43232 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

FEDERAL RESERVE SYSTEM 

12 CFR Part 226 

[Regulation Z; Docket No. R–1366] 

Truth in Lending 

AGENCY: Board of Governors of the 

Federal Reserve System. 

ACTION: Proposed rule; request for 

public comment. 

SUMMARY: The Board proposes to amend 

Regulation Z, which implements the 

Truth in Lending Act (TILA), and the 

staff commentary to the regulation, as 

part of a comprehensive review of 

TILA’s rules for closed-end credit. This 

proposal would revise the rules for 

disclosures of closed-end credit secured 

by real property or a consumer’s 

dwelling, except for rules regarding 

rescission and reverse mortgages, which 

the Board anticipates will be reviewed 

at a later date. Published elsewhere in 

today’s Federal Register is the Board’s 

proposal regarding rules for disclosures 

of open-end credit secured by a 

consumer’s dwelling. 

Disclosures provided at application 

would include a Board-published onepage ‘‘Key Questions to Ask About Your 

Mortgage’’ document that explains 

potentially risky loan features, and a 

Board-published one-page ‘‘Fixed vs. 

Adjustable Rate Mortgages’’ document. 

Transaction-specific disclosures 

required within three business days of 

application would summarize key loan 

terms. The calculation of the annual 

percentage rate and the finance charge 

would be revised to be more 

comprehensive, and their disclosures 

improved. Consumers would receive a 

‘‘final’’ TILA disclosure at least three 

business days before consummation. 

Certain new post-consummation 

disclosures would be required. In 

addition, the proposed revisions would 

prohibit certain payments to mortgage 

brokers and loan officers that are based 

on the loan’s terms or conditions, and 

prohibit steering consumers to 

transactions that are not in their interest 

to increase compensation received. 

Rules regarding eligibility restrictions 

and disclosures for credit insurance and 

debt cancellation or debt suspension 

coverage would apply to all closed-end 

and open-end credit transactions. 

DATES: Comments must be received on 

or before December 24, 2009. 

ADDRESSES: You may submit comments, 

identified by Docket No. R–1366, by any 

of the following methods: 

• Agency Web Site: http:// 

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: 

regs.comments@federalreserve.gov. 

Include the docket number in the 

subject line of the message. 

• FAX: (202) 452–3819 or (202) 452– 

3102. 

• Mail: Jennifer J. Johnson, Secretary, 

Board of Governors of the Federal 

Reserve System, 20th Street and 

Constitution Avenue, NW., Washington, 

DC 20551. 

All public comments are available 

from the Board’s Web site at http:// 

www.federalreserve.gov/generalinfo/ 

foia/ProposedRegs.cfm as submitted, 

unless modified for technical reasons. 

Accordingly, your comments will not be 

edited to remove any identifying or 

contact information. Public comments 

may also be viewed electronically or in 

paper in Room MP–500 of the Board’s 

Martin Building (20th and C Streets, 

NW.) between 9 a.m. and 5 p.m. on 

weekdays. 

FOR FURTHER INFORMATION CONTACT: 

Jamie Z. Goodson, Jelena McWilliams, 

Nikita M. Pastor, or Maureen C. Yap, 

Attorneys; Paul Mondor, Senior 

Attorney; or Kathleen C. Ryan, Senior 

Counsel. Division of Consumer and 

Community Affairs, Board of Governors 

of the Federal Reserve System, at (202) 

452–3667 or 452–2412; for users of 

Telecommunications Device for the Deaf 

(TDD) only, contact (202) 263–4869. 

SUPPLEMENTARY INFORMATION: 

I. Background on 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, or 

administrative sanction. 

II. Summary of Major Proposed 

Changes 

The goal of the proposed amendments 

to Regulation Z is to improve the 

effectiveness of disclosures that 

creditors provide to consumers in 

connection with an application and 

throughout the life of a mortgage. The 

proposed changes are the result of the 

Board’s review of the provisions that 

apply to closed-end mortgage 

transactions. The proposal would apply 

to all closed-end credit transactions 

secured by real property or a dwelling, 

and would not be limited to credit 

secured by the consumer’s principal 

dwelling. The Board is proposing 

changes to the format, timing, and 

content of disclosures for the four main 

types of closed-end credit information 

governed by Regulation Z: (1) 

disclosures at application; (2) 

disclosures within three days after 

application; (3) disclosures three days 

before consummation; and (4) 

disclosures after consummation. In 

addition, the Board is proposing 

additional protections related to limits 

on loan originator compensation. 

Disclosures at Application. The 

proposal contains new requirements 

and changes to the format and content 

of disclosures given at application, to 

make them more meaningful and easier 

for consumers to use. The proposed 

changes include: 

• Providing a new one-page Board 

publication, entitled ‘‘Key Questions to 

Ask About Your Mortgage,’’ which 

would explain the potentially risky 

features of a loan. 

• Providing a new one-page Board 

publication, entitled ‘‘Fixed vs. 

Adjustable Rate Mortgages,’’ which 

would explain the basic differences 

between such loans and would replace 

the lengthy Consumer Handbook on 

Adjustable-Rate Mortgages (CHARM 

booklet) currently required under 

Regulation Z. 

• Revising the format and content of 

the current adjustable-rate mortgage 

(ARM) loan program disclosure, 

including: a requirement that the 

disclosure be in a tabular question and 

answer format, a streamlined plainlanguage disclosure of interest rate and 

payment information, and a new 

disclosure of potentially risky features, 

such as prepayment penalties. 

