The sample illustrates the 4.75%. The minimum payment option has an
illustrates the alternative disclosure under amount borrowed and the disclosures about annual payment cap of 7.5% and can be
§ 226.19(b)(2)(viii)(B) that the initial and the optional insurance that are required for made until the loan recasts at 115% of the
maximum interest rates and payments be mortgage refinancings under § 226.32(c)(5). original loan amount. This sample assumes
shown for a $10,000 loan originated at an Creditors may, at their option, include these only minimum payments are made until the
initial interest rate of 12.41 percent (which disclosures for all loans subject to § 226.32. loan recasts in June 2011, when fully
was in effect July 1996) and to have 2 The sample also includes disclosures amortizing payments of $2,402.54 would be
percentage point annual (and 5 percentage required under § 226.32(c)(3) when the legal required. The taxes and property insurance
point overall) interest rate limitations or obligation includes a balloon payment]. are escrowed, and therefore, a statement of
caps. Thus, the maximum amount that the fl21. Sample H–19(F). This sample the amount of estimated taxes and insurance
interest rate could rise under this program is illustrates the disclosures under § 226.38 for is included in the interest rate and payment
5 percentage points higher than the 12.41 a step-payment mortgage with a seven-year summary disclosure required under
percent initial rate to 17.41 percent, and the step period and a 4 percent annual payment § 226.38(c)(6)(i).
monthly payment could rise from $106.03 to cap. This sample does not offer payment 25. Model H–20. This contains the balloon
a maximum of $145.34. The loan would not options. The consumer is required to make payment clause.
reach the maximum interest rate until its minimum payments for the first seven years; 26. Model H–21. This contains the
fourth year because of the 2 percentage point the minimum payments cover no principal introductory rate clause.
annual rate limitations, and the maximum and only some interest for the first two years 27. Model H–22. These model clauses
payment disclosed reflects the amortization and therefore, the mortgage has a negative illustrate, in the tabular format, the
of the loan during that period. The sample amortization feature. Fully amortizing disclosures required generally under
form also illustrates how to provide payments begin in year eight. The loan § 226.38(d)(2) regarding key questions about
consumers with a method for calculating amount is $200,000, payable in 360 monthly risk for transactions secured by real property
their actual monthly payment for a loan installments at a simple interest rate of or a dwelling. Except as otherwise permitted,
amount other than $10,000.] 6.50%. The date of the transaction is disclosures must be substantially similar in
19. Sample H–[15]fl19(D)fi. flThis February 4, 2009, and the sample assumes sequence and format to model forms H–
sample illustrates the disclosures under the average prime offer rate for the week of 19(A)–(C).
§ 226.38 for a fixed rate mortgage with a February 2, 2009 is 5.75%. The taxes and 28. Model H–23. These model clauses
shared-equity feature. The loan amount is property insurance are escrowed, and illustrate the following disclosures required
$210,000, payable in 36 monthly installments therefore, a statement of the amount of generally under § 226.38(j)(2)–(6) for
at a simple interest rate of 5.50%. The date estimated taxes and insurance is included in transactions secured by real property or a
of the transaction is March 26, 2009, and the the interest rate and payment summary dwelling: rebate; late payment; property
sample assumes the average prime offer rate disclosure required under § 226.38(c)(6)(i). insurance; contract reference; and
for the week of March 23, 2009 is 5.66%. 22. Sample H–19(G). This sample assumption.fi
There is a balloon payment of $202,217.84 illustrates the disclosures under § 226.38 for [21]fl29fi. HRSA–500–1 9–82. Pursuant
due in March 2012. The taxes and property a hybrid adjustable rate mortgage with a to section 113(a) of the Truth in Lending Act,
insurance premiums are not escrowed, and prepayment penalty that is in effect for the Form HRSA–500–1 9–82 issued by the U.S.
therefore, are shown as not included in the first 2 years. The loan amount is $200,000, Department of Health and Human Services
interest rate and payment summary table payable in 360 monthly installments, with an for certain student loans has been approved.
required under § 226.38(c).fi[This sample initial discounted rate of 5.625% that is fixed The form may be used for all Health
illustrates a graduated payment mortgage for the first 3 years. The date of the Education Assistance Loans (HEAL) with a
variable interest rate that are interim student Department of Health and Human Services borrower has reached repayment status and
credit extensions as defined in Regulation Z. for certain student loans has been approved. is making payments of both interest and
[22]fl30fi. HRSA–500–2 9–82. Pursuant The form may be used for all HEAL loans principal.
to section 113(a) of the Truth in Lending Act, with a variable interest rate in which the
Form HRSA–500–2 9–82 issued by the U.S. borrower has reached repayment status and By order of the Board of Governors of the
Department of Health and Human Services is making payments of both interest and Federal Reserve System, July 24, 2009.
for certain student loans has been approved. principal. Robert deV. Frierson,
The form may be used for all HEAL loans [24]fl32fi. HRSA–502–2 9–82. Pursuant Deputy Secretary of the Board.
with a fixed interest rate that are interim to section 113(a) of the Truth in Lending Act,
student credit extensions as defined in Form HRSA–502–2 9–82 issued by the U.S. Note: The following attachments A and B
Regulation Z. Department of Health and Human Services will not appear in the Code of Federal
[23]fl31fi. HRSA–502–1 9–82. Pursuant for certain student loans has been approved. Regulations.
to section 113(a) of the Truth in Lending Act, The form may be used for all HEAL loans
Form HRSA–502–1 9–82 issued by the U.S. with a fixed interest rate in which the BILLING CODE 6210–01–P
EP26AU09.055</GPH>
[FR Doc. E9–18119 Filed 8–25–09; 8:45 am]

