This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by

the Superintendent of Documents. Prices of

new books are listed in the first FEDERAL

REGISTER issue of each week.

Rules and Regulations Federal Register

11319 

Vol. 76, No. 41 

Wednesday, March 2, 2011 

1Public Law 111–203, 124 Stat. 1376. 

2Public Law 111–203, § 1461, 124 Stat. 1376, 

2178 (to be codified at 15 U.S.C. 1639D). 3See Freddie Mac, Bulletin No. 2010–28, 2011 

Loan Limits, available at http:// 

www.freddiemac.com/sell/guide/bulletins/pdf/ 

bll1028.pdf. 

FEDERAL RESERVE SYSTEM 

12 CFR Part 226 

[Regulation Z; Docket No. R–1392] 

RIN No. AD 7100–AD54 

Truth in Lending 

AGENCY: Board of Governors of the 

Federal Reserve System. 

ACTION: Final rule; official staff 

commentary. 

SUMMARY: The Board is publishing a 

final rule to amend Regulation Z, which 

implements the Truth in Lending Act 

(TILA). The final rule implements 

Section 1461 of the recently enacted 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act. Section 1461 

amends TILA to provide a separate, 

higher rate threshold for determining 

when the Board’s escrow requirement 

applies to higher-priced mortgage loans 

that exceed the maximum principal 

obligation eligible for purchase by 

Freddie Mac. 

DATES: The final rule is effective on 

April 1, 2011, for covered loans for 

which an application is received by a 

creditor on or after that date. 

FOR FURTHER INFORMATION CONTACT: 

Jamie Z. Goodson, Attorney, or Paul 

Mondor, Senior Attorney, Division of 

Consumer and Community Affairs, 

Board of Governors of the Federal 

Reserve System, Washington, DC 20551, 

at (202) 452–2412 or (202) 452–3667. 

For users of Telecommunications 

Device for the Deaf (TDD) only, contact 

(202) 263–4869. 

SUPPLEMENTARY INFORMATION: 

I. Background 

A. TILA and Regulation Z 

Congress enacted the Truth in 

Lending Act (TILA) based on findings 

that economic stability would be 

enhanced and competition among 

consumer credit providers would be 

strengthened by the informed use of 

credit resulting from consumers’ 

awareness of the cost of credit. One of 

the purposes of TILA is to provide 

meaningful disclosure of credit terms, to 

enable consumers to compare credit 

terms available in the marketplace more 

readily and avoid the uninformed use of 

credit. 

TILA’s disclosures differ depending 

on whether credit is an open-end 

(revolving) plan or a closed-end 

(installment) loan. TILA also contains 

procedural and substantive protections 

for consumers. TILA is implemented by 

the Board’s Regulation Z. An Official 

Staff Commentary interprets the 

requirements of Regulation Z. By 

statute, creditors that follow in good 

faith Board or official staff 

interpretations are insulated from civil 

liability, criminal penalties, and 

administrative sanction. 

In 1994, Congress amended TILA by 

enacting the Home Ownership and 

Equity Protection Act (HOEPA). The 

HOEPA amendments created special 

substantive protections for consumers 

obtaining mortgage loans with annual 

percentage rates (APRs) or total points 

and fees exceeding prescribed 

thresholds. In addition, TILA Section 

129(l)(2)(A), as added by HOEPA, 

authorizes the Board to prohibit acts 

and practices the Board finds to be 

unfair and deceptive in connection with 

mortgage loans. 15 U.S.C. 1639(l)(2)(A). 

B. The 2008 HOEPA Final Rule 

In July of 2008, the Board adopted 

final rules pursuant to the Board’s 

authority in Section 129(l)(2)(A). 73 FR 

44522, July 30, 2008 (2008 HOEPA Final 

Rule). The 2008 HOEPA Final Rule 

defined a class of ‘‘higher-priced 

mortgage loans’’ and prohibited certain 

lending and servicing practices in 

connection with such transactions. 

Among other things, the Board 

prohibited extending a higher-priced 

mortgage loan secured by a first lien 

unless an escrow account is established 

before consummation for payment of 

property taxes and premiums for 

mortgage-related insurance required by 

the creditor. See § 226.35(b)(3). 

Under the 2008 HOEPA Final Rule, a 

higher-priced mortgage loan is a 

consumer credit transaction secured by 

the consumer’s principal dwelling with 

an APR that exceeds the average prime 

offer rate for a comparable transaction, 

as of the date the transaction’s interest 

rate is set, by 1.5 or more percentage 

points for loans secured by a first lien, 

or by 3.5 or more percentage points for 

loans secured by a subordinate lien. See 

§ 226.35(a)(1). 

C. The Dodd-Frank Act 

On July 21, 2010, the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (the Dodd-Frank Act) 

was signed into law.1 Section 1461 of 

the Dodd-Frank Act creates TILA 

Section 129D.2 TILA Section 129D 

substantially codifies the requirement in 

Regulation Z that escrow accounts for 

taxes and insurance be established for 

first-lien higher-priced mortgage loans, 

adopted by the Board as part of the 2008 

HOEPA Final Rule. As discussed above, 

the 2008 HOEPA Final Rule imposed 

the escrow requirement on first-lien 

mortgage transactions having an APR 

that exceeds the average prime offer rate 

for a comparable transaction by 1.5 or 

more percentage points. The DoddFrank Act incorporates this coverage 

test in new TILA Section 129D for loans 

that do not exceed the maximum 

original principal obligation for a 

mortgage to be eligible for purchase by 

Freddie Mac. TILA Section 

129D(b)(3)(A) (to be codified at 15 

U.S.C. 1639d(b)(3)(A)). 