Disclosures within Three Days after 

Application. The proposal also contains 

revisions to the TILA disclosures 

provided within three days after 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43233 

1The review was initiated pursuant to 

requirements of section 303 of the Riegle 

Community Development and Regulatory 

Improvement Act of 1994, section 610(c) of the 

Regulatory Flexibility Act of 1980, and section 2222 

of the Economic Growth and Regulatory Paperwork 

Reduction Act of 1996. An advance notice of 

proposed rulemaking is published to obtain 

preliminary information prior to issuing a proposed 

rule or, in some cases, deciding whether to issue a 

proposed rule. 

2The MDIA is contained in Sections 2501 

through 2503 of the Housing and Economic 

Recovery Act of 2008, Public Law 110–289, enacted 

on July 30, 2008. The MDIA was later amended by 

the Emergency Economic Stabilization Act of 2008, 

Public Law 110–343, enacted on October 3, 2008. 

application (the ‘‘early TILA 

disclosure’’) to make the information 

clearer and more conspicuous. The 

proposed changes include: 

• Revising the calculation of the 

finance charge and annual percentage 

rate (APR) so that they capture most fees 

and costs paid by consumers in 

connection with the credit transaction. 

• Providing a graph that would show 

consumers how their APR compares to 

the APRs for borrowers with excellent 

credit and for borrowers with impaired 

credit. 

• Summarizing key loan features, 

such as the loan term, amount, and type, 

and disclosing total settlement charges, 

as is currently required for the good 

faith estimate of settlement costs (GFE) 

under the Real Estate Settlement 

Procedures Act (RESPA) and Regulation 

X. 

• Requiring disclosure of potential 

changes to the interest rate and monthly 

payment. 

• Adopting new format requirements, 

including rules regarding: type size and 

use of boldface for certain terms, 

placement of information, and 

highlighting certain information in a 

tabular format. 

Disclosures Three Days before 

Consummation. The proposal would 

require creditors to provide a ‘‘final’’ 

TILA disclosure that the consumer must 

receive at least three business days 

before consummation. In addition, two 

proposed alternatives regarding 

redisclosure of the ‘‘final’’ TILA 

disclosure include: 

• Alternative 1: If any terms change 

after the ‘‘final’’ TILA disclosures are 

provided, then another final TILA 

disclosure would need to be provided so 

that the consumer receives it at least 

three business days before 

consummation. 

• Alternative 2: If the APR exceeds a 

certain tolerance or an adjustable-rate 

feature is added after the ‘‘final’’ TILA 

disclosures are provided, then another 

final TILA disclosure would need to be 

provided so that the consumer receives 

it at least three business days before 

consummation. All other changes could 

be disclosed at consummation. 

Disclosures after Consummation. The 

proposal would change the timing, 

content and types of notices provided 

after consummation. The proposed 

changes include: 

• For ARMs, increasing advance 

notice of a payment change from 25 to 

60 days, and revising the format and 

content of the ARM adjustment notice. 

• For payment option loans with 

negative amortization, requiring a 

monthly statement to provide 

information about payment options that 

include the costs and effects of 

negatively-amortizing payments. 

• For creditor-placed property 

insurance, requiring notice of the cost 

and coverage at least 45 days before 

imposing a charge for such insurance. 

Loan Originator Compensation. The 

proposal contains new limits on 

originator compensation for all closedend mortgages. The proposed changes 

include: 

• Prohibiting certain payments to a 

mortgage broker or a loan officer that are 

based on the loan’s terms and 

conditions. 

• Prohibiting a mortgage broker or 

loan officer from ‘‘steering’’ consumers 

to transactions that are not in their 

interest in order to increase the 

mortgage broker’s or loan officer’s 

compensation. 

III. The Board’s Review of Closed-End 

Credit Rules 

The Board has amended Regulation Z 

numerous times since TILA 

simplification in 1980. In 1987, the 

Board revised Regulation Z to require 

special disclosures for closed-end ARMs 

secured by the borrower’s principal 

dwelling. 52 FR 48665; Dec. 24, 1987. In 

1995, the Board revised Regulation Z to 

implement changes to TILA by the 

Home Ownership and Equity Protection 

Act (HOEPA). 60 FR 15463; Mar. 24, 

1995. HOEPA requires special 

disclosures and substantive protections 

for home-equity loans and refinancings 

with APRs or points and fees above 

certain statutory thresholds. Numerous 

other amendments have been made over 

the years to address new mortgage 

products and other matters, such as 

abusive lending practices in the 

mortgage and home-equity markets. 

The Board’s current review of 

Regulation Z was initiated in December 

2004 with an advance notice of 

proposed rulemaking.1 69 FR 70925; 

Dec. 8, 2004. At that time, the Board 

announced its intent to conduct its 

review of Regulation Z in stages, 

focusing first on the rules for open-end 

(revolving) credit accounts that are not 

home-secured, chiefly general-purpose 

credit cards and retailer credit card 

plans. In December 2008, the Board 

approved final rules for open-end credit 

that is not home-secured. 74 FR 5244; 

Jan. 29, 2009. 

Beginning in 2007, the Board 

proposed revisions to the rules for 

closed-end credit in several phases: 

• HOEPA. In 2007, the Board 

proposed rules under HOEPA for 

higher-priced mortgage loans (2007 

HOEPA Proposed Rule). The final rules, 

approved in July 2008 (2008 HOEPA 

Final Rule), prohibited certain unfair or 

deceptive lending and servicing 

practices in connection with closed-end 

mortgages. The Board also approved 

revisions to advertising rules for both 

closed-end and open-end home-secured 

loans to ensure that advertisements 

contain accurate and balanced 

information and do not contain 

misleading or deceptive representations. 

The final rules also required creditors to 

provide consumers with transactionspecific disclosures early enough to use 

while shopping for a mortgage. 73 FR 

44522; July 30, 2008. 