EP26AU09.056</GPH>
BILLING CODE 6210–01–C

Wednesday, August 26, 2009

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FEDERAL RESERVE SYSTEM http://www.federalreserve.gov/ faith Board or official staff

on whether credit is an open-end answer format, a streamlined plain-

changes include: 1 The review was initiated pursuant to

terms, the revised TILA disclosure and eleven rounds of one-on-one

arrangements of the borrower, the 14 Id.

to the extension of credit.’’ 15 U.S.C. should increase the finance charge

mortgages secured by real property or a current § 226.18(f)(1) would be deleted,

of § 226.18(e). Technical amendments to dwelling, are unnecessary and would be

under §§ 226.18(f)(2)(ii) or 226.19(b). requirements for variable-rate loans

§ 226.19(c). began to slow as consumers experienced

disclose that payments previously were 20(c)(2)(v) redesignated as proposed § 226.20(c)(3).

to which transactions the requirement to 20(c)(3)(iv)

(2005). consumers.’’ TILA Section 102(a), 15 Baltimore, Maryland, FDIC–07–285b, FDIC–08–

59 News Release, Fannie Mae and Freddie Mac

dwelling in connection with a closed- consumer advocates urged the Board to

unnecessary to achieve the purposes of Prohibition of compensation from

mortgage,’’ or a ‘‘fixed-rate mortgage’’ comment 17(c)(1)–11 which provide

§§ 226.19(a)(2)(ii), 226.19(a)(2)(iii)– Although some consumers might benefit

comment 38(a)(5)–1 is consistent with the penalty disclosure. Further, if a possible.

§ 226.35(a) in determining how to select more complicated and would vary

creditor must include a description such Principal and interest payments.

Payment increases. Proposed § 226.38(d)(2) would require the creditor

aggregated do not fully amortize the Finally, proposed 226.38(d)(3)(iv)

amounts that are financed necessarily

conspicuously in writing, in a form that 37 ﬂ[Reserved]ﬁ[The disclosures may include

40 ﬂ[Reserved]ﬁ[Good faith estimates of

45a ﬂReserved.ﬁ[Information provided in

(ii) The creditor has mailed or mortgage brokers;

* * * * * directly or indirectly, in connection ‘‘type of transaction’’ refers to whether

BILLING CODE 6210–01–C

transactions. Charges imposed

18(d) Finance charge. [Section 226.18(f)(1) applies to variable- Paragraph 18(f)(1)[(i)].

the existence of a prepayment penalty. compensation through increased pursuant to § 226.36(d)(2).

ﬂ36(d)(3) Affiliates. already do business. To be considered a complies with § 226.36(e)(2) is deemed

[FR Doc. E9–18119 Filed 8–25–09; 8:45 am]

BILLING CODE 6210–01–C

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