For loans with an original principal 

obligation that exceeds the applicable 

Freddie Mac maximum principal 

obligation, TILA Section 129D requires 

escrow accounts only if the APR 

exceeds the applicable average prime 

offer rate by 2.5 or more percentage 

points. TILA Section 129D(b)(3)(B) (to 

be codified at 15 U.S.C. 1639d(b)(3)(B)). 

The current maximum principal 

obligation for a mortgage loan to be 

eligible for purchase in 2011 by Freddie 

Mac is $417,000 for a single-family 

property that is not located in a 

designated ‘‘high-cost’’ area.3 (Higher 

limits apply for mortgage loans secured 

by a property with two to four 

residential units.) Thus, if the original 

principal obligation for a mortgage loan 

secured by a single-family property in 

such an area is $415,000, the 

determination of whether the loan is 

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11320 Federal Register / Vol. 76, No. 41 / Wednesday, March 2, 2011 / Rules and Regulations 

subject to the escrow requirement in 

§ 226.35(b)(3) would be made using an 

APR threshold of 1.5 percentage points 

over the applicable average prime offer 

rate; by contrast, if the original principal 

obligation is $420,000, the 

determination would be made using a 

threshold of 2.5 percentage points over 

the applicable average prime offer rate. 

Loans that are not eligible for purchase 

by Freddie Mac because their original 

principal obligation is too large are 

widely referred to in the mortgage 

market as ‘‘jumbo’’ mortgages. The term 

‘‘jumbo’’ also is used in this final rule to 

refer to such loans. 

II. The Board’s September 2010 Escrow 

Proposal 

A. Summary of the September 2010 

Escrow Proposal 

On September 24, 2010, the Board 

published a proposed rule in the 

Federal Register to implement TILA 

Section 129D(b)(3)(B), as enacted by 

Section 1461 of the Dodd-Frank Act. See 

75 FR 58505 (September 2010 Escrow 

Proposal). Accordingly, the Board 

proposed to raise the rate threshold for 

coverage by the escrow account 

requirement for first-lien, higher-priced 

‘‘jumbo’’ mortgage loans. Specifically, 

the Board proposed to require escrows 

for ‘‘jumbo’’ loans whose APR exceeds 

the average prime offer rate for a 

comparable transaction, as of the date 

the transaction’s interest rate is set, by 

2.5 or more percentage points. The 

Board did not propose to implement 

other provisions of the Dodd-Frank Act 

related to escrow accounts under the 

September 2010 Escrow Proposal. The 

Board is proposing rules to implement 

other escrow-related provisions of the 

Dodd-Frank Act in a separate notice 

published elsewhere in today’s Federal 

Register. 

B. Overview of Comments Received 

The comment period on the 

September 2010 Escrow Proposal closed 

on October 25, 2010. The Board 

received 15 comment letters in response 

to the proposed rule, from creditors, 

loan originators, banking trade 

associations, and state banking 

regulators. No comments were received 

from consumers or consumer advocates. 

Commenters generally supported the 

proposed increase in the coverage 

threshold for the escrow requirement, 

for ‘‘jumbo’’ loans. 

Several commenters, however, 

requested that the Board clarify that 

only the dollar amount specified in the 

sixth sentence of Section 305(a)(2) of the 

Federal Home Loan Mortgage 

Corporation Act (FHLMCA), 12 U.S.C. 

1454(a)(2), should be used in 

determining whether or not a loan is a 

‘‘jumbo’’ loan. (Currently, the amount 

specified in that sentence as the 

maximum principal obligation for a loan 

secured by a single-family residence is 

$417,000.) In particular, these 

commenters stated that the higher 

maximum principal obligation set for 

‘‘high-cost’’ areas under Section 

305(a)(2) should not be considered in 

determining whether a loan is a ‘‘jumbo’’ 

loan. For example, if the maximum 

principal obligation eligible for 

purchase by Freddie Mac in a particular 

‘‘high-cost’’ area were $500,000 for a 

single-family residence, these 

commenters believe that a loan with a 

principal obligation between $417,000 

and $500,000 secured by a single-family 

residence in that area should be 

classified as a ‘‘jumbo’’ loan subject to 

the higher rate threshold for 

classification as a higher-priced 

mortgage loan, even though Freddie 

Mac may purchase that loan. 

Other commenters recommended 

exemptions from the escrow 

requirement for higher-priced mortgage 

loans. Recommended exemptions 

included for: (1) Loans a creditor holds 

in portfolio; (2) loans made by 

community banks; (3) loans made in 

rural areas; and (4) small retail loans 

that are first-lien loans because a 

consumer has paid off his larger 

mortgage. Such exceptions are outside 

the scope of this rulemaking. The Board 

is publishing elsewhere in today’s 

Federal Register a proposed rule that 

addresses several of those proposed 

exceptions. 