• Timing of Disclosures for ClosedEnd Mortgages. On May 7, 2009, the 

Board approved final rules 

implementing the Mortgage Disclosure 

Improvement Act of 2008 (the MDIA).2

The MDIA adds to the requirements of 

the 2008 HOEPA Final Rule regarding 

transaction-specific disclosures. Among 

other things, the MDIA and the final 

rules require early, transaction-specific 

disclosures for mortgage loans secured 

by dwellings even when the dwelling is 

not the consumer’s principal dwelling, 

and requires waiting periods between 

the time when disclosures are given and 

consummation of the transaction. 74 FR 

23289; May 19, 2009. 

This proposal would revise the rules 

for disclosures for closed-end credit 

secured by real property or a consumer’s 

dwelling. The Board anticipates 

reviewing the rules for rescission and 

reverse mortgages in the next phase of 

the Regulation Z review. 

A. Coordination With Disclosures 

Required Under the Real Estate 

Settlement Procedures Act 

The Board anticipates working with 

the Department of Housing and Urban 

Development (HUD) to ensure that TILA 

and Real Estate Settlement Procedures 

Act of 1974 (RESPA) disclosures are 

compatible and complementary, 

including potentially developing a 

single disclosure form that creditors 

could use to combine the initial 

disclosures required under TILA and 

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43234 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

3Bd. of Governors of the Fed. Reserve Sys. and 

U.S. Dep’t of Hous. and Urban Dev., Joint Report to 

the Congress Concerning Reform to the Truth in 

Lending Act and the Real Estate Settlement 

Procedures Act (1998), available at http:// 

www.federalreserve.gov/boarddocs/rptcongress/ 

tila.pdf. 

4As noted, Congress subsequently amended the 

MDIA with the Emergency Economic Stabilization 

Act of 2008. 

5To ease discussion, the description of the 

closed-end mortgage disclosure scheme includes 

MDIA’s recent amendments to TILA and the 

disclosure timing requirements of the 2008 HOEPA 

Final Rule that will be effective July 30, 2009. 

RESPA. The two statutes have different 

purposes but have considerable overlap. 

Harmonizing the two disclosure 

schemes would ensure that consumers 

receive consistent information under 

both laws. It may also help reduce 

information overload by eliminating 

some duplicative disclosures. Consumer 

testing would be used to ensure 

consumers could understand and use 

the combined disclosures. In the 

meantime, the Board is proposing a 

revised model TILA form so that 

commenters can see how the Board’s 

proposed revisions to Regulation Z 

might be applied in practice. 

RESPA, which is implemented by 

HUD’s Regulation X, seeks to ensure 

that consumers are provided with 

timely information about the nature and 

costs of the settlement process and are 

protected from unnecessarily high real 

estate settlement charges. To this end, 

RESPA mandates that consumers 

receive information about the costs 

associated with a mortgage loan 

transaction, and prohibits certain 

business practices. Under RESPA, 

creditors must provide a GFE within 

three business days after a consumer 

submits a written application for a 

mortgage loan, which is the same time 

creditors must provide the early TILA 

disclosure. RESPA also requires a 

statement of the actual costs imposed at 

loan settlement (HUD–1 settlement 

statement). In November 2008, HUD 

published revised RESPA rules, 

including new GFE and HUD–1 

settlement statement forms, which 

lenders, mortgage brokers, and 

settlement agents must use beginning on 

January 1, 2010. 73 FR 68204; Nov. 17, 

2008. In addition to revised disclosures 

of settlement costs, the revised GFE now 

includes loan terms, some of which 

would also appear on the TILA 

disclosure, such as whether there is a 

prepayment penalty and the borrower’s 

interest rate and monthly payment. The 

revised GFE form was developed 

through HUD’s consumer testing. 

TILA, which is implemented by the 

Board’s Regulation Z, governs the 

disclosure of the APR and certain loan 

terms. This proposal contains a revised 

model TILA form that was developed 

through consumer testing. In addition to 

a revised disclosure of the APR and loan 

terms, the revised TILA disclosure 

would include the total settlement 

charges that appear on the GFE required 

under RESPA. Total settlement charges 

would be added to the TILA form 

because consumer testing conducted by 

the Board found that consumers wanted 

to have settlement charges disclosed on 

the TILA form. 

The proposed revised TILA form and 

HUD’s revised GFE would represent 

significant improvements, but overlap 

between the two forms could be 

eliminated to reduce information 

overload and consistency issues. There 

have been previous efforts to develop a 

combined TILA and RESPA disclosure 

form, which were fueled by the amount, 

complexity, and overlap of information 

in the disclosures. Under a 1996 

congressional directive, the Board and 

HUD studied ways to simplify and 

improve the disclosures. In July 1998, 

the Board and HUD submitted a joint 

report to Congress that provided a broad 

outline intended to be a starting point 

for consideration of legislative reform of 

the mortgage disclosure requirements 

(the 1998 Joint Report).3 The 1998 Joint 

Report included a recommendation for 

combining and simplifying the RESPA 

and TILA disclosure forms to satisfy the 

requirements of both laws. In addition, 

The 1998 Joint Report recommended 

that the timing of the TILA and RESPA 

disclosures be coordinated. Recent 

regulatory changes addressed the timing 

issues so that initial disclosures 

required under TILA and RESPA would 

be delivered at the same time. 

B. The Bankruptcy Act’s Amendment to 

TILA 

The Bankruptcy Abuse Prevention 

and Consumer Protection Act of 2005 

(Bankruptcy Act) primarily amended 

the federal bankruptcy code, but also 

contained several provisions amending 

TILA. With respect to open-end and 

closed-end dwelling-secured credit, the 

Bankruptcy Act requires that the credit 

application disclosure contain a 

statement warning consumers that if the 

loan exceeds the fair market value of the 

dwelling, then the interest on that 

portion of the loan is not tax deductible, 

and the consumer should consult a tax 

advisor for further information on tax 

deductibility. This proposal would 

implement this Bankruptcy Act 

provision. 

C. The MDIA’s Amendments to TILA 

On July 30, 2008, Congress enacted 

the MDIA.4 The MDIA codified some of 

the requirements of the Board’s 2008 

HOEPA Final Rule, which required 

transaction-specific disclosures to be 

provided within three business days 

after an application is received and 

before the consumer has paid a fee, 

other than a fee for obtaining the 

consumer’s credit history.5 The MDIA 

also expanded coverage of the early 

disclosure requirement to include loans 

secured by a dwelling even when it is 

not the consumer’s principal dwelling. 

In addition, the MDIA required creditors 

to mail or deliver early TILA disclosures 

at least seven business days before 

consummation and provide corrected 

disclosures if the disclosed APR 

changes in excess of a specified 

tolerance. The consumer must receive 

the corrected disclosures no later than 

three business days before 

consummation. The Board implemented 

these MDIA requirements in final rules 

published May 19, 2009, and effective 

July 30, 2009. 74 FR 23289; May 19, 

2009. 

The MDIA also requires payment 

examples if the interest rate or payments 

can change. Such disclosures are to be 

formatted in accordance with the results 

of consumer testing conducted by the 

Board. Those provisions of the MDIA 

will not become effective until January 

30, 2011, or any earlier compliance date 

established by the Board. This proposal 

would implement those MDIA 

provisions. 

D. Consumer Testing 

A principal goal for the Regulation Z 

review is to produce revised and 

improved mortgage disclosures that 

consumers will be more likely to 

understand and use in their decisions, 

while at the same time not creating 

undue burdens for creditors. Currently, 

Regulation Z requires creditors to 

provide at application an ARM loan 

program disclosure and the CHARM 

booklet. An early TILA disclosure is 

required within three business days of 

application and at least seven business 

days before consummation for closedend mortgages. 

In 2007, the Board retained a research 

and consulting firm (ICF Macro) that 

specializes in designing and testing 

documents to conduct consumer testing 

to help the Board’s review of mortgage 

rules under Regulation Z. Working 

closely with the Board, ICF Macro 

conducted several tests in different 

cities throughout the United States. The 

testing consisted of four focus groups 

and eleven rounds of one-on-one 

cognitive interviews. The goals of these 

focus groups and interviews were to 

learn how consumers shop for 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43235 

mortgages and what information 

consumers read when they receive 

mortgage disclosures, and to assess their 

understanding of such disclosures. 

The consumer testing groups 

contained participants with a range of 

ethnicities, ages, educational levels, and 

mortgage behaviors, including first-time 

mortgage shoppers, prime and subprime 

borrowers, and consumers who had 

obtained one or more closed-end 

mortgages. For each round of testing, 

ICF Macro developed a set of model 

disclosure forms to be tested. Interview 

participants were asked to review model 

forms and provide their reactions, and 

were then asked a series of questions 

designed to test their understanding of 

the content. Data were collected on 

which elements and features of each 

form were most successful in providing 

information clearly and effectively. The 

findings from each round of interviews 

were incorporated in revisions to the 

model forms for the following round of 

testing. 

Specifically, the Board worked with 

ICF Macro to develop and test several 

types of closed-end disclosures, 

including: 

• Two Board publications to be 

provided at application, entitled ‘‘Key 

Questions To Ask About Your 

Mortgage’’ and ‘‘Fixed vs. Adjustable 

Rate Mortgages’’; 

• An ARM loan program disclosure to 

be provided at application; 

• An early TILA disclosure to be 

provided within three business days of 

application, and again so that the 

consumer receives it at least three 

business days before consummation; 

• An ARM adjustment notice to be 

provided after consummation; and 

• A payment option monthly 

statement to be provided after 

consummation. 

Exploratory focus groups. In February 

and March 2008 the Board worked with 

ICF Macro to conduct four focus groups 

with consumers who had obtained a 

mortgage in the previous two years. Two 

of the groups consisted of subprime 

borrowers and two consisted of prime 

borrowers, with creditworthiness 

determined by their answers to 

questions about prior financial 

hardship, difficulties encountered in 

shopping for credit, and the rate on their 

current mortgage. Each focus group 

consisted of between seven and nine 

people that discussed issues identified 

by the Board and raised by a moderator 

from ICF Macro. Through these focus 

groups, the Board gathered information 

on how consumers shop for mortgages, 

what information consumers currently 

use in making decisions about 

mortgages, and what perceptions 

consumers had of TILA disclosures 

currently provided in the shopping and 

application process. 

Cognitive interviews on existing 

disclosures. In 2008, the Board worked 

with ICF Macro to conduct five rounds 

of cognitive interviews with mortgage 

customers (seven to eleven participants 

per round). These cognitive interviews 

consisted of one-on-one discussions 

with consumers, during which 

consumers described their recent 

mortgage shopping experience and 

reviewed existing sample mortgage 

disclosures. In addition to learning 

about shopping behavior, the goals of 

these interviews were: (1) To learn more 

about what information consumers read 

when they receive current mortgage 

disclosures; (2) to research how easily 

consumers can find various pieces of 

information in these disclosures; and (3) 

to test consumers’ understanding of 

certain mortgage related words and 

phrases. 

1. Initial design of disclosures for 

testing. In the fall of 2008, the Board 

worked with ICF Macro to develop 

sample mortgage disclosures to be used 

in later rounds of testing, taking into 

account information learned through the 

focus groups and the cognitive 

interviews. 