III. Summary of the Final Rule 

This final rule revises § 226.35(b)(3), 

as proposed, to provide a higher APR 

threshold for determining whether 

‘‘jumbo’’ mortgage loans secured by a 

first lien on a consumer’s principal 

dwelling are higher-priced mortgage 

loans for which an escrow account must 

be established. As revised, the threshold 

for coverage of the escrow requirement 

for ‘‘jumbo’’ loans is 2.5 percentage 

points (rather than 1.5 percentage 

points) in excess of the average prime 

offer rate for a comparable transaction, 

as of the date the transaction’s rate is 

set. Raising the APR threshold 

applicable to ‘‘jumbo’’ loans eliminates 

the mandatory escrow requirement for 

loans with an APR above the existing 

threshold but below the new threshold. 

Creditors may, at their option, elect to 

continue to use the 1.5 percentage point 

threshold for ‘‘jumbo’’ loans. Section 

226.35 and this final rule do not apply 

to open-end credit plans subject to 

§ 226.5b or to loans to finance the initial 

construction of a dwelling, temporary or 

‘‘bridge’’ loans with a term of 12 months 

or less, or reverse mortgages. See 

§ 226.35(a)(3). This final rule is effective 

on April 1, 2011 for covered loans for 

which an application is received on or 

after that date, as discussed in detail 

below in Part VI of this SUPPLEMENTARY

INFORMATION. 

IV. Legal Authority 

The Board amends § 226.35(b)(3) 

pursuant to its authority under TILA 

Section 105(a) to prescribe regulations 

to carry out the purposes of TILA and 

to provide for such requirements, 

adjustments, and exceptions as 

necessary or proper to effectuate the 

purposes of, to prevent circumvention 

of, and facilitate compliance with TILA, 

as discussed in detail below. See 15 

U.S.C. 1604(a) (as revised). 

V. Section-by-Section Analysis 

Section 226.1 Authority, Purpose, 

Coverage, Organization, Enforcement 

and Liability 

1(d) Organization 

Section 226.1(d) describes how 

Regulation Z is organized. Section 

226.1(d)(5) describes Subpart E of 

Regulation Z, which this interim final 

rule amends by revising § 226.35(a)(1) 

and (b)(3)(v). Comment 1(d)(5)–1 is 

revised to add a new subpart 1(d)(5)– 

1.iii, stating that this final rule is 

effective on April 1, 2011, for covered 

transactions for which an application is 

received on or after April 1, 2011. 

Section 226.35 Prohibited Acts or 

Practices in Connection With HigherPriced Mortgage Loans 

35(a) Higher-Priced Mortgage Loans 

35(a)(1) 

As discussed below, the Board revises 

§ 226.35(b)(3) to provide a higher 

threshold for determining whether 

escrow accounts must be established for 

certain closed-end mortgage loans 

secured by a first lien on the consumer’s 

principal dwelling, pursuant to the 

Dodd-Frank Act. As revised, the 

threshold for coverage of the escrow 

requirement for ‘‘jumbo’’ loans is 2.5 

percentage points (rather than the 1.5 

percentage points generally applicable 

under § 226.35(a)(1)) in excess of the 

average prime offer rate for a 

comparable transaction, as of the date 

the transaction’s rate is set. The Board 

is making a conforming amendment to 

§ 226.35(a)(1) to reflect this exception to 

the general coverage test for higherpriced mortgage loans. 

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Federal Register / Vol. 76, No. 41 / Wednesday, March 2, 2011 / Rules and Regulations 11321 

4Section 1124 of HERA revises Section 305(a)(2) 

of the FHLMCA. See Public Law 110–289, 122 Stat. 

2654, 2692. 

5See Public Law 111–242, § 146, 124 Stat. 2607, 

2615 (2010) (providing for adjustments under a 

continuing resolution); Public Law 111–88, § 167, 

122 Stat. 2904, 2973 (2009) (same); see also Public 

Law 110–185, § 201, 122 Stat. 613, 620 (Feb. 13, 

2008) (providing for adjustments under the 

Economic Stimulus Act). 

35(b) Rules for Higher-Priced Mortgage 

Loans 

35(b)(3) Escrows 

35(b)(3)(v) ‘‘Jumbo’’ Loans 

The Board adds a new 

§ 226.35(b)(3)(v) to implement TILA 

Section 129D(b)(3)(B), as enacted by 

Section 1461 of the Dodd-Frank Act. 

Section 226.35(b)(3)(v) provides a 

higher threshold for determining 

whether escrow accounts must be 

established for certain closed-end 

mortgage loans secured by a first lien on 

a consumer’s principal dwelling. 

Currently, under § 226.35(a)(1), such a 

loan is considered a higher-priced 

mortgage loan and is subject to the 

escrow requirement if its APR exceeds 

the average prime offer rate for a 

comparable transaction, as of the date 

the transaction’s rate is set, by 1.5 or 

more percentage points. Pursuant to 

TILA Section 129D(b)(3)(B), for a 

closed-end, first-lien mortgage loan 

whose original principal obligation 

exceeds the current maximum principal 

obligation for loans eligible for purchase 

by Freddie Mac, the applicable rate 

threshold is 2.5 percentage points or 

more above the average prime offer rate 

for a comparable transaction, as of the 

date the transaction’s rate is set. 

Comment 35(b)(3)(v)–1 clarifies that 

adjustments to the maximum principal 

obligation that are made by the Federal 

Housing Finance Agency (FHFA) 

pursuant to FHLMCA Section 305(a)(2) 

or by other federal law will apply in 

determining whether a mortgage loan is 

a ‘‘jumbo’’ loan subject to the higher APR 

threshold under § 226.35(b)(3)(v). 