2. Additional cognitive interviews and 

revisions to disclosures. In late 2008 and 

early 2009, the Board worked with ICF 

Macro to conduct six additional rounds 

of cognitive interviews (nine or ten 

participants per round), where 

consumers were asked to view new 

sample mortgage disclosures developed 

by the Board and ICF Macro. The 

rounds of interviews were conducted 

sequentially to allow for revisions to the 

testing materials based on what was 

learned from the testing during each 

previous round. 

Results of testing. Several of the 

model forms were developed through 

the testing. A report summarizing the 

results of the testing is available on the 

Board’s public Web site: http:// 

www.federalreserve.gov. 

Many consumer testing participants 

reported that they did not shop for a 

lender or a mortgage. Several stated that 

they were referred to a lender by a 

realtor, family member or friend, and 

that they relied on that lender to get 

them a loan. Participants who reported 

shopping for a mortgage relied on 

originators’ oral quotes for interest rates, 

monthly payments, and closing costs. 

Most participants stated that once they 

had applied for a particular loan and 

received a TILA disclosure they ceased 

shopping. Some cited the time involved, 

and the amount of documentation 

required, as factors for limiting their 

shopping. These findings suggest that 

consumers need information early in the 

process and that information should not 

be limited to information about ARMs. 

Therefore, the proposal would require 

creditors to provide key information 

about evaluating loan terms at the time 

an application form is provided, as 

discussed below. 

1. Disclosures provided to consumers 

before application. Currently, creditors 

must provide the CHARM booklet 

before a consumer applies or pays a 

nonrefundable fee, whichever is earlier. 

The booklet explains how ARMs 

generally work. Testing showed that 

participants found the CHARM booklet 

too lengthy to be useful, although some 

liked specific elements such as the 

glossary. In addition, creditors must 

provide an ARM loan program 

disclosure for each ARM loan program 

in which the consumer expresses an 

interest, before the consumer applies or 

has paid a nonrefundable fee. The ARM 

loan program disclosure currently must 

include either a 15-year historical 

example of rates and payments for a 

$10,000 loan, or the maximum interest 

rate and payment for a $10,000 loan 

originated at the interest rate in effect 

for the disclosure’s identified month 

and year. Many testing participants 

found the narrative form of the current 

ARM loan program disclosure difficult 

to read and understand. Some 

participants mistook the historical 

examples to be their actual loan rate and 

payments. Participants also found the 

content of the disclosure too general to 

be useful to them when comparing 

between lenders or products, and noted 

the absence of key loan information, 

such as the interest rate. 

Thus, the proposal would require 

creditors to provide, for all closed-end 

mortgages, a one-page document that 

explains the basic differences between 

fixed-rate mortgages and ARMs, and a 

one-page document that would explain 

potentially risky features of a mortgage 

in a plain-English question and answer 

format. In addition, the proposal would 

streamline the content of the ARM loan 

program disclosure to highlight in a 

table form information that participants 

found most useful, such as interest rate 

and payment adjustments, and to 

provide information about programspecific loan features that could pose 

greater risk, such as prepayment 

penalties. Consumer testing suggested 

that highlighting such information in a 

table form improved participants’ ability 

to identify and understand the 

information provided about key loan 

features. 

2. Disclosures provided to consumers 

after application. Currently, creditors 

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43236 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

6 James M. Lacko and Janis K. Pappalardo, Fed. 

Trade Comm’n, Improving Consumer Mortgage 

Disclosures: An Empirical Assessment of Current 

and Protoype Disclosure Forms (2007), (‘‘Improving 

Consumer Mortgage Disclosures’’) available at 

http://www2.ftc.gov/os/2007/06/ 

P025505MortgageDisclosureReport.pdf. 

7U.S. Dep’t. of Hous. and Urban Dev., Summary 

Report: Consumer Testing of the Good Faith 

Estimate Form (GFE) (2008), available at http:// 

www.huduser.org/publications/pdf/ 

Summary_Report_GFE.pdf. 

must provide an early TILA disclosure 

within three business days after 

application and at least seven business 

days before consummation, and before 

the consumer has paid a fee other than 

a fee for obtaining the consumer’s credit 

history. If the APR on the early TILA 

disclosure exceeds a certain tolerance 

before consummation, the creditor must 

provide corrected disclosures that the 

consumer must receive at least three 

days before consummation. If any term 

other than the APR becomes inaccurate, 

the creditor must give the corrected 

disclosure no later than at 

consummation. 

The early TILA disclosure—and any 

corrected disclosure—must provide 

certain information, such as the loan’s 

annual percentage rate (APR), finance 

charge, amount financed, and total of 

payments. Participants in consumer 

testing indicated that much of the 

information in the current TILA 

disclosure was of secondary importance 

to them when considering a loan. 

Participants consistently looked for the 

contract rate of interest, monthly 

payment, and in some cases, closing 

costs. Most participants assumed that 

the APR was the contract rate of 

interest, and that the finance charge was 

the total of all interest they would pay 

if they kept the loan to maturity. Most 

identified the amount financed as the 

loan amount. When asked to compare 

two loan offers using redesigned model 

forms that contained these disclosures, 

few participants used the APR and 

finance charge to compare the loans. In 

addition, some participants had 

difficulty determining whether the loan 

tested had a variable or fixed rate and 

understanding the payment schedule’s 

relationship to the changing interest 

rate. Many did not understand what 

circumstances would trigger a 

prepayment penalty. 

Thus, the proposal contains a number 

of revisions to the format and content of 

TILA disclosures to make them clearer 

and more conspicuous. To enhance the 

effectiveness of the finance charge as a 

disclosure of the true cost of credit, the 

proposal would require a simpler, more 

inclusive approach. The disclosure of 

the APR would be enhanced to improve 

consumers’ comprehension of the cost 

of credit. In addition, to help consumers 

determine whether the loan offered is 

affordable for them, creditors would be 

required to summarize key loan terms 

and highlight interest rate and payment 

information in a table. Consumer testing 

showed that using special formatting 

requirements, consistent terminology 

and a minimum 10-point font, would 

ensure that consumers are better able to 

identify and review key loan terms. 

3. Disclosures required after 

consummation. Currently, creditors 

must provide advance notice to a 

consumer before the interest rate and 

monthly payment adjust on an ARM. 

The ARM adjustment notice must 

provide certain information, including 

current and prior interest rates, the 

index values upon which the current 

and prior interest rates are based, and 

the payment that would be required to 

amortize the loan fully at the new 

interest rate. The Board worked with 

ICF Macro to develop a revised ARM 

adjustment notice that would enhance 

consumers’ ability to identify and 

understand changes being made to their 

loan terms. Consumer testing of the 

revised ARM adjustment notice 

indicated that consumers understood 

the content and were able correctly to 

identify the amount and due date of the 

new payment. Thus, under the proposal, 

creditors would be required to provide 

the ARM adjustment notice in a revised 

format that would highlight changes 

being made to the interest rate and the 

monthly payment, and provide other 

important information, such as the due 

date of the new payment and the loan 

balance. 

Currently, creditors are not required 

to provide disclosures after 

consummation for negatively-amortizing 

loans. The Board worked with ICF 

Macro to develop a monthly statement 

that compares the amount and the 

impact on the loan balance of a fullyamortizing payment, interest-only 

payment, and minimum payment. 

Consumer testing of the proposed 

monthly statement indicated that 

consumers understood the content, 

easily recognized the payment options 

highlighted in the table, and understood 

that by making only the minimum 

payment they would be borrowing more 

money and increasing their loan 

balance. Thus, to improve consumer 

understanding of the risks associated 

with payment option loans, the Board 

proposes to require, not later than 15 

days before a periodic payment is due, 

a monthly statement of payment options 

that explains the impact of payment 

choice on the loan balance. 

Additional testing during and after 

the comment period. During the 

comment period, the Board will work 

with ICF Macro to conduct additional 

testing of model disclosures. After 

receiving comments from the public on 

the proposal and the proposed 

disclosure forms, the Board will work 

with ICF Macro to further revise model 

disclosures based on comments 

received, and to conduct additional 

rounds of cognitive interviews to test 

the revised disclosures. After the 

cognitive interviews, quantitative 

testing will be conducted. The goal of 

the quantitative testing is to measure 

consumers’ comprehension of the 

newly-developed disclosures with a 

larger and more statistically 

representative group of consumers. 

E. Other Outreach and Research 

The Board also solicited input from 

members of the Board’s Consumer 

Advisory Council on various issues 

presented by the review of Regulation Z. 

During 2009, for example, the Council 

discussed ways to improve disclosures 

for home-secured credit. In addition, 

Board staff met or conducted conference 

calls with various industry and 

consumer group representatives 

throughout the review process leading 

to this proposal. Board staff also 

reviewed disclosures currently provided 

by creditors, the Federal Trade 

Commission’s (FTC) report on consumer 

testing of mortgage disclosures,6 HUD’s 

report on consumer testing of the GFE,7

and other information. 

F. Reviewing Regulation Z in Stages 

The Board is proceeding with a 

review of Regulation Z in stages. This 

proposal largely contains revisions to 

rules affecting closed-end credit 

transactions secured by real property or 

a dwelling. Published elsewhere in 

today’s Federal Register is the Board’s 

proposal regarding disclosures for openend credit secured by a consumer’s 

dwelling. Closed-end mortgages are 

distinct from other TILA-covered 

products, and conducting a review in 

stages allows for a manageable process. 

To minimize compliance burden for 

creditors offering other closed-end 

credit, as well as home-secured credit, 

the proposed rules that would apply 

only to closed-end home-secured credit 

are organized in sections separate from 

the general disclosure requirements for 

closed-end rules. Although this 

reorganization would increase the size 

of the regulation and commentary, the 

Board believes a clear delineation of 

rules for closed-end, home-secured 

loans pending the review of the 

remaining closed-end rules provides a 

clear compliance benefit to creditors. 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43237 

8H.R. Rep. 103–652, at 162 (1994) (Conf. Rep.). 

9See 15 U.S.C. 45(n); Letter from Commissioners 

of the FTC to the Hon. Wendell H. Ford, Chairman, 

and the Hon. John C. Danforth, Ranking Minority 

Member, Consumer Subcomm. of the H. Comm. on 

Commerce, Science, and Transp. (Dec. 17, 1980). 

10 15 U.S.C. 45(n). 

11Statement of Basis and Purpose and Regulatory 

Analysis, Credit Practices Rule, 42 FR 7740, 7743; 

Mar. 1, 1984 (Credit Practices Rule). 

12Letter from Commissioners of the FTC to the 

Hon. Wendell H. Ford, Chairman, and the Hon. 

John C. Danforth, Ranking Minority Member, 

Consumer Subcomm. of the H. Comm. on 

Commerce, Science, and Transp., n.12 (Dec. 17, 

1980). 

13Credit Practices Rule, 42 FR at 7744. 

14 Id. 

15 Id. 

16Letter from James C. Miller III, Chairman, FTC 

to the Hon. John D. Dingell, Chairman, H. Comm. 

on Energy and Commerce (Oct. 14, 1983) (Dingell 

Letter). 