Comment 35(b)(3)(v)–2 clarifies that the 

higher APR threshold applies solely in 

determining if a ‘‘jumbo’’ loan is subject 

to the escrow requirement. The 

determination of whether ‘‘jumbo’’ firstlien loans are subject to the other 

protections in § 226.35, such as the 

ability to repay requirements under 

§ 226.35(b)(1) and the restrictions on 

prepayment penalties under 

§ 226.35(b)(2), would continue to be 

based on the 1.5 percentage point 

threshold. 

Adjustments pursuant to FHLMCA 

Section 305(a)(2). TILA Section 

129D(b)(3)(B) provides that a separate, 

higher APR threshold applies to a firstlien mortgage loan that exceeds the 

applicable maximum principal 

obligation eligible for purchase by 

Freddie Mac, established pursuant to 

the sixth sentence of FHLMCA Section 

305(a)(2) (the ‘‘general maximum 

principal obligation’’). However, the 

sixth sentence of FHLMCA Section 

305(a)(2), as revised by the Housing and 

Economic Recovery Act of 2008 (HERA), 

also provides that its principal 

obligation limitations are subject to 

other limitations in that paragraph.4See 

12 U.S.C. 1454(a)(2). Other limitations 

in that paragraph include annual 

adjustments based on changes in the 

housing price index maintained by 

FHFA and adjustments to increase the 

maximum principal obligation for loans 

secured by property in ‘‘high-cost’’ areas. 

See 12 U.S.C. 1454(a)(2). The plain 

language of the sixth sentence of 

FHLMCA Section 305(a)(2) incorporates 

by reference limitations set by other 

sentences in Section 305(a)(2). The 

Board believes, therefore, that 

adjustments made pursuant to Section 

305(a)(2) should apply in determining 

whether a loan is a ‘‘jumbo’’ loan subject 

to the higher APR threshold for 

classification as a higher-priced 

mortgage loan. 

The Board believes this is also 

consistent with statutory intent, because 

taking into account adjustments to the 

maximum principal obligation will 

ensure similar treatment of all loans 

eligible for purchase by Freddie Mac. 

The higher threshold for ‘‘jumbo’’ loans 

reflects the higher price typically 

associated with loans that are not 

eligible for purchase by Freddie Mac (or 

by Fannie Mae, which is subject to the 

same limit on the maximum principal 

obligation). Using the higher APR 

threshold for loans that are eligible for 

purchase by Freddie Mac after 

adjustments to the maximum principal 

obligation pursuant to FHLMCA Section 

305(a)(2) would not be consistent with 

the statutory intent. 

Adjustments pursuant to other federal 

law. Legislation enacted by Congress in 

2009 and 2010 provides for further 

adjustments to the maximum principal 

obligation eligible for purchase by 

Freddie Mac. In light of declines in 

home values in certain areas, Congress 

provided in that legislation that the 

maximum principal obligation eligible 

for purchase by Freddie Mac shall be 

the greater of: (1) The maximum 

principal obligation determined 

pursuant to FHLMCA Section 305(a)(2); 

and (2) the maximum principal 

obligation established for 2008 under 

Section 201 of the Economic Stimulus 

Act of 2008.5 The Board believes such 

adjustments also should apply in 

determining if a loan is a ‘‘jumbo’’ loan 

for purposes of § 226.35(b)(3)(v). The 

Board believes such adjustments are 

made pursuant to Section 305(a)(2), 

because they incorporate FHLMCA 

Section 305(a)(2) in the formula used to 

determine the maximum principal 

obligation eligible for purchase by 

Freddie Mac. 

Nevertheless, even if the adjustments 

made pursuant to this legislation are not 

deemed to be made pursuant to Section 

305(a)(2), the Board believes it is 

appropriate to use its authority under 

TILA Section 105(a) to require 

consideration of such adjustments. 15 

U.S.C. 1604(a). TILA Section 105(a) 

authorizes the Board to provide for such 

requirements, adjustments, and 

exceptions for all or any class of 

transactions as in the Board’s judgment 

are necessary or proper to effectuate the 

purposes of, to prevent circumvention 

or evasion of, or to facilitate compliance 

with TILA. The Board believes it is 

necessary and proper, to effectuate the 

purposes of TILA Section 129D(b)(3)(B), 

to make adjustments consistent with the 

provisions of federal law other than 

FHLMCA Section 305(a)(2) to ensure all 

loans eligible for purchase by Freddie 

Mac are treated similarly for purposes of 

the escrow requirements. Further, 

considering the additional adjustments 

made by other federal laws is consistent 

with the language in TILA Section 

129D(b)(3)(B), which states that the 

determination of whether or not a loan 

is a ‘‘jumbo’’ loan subject to a higher 

APR threshold shall be based on the 

maximum principal obligation ‘‘in 

effect’’ for Freddie Mac as of the date the 

transaction’s rate is set. The maximum 

principal obligation in effect is the 

obligation FHFA establishes pursuant to 

both FHLMCA Section 305(a)(2) and 

other federal law. 

The Board also believes those 

adjustments are necessary and proper to 

facilitate compliance with TILA Section 

129D(b)(3)(B). Considering only 

adjustments made under FHLMCA 

Section 305(a)(2) would require 

creditors that sell loans to Freddie Mac 

to use one dollar limit to ascertain what 

rate threshold to apply in determining 

whether a loan is subject to the escrow 

requirements and a different limit to 

determine whether they may sell loans 

to Freddie Mac. The same burden would 

apply for creditors that sell loans to 

Fannie Mae, which is subject to the 

same maximum principal obligation 

limits. Considering adjustments under 

both FHLMCA Section 305(a)(2) and 

other applicable federal law would 

facilitate compliance by eliminating that 

burden. 