17 Dingell Letter at 1–2. 

G. Implementation Period 

The Board contemplates providing 

creditors sufficient time to implement 

any revisions that may be adopted. The 

Board seeks comment on an appropriate 

implementation period. 

IV. The Board’s Rulemaking Authority 

TILA Section 105. TILA mandates that 

the Board prescribe regulations to carry 

out the purposes of the act. TILA also 

specifically authorizes the Board, among 

other things, to: 

• Issue regulations that contain such 

classifications, differentiations, or other 

provisions, or that provide for such 

adjustments and exceptions for any 

class of transactions, that in the Board’s 

judgment are necessary or proper to 

effectuate the purposes of TILA, 

facilitate compliance with the act, or 

prevent circumvention or evasion. 15 

U.S.C. 1604(a). 

• Exempt from all or part of TILA any 

class of transactions if the Board 

determines that TILA coverage does not 

provide a meaningful benefit to 

consumers in the form of useful 

information or protection. The Board 

must consider factors identified in the 

act and publish its rationale at the time 

it proposes an exemption for comment. 

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

In the course of developing the 

proposal, the Board has considered the 

views of interested parties, its 

experience in implementing and 

enforcing Regulation Z, and the results 

obtained from testing various disclosure 

options in controlled consumer tests. 

For the reasons discussed in this notice, 

the Board believes this proposal is 

appropriate pursuant to the authority 

under TILA Section 105(a). 

Also, as explained in this notice, the 

Board believes that the specific 

exemptions proposed are appropriate 

because the existing requirements do 

not provide a meaningful benefit to 

consumers in the form of useful 

information or protection. In reaching 

this conclusion with each proposed 

exemption, the Board considered (1) the 

amount of the loan and whether the 

disclosure provides a benefit to 

consumers who are parties to the 

transaction involving a loan of such 

amount; (2) the extent to which the 

requirement complicates, hinders, or 

makes more expensive the credit 

process; (3) the status of the borrower, 

including any related financial 

arrangements of the borrower, the 

financial sophistication of the borrower 

relative to the type of transaction, and 

the importance to the borrower of the 

credit, related supporting property, and 

coverage under TILA; (4) whether the 

loan is secured by the principal 

residence of the borrower; and (5) 

whether the exemption would 

undermine the goal of consumer 

protection. The rationales for these 

proposed exemptions are explained in 

part VI below. 

TILA Section 129(l)(2). TILA also 

authorizes the Board to prohibit acts or 

practices in connection with: 

• Mortgage loans that the board finds 

to be unfair, deceptive, or designed to 

evade the provisions of HOEPA; and 

• Refinancing of mortgage loans that 

the Board finds to be associated with 

abusive lending practices or that are 

otherwise not in the interest of the 

borrower. 

The authority granted to the Board 

under TILA Section 129(l)(2), 15 U.S.C. 

1639(l)(2), is broad. It reaches mortgage 

loans with rates and fees that do not 

meet HOEPA’s rate or fee trigger in 

TILA Section 103(aa), 15 U.S.C. 

1602(aa), as well as mortgage loans not 

covered under that section, such as 

home purchase loans. Moreover, while 

HOEPA’s statutory restrictions apply 

only to creditors and only to loan terms 

or lending practices, Section 129(l)(2) is 

not limited to acts or practices by 

creditors, nor is it limited to loan terms 

or lending practices. See 15 U.S.C. 

1639(l)(2). It authorizes protections 

against unfair or deceptive practices ‘‘in 

connection with mortgage loans,’’ and it 

authorizes protections against abusive 

practices ‘‘in connection with 

refinancing of mortgage loans.’’ Thus, 

the Board’s authority is not limited to 

regulating specific contractual terms of 

mortgage loan agreements; it extends to 

regulating loan-related practices 

generally, within the standards set forth 

in the statute. 

HOEPA does not set forth a standard 

for what is unfair or deceptive, but the 

Conference Report for HOEPA indicates 

that, in determining whether a practice 

in connection with mortgage loans is 

unfair or deceptive, the Board should 

look to the standards employed for 

interpreting State unfair and deceptive 

trade practices statutes and the Federal 

Trade Commission Act (FTC Act), 

Section 5(a), 15 U.S.C. 45(a).8

Congress has codified standards 

developed by the Federal Trade 

Commission (FTC) for determining 

whether acts or practices are unfair 

under Section 5(a), 15 U.S.C. 45(a).9

Under the FTC Act, an act or practice 

is unfair when it causes or is likely to 

cause substantial injury to consumers 

which is not reasonably avoidable by 

consumers themselves and not 

outweighed by countervailing benefits 

to consumers or to competition. In 

addition, in determining whether an act 

or practice is unfair, the FTC is 

permitted to consider established public 

policies, but public policy 

considerations may not serve as the 

primary basis for an unfairness 

determination.10

The FTC has interpreted these 

standards to mean that consumer injury 

is the central focus of any inquiry 

regarding unfairness.11 Consumer injury 

may be substantial if it imposes a small 

harm on a large number of consumers, 

or if it raises a significant risk of 

concrete harm.12 The FTC looks to 

whether an act or practice is injurious 

in its net effects.13 The FTC has also 

observed that an unfair act or practice 

will almost always reflect a market 

failure or market imperfection that 

prevents the forces of supply and 

demand from maximizing benefits and 

minimizing costs.14 In evaluating 

unfairness, the FTC looks to whether 

consumers’ free market decisions are 

unjustifiably hindered.15

The FTC has also adopted standards 

for determining whether an act or 

practice is deceptive (though these 

standards, unlike unfairness standards, 

have not been incorporated into the FTC 

Act).16 First, there must be a 

representation, omission or practice that 

is likely to mislead the consumer. 