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11322 Federal Register / Vol. 76, No. 41 / Wednesday, March 2, 2011 / Rules and Regulations 

6 13 CFR 121.201. 

For the reasons discussed above, and 

pursuant to its authority under TILA 

Section 105(a), the final rule provides 

that FHFA’s adjustments to the general 

maximum principal obligation stated in 

FHLMCA Section 305(a)(2) which are 

made pursuant to other applicable 

federal law shall be considered in 

determining whether a loan is a ‘‘jumbo’’ 

loan subject to § 226.35(b)(3)(v). See 

comment 35(b)(3)(v)–1. 

VI. Effective Date of Final Rule 

The Board is changing the escrow 

requirement’s coverage threshold to 

implement the statutory amendment 

made by the Dodd-Frank Act, as 

discussed above. The amendment 

relieves mortgage creditors of 

compliance with the escrow 

requirement for certain ‘‘jumbo’’ loans. 

When relief is granted from Regulation 

Z’s escrow requirement, the affected 

loans could become subject to any state 

or local laws that prohibit mandatory 

escrow accounts. As a result, some 

creditors might need time to make the 

system changes necessary to comply 

with state or local laws. Accordingly, 

the Board sought comment on the 

amount of time necessary for creditors 

to implement the change in their 

systems and procedures. 

Almost all commenters that discussed 

the implementation period stated that 

the Board should allow creditors to 

immediately use the higher APR 

threshold for classification of a ‘‘jumbo 

loan’’ as a higher-priced mortgage loan. 

One banking trade association stated 

that creditors easily can adjust their 

systems to stop escrowing for such 

loans. Most of the commenters that 

addressed the effective date stated that 

compliance with the higher threshold 

should be optional until final rules are 

issued to implement other escrowrelated requirements under the DoddFrank Act. Those commenters stated 

that creditors would prefer to adjust 

their training and systems to implement 

all escrow-related statutory and 

regulatory requirements at one time. 

Some of those commenters stated that, 

at a minimum, compliance should be 

optional for a period of time; the 

recommended periods ranged between 

six months and one year. An industry 

trade association and a bank stated that 

the effective date for the final rule 

should be delayed until other escrowrelated requirements are implemented. 

The industry trade association 

suggested, in the alternative, at least a 

six-month delay. The industry trade 

association also stated that creditors 

should not have to adjust their systems 

to comply with state or local laws 

prohibiting mandatory escrow accounts 

and again subsequently to comply with 

Board regulations. 

The Dodd-Frank Act does not provide 

an effective date specifically for rules 

implementing TILA Section 

129D(b)(3)(B). The Riegle Community 

Development and Regulatory 

Improvement Act of 1994 requires that 

agency regulations that impose 

additional reporting, disclosure, and 

other requirements on insured 

depository institutions take effect on the 

first day of a calendar quarter following 

publication in final form. 12 U.S.C. 

4802(b). Consistent with the Riegle 

Community Development Act, this final 

rule is effective on April 1, 2011, for 

covered loans for which an application 

is received by a creditor on or after that 

date. See comment 1(d)(5)–1.iii. The 

Board believes that this time period will 

afford creditors sufficient time to adjust 

their systems to eliminate escrow 

accounts for covered loans to comply 

with any applicable state or local laws 

that prohibit requiring an escrow 

account or imposing other escrow 

requirements. 

Under this final rule, creditors can 

choose to continue to escrow for 

‘‘jumbo’’ loans with an APR below the 

new threshold (subject to applicable 

state or local laws). This final rule does 

not require termination of any existing 

escrow account. 

VII. Paperwork Reduction Act 

In accordance with the Paperwork 

Reduction Act (PRA) of 1995 (44 U.S.C. 

3506; 5 CFR part 1320 Appendix A.1), 

the Board reviewed the final rule under 

the authority delegated to the Board by 

the Office of Management and Budget 

(OMB). The rule contains no collections 

of information under the PRA. See 44 

U.S. C. 3502(3). Accordingly, there is no 

paperwork burden associated with the 

rule. 

VIII. Final Regulatory Flexibility 

Analysis 

In accordance with Section 4 of the 

Regulatory Flexibility Act (RFA), 5 

U.S.C. 604, the Board is publishing a 

final regulatory flexibility analysis for 

the amendments to Regulation Z. The 

RFA generally requires an agency to 

assess the impact a rule is expected to 

have on small entities. The RFA 

requires an agency either to provide a 

final regulatory flexibility analysis with 

a final rule or certify that the final rule 

will not have a significant economic 

impact on a substantial number of small 

entities. Under standards the Small 

Business Administration (SBA) sets, the 

threshold for an entity to be considered 

‘‘small’’ is $175 million or less in assets 

for banks and other depository 

institutions and $7 million or less in 

revenues for non-bank mortgage 

lenders.6

A. Statement of the Need for, and 

Objectives of, the Final Rule 

Congress enacted TILA based on 

findings that economic stability would 

be enhanced and competition among 

consumer credit providers would be 

strengthened by the informed use of 

credit resulting from consumers’ 

awareness of the cost of credit. Congress 

enacted HOEPA in 1994 as an 

amendment to TILA. TILA is 

implemented by the Board’s Regulation 

Z. HOEPA imposed additional 

substantive protections on certain highcost mortgage transactions. HOEPA also 

charged the Board with prohibiting acts 

or practices in connection with 

mortgage loans that are unfair, 

deceptive, or designed to evade the 

purposes of HOEPA, and acts or 

practices in connection with refinancing 

of mortgage loans that are associated 

with abusive lending or are otherwise 

not in the interest of borrowers. The 

Board adopted the requirement to 

establish an escrow account for higherpriced mortgage loans under 2008 

HOEPA Final Rule pursuant to this 

mandate. 

The Dodd-Frank Act amended TILA 

to increase the threshold for coverage of 

the escrow requirement, for certain 

loans ineligible for purchase by Freddie 

Mac because their original principal 

obligation is too high (‘‘jumbo’’ loans), as 

discussed above in the SUPPLEMENTARY

INFORMATION. This final rule implements 

that change by amending Regulation Z. 

These amendments are made in 

furtherance of the Board’s responsibility 

to prescribe regulations to carry out the 

purposes of TILA. The legal basis for the 

final rule is in Section 105(a) of TILA. 

15 U.S.C. 1604(a). 

B. Summary of Significant Issues Raised 

by Comments in Response to the Initial 

Regulatory Flexibility Analysis 

In accordance with Section 3(a) of the 

RFA, 5 U.S.C. 603(a), the Board 

prepared an initial regulatory flexibility 

analysis (IRFA) in connection with the 

proposed rule. The IRFA stated that the 

Board believed the proposed rule would 

not have a significant economic effect 

on a substantial number of small 

entities. The Board requested comment 

on the IRFA and on any costs, 

compliance requirements, or changes in 

operating procedures arising from the 

application of the proposed rule to 

small businesses. 

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Federal Register / Vol. 76, No. 41 / Wednesday, March 2, 2011 / Rules and Regulations 11323 

No commenter specifically addressed 

the Board’s IRFA, but several 

commenters stated that compliance with 

recent statutory and regulatory changes 

to requirements for mortgage lending, 

including amendments to TILA and 

Regulation Z, is burdensome in the 

aggregate. Most commenters that 

discussed the effective date stated that 

creditors should be able to use the 

higher annual percentage rate threshold 

immediately, to provide relief in 

connection with ‘‘jumbo’’ loans that 

would be subject to the higher threshold 

for the escrow requirement. Those 

commenters generally recommended, 

however, that compliance with the final 

rule be optional until the Board 

implements other escrow-related 

requirements under the Dodd-Frank 

Act. An industry trade association and 

a bank opposed an immediate effective 

date for the final rule. Both commenters 

that recommended allowing creditors to 

use the higher threshold immediately 

and commenters that recommended 

delaying the effective date of the rule 

suggested that, at a minimum, the Board 

make compliance optional for a period 

of time. Recommended periods ranged 

from 6 months to one year. 

As discussed above in Part VI of the 

SUPPLEMENTARY INFORMATION, the Board 

believes that the effective date of April 

1, 2011, provides sufficient time for 

creditors to adjust their training and 

systems to apply the higher APR 

threshold for ‘‘jumbo’’ loans. The rule is 

effective on that date for loans where 

the creditor receives an application on 

or after April 1, 2011. Escrow accounts 

typically are established when the loan 

is consummated some time after the 

application is processed and approved. 

Further, creditors can choose to 

continue to escrow for ‘‘jumbo’’ loans 

with an APR below the new threshold, 

subject to applicable state or local laws 

prohibiting mandatory escrow or 

imposing other escrow requirements. If 

a creditor elects not to apply the higher 

APR threshold to such loans, it is likely 

that few or no training or systems 

changes will be necessary. 

C. Description and Estimate of Small 

Entities to Which the Final Rule Applies 

The final rule applies to all 

institutions and entities that engage in 

closed-end lending secured by a 

consumer’s principal dwelling. TILA 

and Regulation Z have broad 

applicability to individuals and 

businesses that originate even small 

numbers of home-secured loans. See 

§ 226.1(c)(1). Using data from Reports of 

Condition and Income (Call Reports) of 

depository institutions and certain 

subsidiaries of banks and bank holding 

companies and data reported under the 

Home Mortgage Disclosure Act (HMDA), 

the Board can estimate the approximate 

number of small entities that would be 

subject to the rules. For the majority of 

HMDA respondents that are not 

depository institutions, however, exact 

revenue information is not available. 

Based on the best information 

available, the Board makes the following 

estimate of small entities that are 

affected by this final rule: According to 

September 2010 Call Report data, 

approximately 8,669 small depository 

institutions would be subject to the rule. 

Approximately 15,627 depository 

institutions in the United States filed 

Call Report data, approximately 10,993 

of which had total domestic assets of 

$175 million or less and thus were 

considered small entities for purposes of 

the RFA. Of the 3,788 banks, 507 thrifts, 

6,632 credit unions, and 66 branches of 

foreign banks that filed Call Report data 

and were considered small entities, 

3,667 banks, 479 thrifts, 4,520 credit 

unions, and 3 branches of foreign banks, 

totaling 8,669 institutions, extended 

mortgage credit. For purposes of this 

Call Report analysis, thrifts include 

savings banks, savings and loan entities, 

co-operative banks and industrial banks. 

Further, 1,303 non-depository 

institutions (independent mortgage 

companies, subsidiaries of a depository 

institution, or affiliates of a bank 

holding company) filed HMDA reports 

in 2010 for 2009 lending activities. 

Based on the small volume of lending 

activity reported by these institutions, 

most are likely to be small entities. 

D. Reporting, Recordkeeping, and Other 

Compliance Requirements 

The changes to compliance 

requirements that the final rule makes 

are described in the SUPPLEMENTARY

INFORMATION. The effect of the revisions 

to Regulation Z on small entities is 

minimal because the revisions bring 

about burden relief; certain mortgage 

loans that otherwise would be subject to 

the escrow account requirement in 

§ 226.35(b)(3) are relieved of that 

requirement. To take advantage of that 

relief, some small entities will need to 

modify their home-secured credit 

origination processes once to implement 

the revised coverage test. The precise 

costs to small entities of updating their 

systems are difficult to predict. These 

costs will depend on a number of 

unknown factors, including, among 

other things, the specifications of the 

current systems used by such entities to 

originate mortgage loans and test them 

for ‘‘higher-priced mortgage loan’’ 

coverage. 

E. Steps Taken To Minimize the 

Economic Impact on Small Entities 

The final rule implements a specific 

numerical adjustment to an annual 

percentage rate (APR) threshold 

mandated by Section 1461 the DoddFrank Act for ‘‘jumbo’’ loans, which 

limits the Board’s flexibility to establish 

alternative APR thresholds. The higher 

APR threshold may be used in 

connection with a ‘‘jumbo’’ loan, that is, 

a loan with an original principal 

obligation that exceeds the maximum 

principal obligation for loans eligible for 

purchase by Freddie Mac. As discussed 

above in Part V of the SUPPLEMENTARY

INFORMATION, the Board believes that, 

under the Dodd-Frank Act, loans are 

‘‘jumbo’’ loans for purposes of TILA 

Section 129D if they are ‘‘jumbo’’ loans 

ineligible for purchase by Freddie Mac 

because their original principal 

obligation is too high. Some 

commenters recommended that the 

Board construe Section 1461 of the 

Dodd-Frank Act narrowly to consider 

only the general maximum principal 

obligation for loans eligible for purchase 

by Freddie Mac, despite the fact that the 

maximum principal obligation is higher 

in certain high-cost areas. 

The Board is not adopting that 

suggested alternative. As discussed in 

greater detail in Part V of the 

SUPPLEMENTARY INFORMATION, the Board 

believes that the Dodd-Frank Act 

requires consideration of adjustments to 

the general maximum principal 

obligation made by the Federal Housing 

Finance Agency (FHFA) pursuant to 

Section 305(a)(2) of the Federal Home 

Loan Mortgage Corporation Act 

(FHLMCA). Further, the Board believes 

that it is necessary to consider 

additional adjustments FHFA makes 

pursuant to other applicable federal law 

to effectuate the purposes of and 

facilitate compliance with TILA, as 

discussed above. 

List of Subjects in 12 CFR Part 226 

Advertising, Consumer protection, 

Federal Reserve System, Mortgages, 

Reporting and recordkeeping 

requirements, Truth in lending. 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Board amends Regulation 

Z, 12 CFR part 226, as set forth below: 

PART 226—TRUTH IN LENDING 

(REGULATION Z) 

■ 1. The authority citation for part 226 

is revised to read as follows: 

Authority: 12 U.S.C. 3806; 15 U.S.C. 1604, 

1637(c)(5), and 1639(l); Pub. L. 111–24 § 2, 

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11324 Federal Register / Vol. 76, No. 41 / Wednesday, March 2, 2011 / Rules and Regulations 

123 Stat. 1734; Pub. L. 111–203, 124 Stat. 

1376. 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

■ 2. Section 226.35 is amended by 

revising paragraph (a)(1) and adding 

paragraph (b)(3)(v) to read as follows: 

§ 226.35 Prohibited acts or practices in 

connection with higher-priced mortgage 

loans. 

(a) Higher-priced mortgage loans—(1) 

For purposes of this section, except as 

provided in paragraph (b)(3)(v) of this 

section, a higher-priced mortgage loan is 

a consumer credit transaction secured 

by the consumer’s principal dwelling 

with an annual percentage rate that 

exceeds the average prime offer rate for 

a comparable transaction as of the date 

the interest rate is set by 1.5 or more 

percentage points for loans secured by 

a first lien on a dwelling, or by 3.5 or 

more percentage points for loans 

secured by a subordinate lien on a 

dwelling. 

* * * * * 

(b) * * * 

(3) * * * 

(v) ‘‘Jumbo’’ loans. For purposes of 

this § 226.35(b)(3), for a transaction with 

a principal obligation at consummation 

that exceeds the limit in effect as of the 

date the transaction’s interest rate is set 

for the maximum principal obligation 

eligible for purchase by Freddie Mac, 

the coverage threshold set forth in 

paragraph (a)(1) of this section for loans 

secured by a first lien on a dwelling 

shall be 2.5 or more percentage points 

greater than the applicable average 

prime offer rate. 

* * * * * 

■ 3. In Supplement I to Part 226: 

■ A. Under Section 226.1—Authority, 

Purpose, Coverage, Organization, 

Enforcement and Liability, new 

paragraph 1(d)(5)–1.iii is added. 

■ B. Under Section 226.35—Prohibited 

Acts or Practices in Connection With 

Higher-Priced Mortgage Loans, 35(b) 

Rules for higher-priced mortgage loans, 

35(b)(3) Escrows, new heading 

35(b)(3)(v) ‘‘Jumbo’’ loans and new 

paragraphs 1 and 2 are added. 

Supplement I to Part 226—Official Staff 

Interpretations 

* * * * * 

Subpart A—General 

Section 226.1—Authority, Purpose, Coverage, 

Organization, Enforcement and Liability 

Paragraph 1(d)(5). 

1. Effective dates. 

i. * * * 

ii. * * * 

iii. The final rule revising escrow 

requirements under § 226.35(b)(3) published 

on March 2, 2011 applies to certain closedend extensions of consumer credit secured by 

the consumer’s principal dwelling. See 

§ 226.35(a). Covered transactions for which 

an application is received by a creditor on or 

after April 1, 2011 are subject to 

§ 226.35(b)(3), as revised. 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

* * * * * 

Section 226.35—Prohibited Acts or Practices 

in Connection With Higher-Priced Mortgage 

Loans 

* * * * * 

35(b) Rules for higher-priced mortgage 

loans. 

* * * * * 

35(b)(3) Escrows. 

* * * * * 

35(b)(3)(v) ‘‘Jumbo’’ loans. 

1. Special threshold for ‘‘jumbo’’ loans. For 

purposes of the escrow requirement in 

§ 226.35(b)(3) only, the coverage threshold 

stated in § 226.35(a)(1) for first-lien loans (1.5 

or more percentage points greater than the 

average prime offer rate) does not apply to a 

loan with a principal obligation that exceeds 

the limit in effect as of the date the loan’s rate 

is set for the maximum principal obligation 

eligible for purchase by Freddie Mac 

(‘‘jumbo’’ loans). The Federal Housing 

Finance Agency (FHFA) establishes and 

adjusts the maximum principal obligation 

pursuant to 12 U.S.C. 1454(a)(2) and other 

provisions of federal law. Adjustments to the 

maximum principal obligation made by 

FHFA apply in determining whether a 

mortgage loan is a ‘‘jumbo’’ loan to which the 

separate coverage threshold in 

§ 226.35(b)(3)(v) applies. 

2. Escrow requirements only. Under 

§ 226.35(b)(3)(v), for ‘‘jumbo’’ loans, the 

annual percentage rate threshold is 2.5 or 

more percentage points greater than the 

average prime offer rate. This threshold 

applies solely in determining whether a 

‘‘jumbo’’ loan is subject to the escrow 

requirement of § 226.35(b)(3). The 

determination of whether ‘‘jumbo’’ first-lien 

loans are subject to the other protections in 

§ 226.35, such as the ability to repay 

requirements under § 226.35(b)(1) and the 

restrictions on prepayment penalties under 

§ 226.35(b)(2), is based on the 1.5 percentage 

point threshold stated in § 226.35(a)(1). 

* * * * * 

By order of the Board of Governors of the 

Federal Reserve System, February 23, 2011. 

Jennifer J. Johnson, 

Secretary of the Board. 

[FR Doc. 2011–4384 Filed 3–1–11; 8:45 am] 

BILLING CODE 6210–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 39 

[Docket No. FAA–2011–0149; Directorate 

Identifier 2011–CE–001–AD; Amendment 

39–16616; AD 2011–05–07] 

RIN 2120–AA64 

Airworthiness Directives; Allied Ag Cat 

Productions, Inc. Models G–164, G– 

164A, G–164B, G–164B With 73′′ Wing 

Gap, G–164B–15T, G–164B–34T, G– 

164B–20T, G–164C, G–164D, and G– 

164D With 73′′ Wing Gap Airplanes 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Final rule; request for 

comments. 

SUMMARY: We are superseding an 

existing airworthiness directive (AD) for 

the products listed above. That AD 

currently requires repetitively 

inspecting the interior and the exterior 

of the main tubular spar of the rudder 

assembly for corrosion, taking necessary 

corrective action if corrosion is found, 

and applying corrosion protection. This 

AD retains the requirements of the 

previous AD and changes the 

compliance time for certain products 

listed above. This AD was prompted by 

our determination that the compliance 

time specified for Models G–164, G– 

164A, and G–164B airplanes does not 

adequately address the unsafe 

condition. We are issuing this AD to 

detect and correct corrosion in the 

rudder main tubular spar, which could 

result in failure of the rudder main spar 

tube. This failure could lead to loss of 

directional control. 

DATES: This AD is effective March 17, 

2011. 

The Director of the Federal Register 

approved the incorporation by reference 

of certain publications listed in this AD 

as of December 19, 2008 (73 FR 67372, 

November 14, 2008). 

We must receive any comments on 

this AD by April 18, 2011. 

ADDRESSES: You may send comments by 

any of the following methods: 

• Federal eRulemaking Portal: Go to 

http://www.regulations.gov. Follow the 

instructions for submitting comments. 

• Fax: 202–493–2251. 

• Mail: U.S. Department of 

Transportation, Docket Operations, 

M–30, West Building Ground Floor, 

Room W12–140, 1200 New Jersey 

Avenue, SE., Washington, DC 20590. 

• Hand Delivery: U.S. Department of 

Transportation, Docket Operations, 

M–30, West Building Ground Floor, 

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