Second, the act or practice is examined 

from the perspective of a consumer 

acting reasonably in the circumstances. 

Third, the representation, omission, or 

practice must be material. That is, it 

must be likely to affect the consumer’s 

conduct or decision with regard to a 

product or service.17

Many States also have adopted 

statutes prohibiting unfair or deceptive 

acts or practices, and these statutes 

employ a variety of standards, many of 

them different from the standards 

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18See, e.g., Kenai Chrysler Ctr., Inc. v. Denison, 

167 P.3d 1240, 1255 (Alaska 2007) (quoting FTC v. 

Sperry & Hutchinson Co., 405 U.S. 233, 244–45 n.5 

(1972)); State v. Moran, 151 N.H. 450, 452, 861 A.2d 

763, 755–56 (N.H. 2004) (concurrently applying the 

FTC’s former test and a test under which an act or 

practice is unfair or deceptive if ‘‘the objectionable 

conduct * * * attain[s] a level of rascality that 

would raise an eyebrow of someone inured to the 

rough and tumble of the world of commerce.’’) 

(citation omitted); Robinson v. Toyota Motor Credit 

Corp., 201 Ill. 2d 403, 417–418, 775 N.E.2d 951, 

961–62 (2002) (quoting 405 U.S. at 244–45 n.5). 

currently applied to the FTC Act. A 

number of States follow an unfairness 

standard formerly used by the FTC. 

Under this standard, an act or practice 

is unfair where it offends public policy; 

or is immoral, unethical, oppressive, or 

unscrupulous; and causes substantial 

injury to consumers.18

In developing proposed rules under 

TILA Section 129(l)(2)(A), 15 U.S.C. 

1639(l)(2)(A), the Board has considered 

the standards currently applied to the 

FTC Act’s prohibition against unfair or 

deceptive acts or practices, as well as 

the standards applied to similar State 

statutes. 

V. Discussion of Major Proposed 

Revisions 

The goal of the proposed revisions is 

to improve the effectiveness of the 

Regulation Z disclosures that must be 

provided to consumers for closed-end 

credit transactions secured by real 

property or a dwelling. To shop for and 

understand the cost of home-secured 

credit, consumers must be able to 

identify and comprehend the key terms 

of mortgages. But the terms and 

conditions for mortgage transactions can 

be very complex. The proposed 

revisions to Regulation Z are intended 

to provide the most essential 

information to consumers when the 

information would be most useful to 

them, with content and formats that are 

clear and conspicuous. The proposed 

revisions are expected to improve 

consumers’ ability to make informed 

credit decisions and enhance 

competition among creditors. Many of 

the changes are based on the consumer 

testing that was conducted in 

connection with the review of 

Regulation Z. 

In considering the proposed revisions, 

the Board sought to ensure that the 

proposal would not reduce access to 

credit, and sought to balance the 

potential benefits for consumers with 

the compliance burdens imposed on 

creditors. For example, the proposed 

revisions seek to provide greater 

certainty to creditors in identifying what 

costs must be disclosed for mortgages, 

and how those costs must be disclosed. 

More effective disclosures may also 

reduce confusion and 

misunderstanding, which may also ease 

creditors’ costs relating to consumer 

complaints and inquiries. 

A. Disclosures at Application 

Currently, Regulation Z requires preapplication disclosures only for 

variable-rate transactions. For these 

transactions, creditors are required to 

provide the CHARM booklet and a loan 

program disclosure that provides twelve 

items of information at the time an 

application form is provided or before 

the consumer pays a nonrefundable fee, 

whichever is earlier. 

‘‘Key Questions to Ask about Your 

Mortgage’’ publication. Since 1987, the 

number of loan products and product 

features has grown, providing 

consumers with more choices. However, 

the growth in loan features and products 

has also made the decision-making 

process more complex for consumers. 

The proposal would require creditors to 

provide to consumers a one-page Board 

publication entitled, ‘‘Key Questions to 

Ask about Your Mortgage.’’ Creditors 

would be required to provide this 

document for all closed-end loans 

secured by real property or a dwelling, 

not just variable-rate loans, before the 

consumer applies for a loan or pays a 

nonrefundable fee, whichever is earlier. 

The publication would inform 

consumers in a plain-English question 

and answer format about potentially 

risky features, such as interest-only, 

negative amortization, and prepayment 

penalties. To enable consumers to track 

the presence or absence of potentially 

risky features throughout the mortgage 

transaction process, the key questions 

and answers provided in this one-page 

document would also be included in the 

ARM loan program disclosure and the 

early and final TILA disclosures. 

‘‘Fixed vs. Adjustable Rate 

Mortgages’’ publication. Instead of the 

CHARM booklet, the proposal would 

require creditors to provide a one-page 

Board publication entitled, ‘‘Fixed vs. 

Adjustable Rate Mortgages’’ for all 

closed-end loans secured by real 

property or a dwelling, not just variablerate loans. The publication would 

contain an explanation of the basic 

differences between fixed-rate 

mortgages and ARMs. Although the 

requirement to provide a CHARM 

booklet would be eliminated, the Board 

would continue to publish the CHARM 

booklet as a consumer-education 

publication. 

ARM loan program disclosure. 

Currently, for each variable-rate loan 

program in which a consumer expresses 

an interest, creditors must provide 

certain information, including the index 

and margin to be used to calculate 

interest rates and payments, and either 

a 15-year historical example of rates and 

payments for a $10,000 loan, or the 

maximum interest rate and payment for 

a $10,000 loan originated at the interest 

rate in effect for the disclosure’s 

identified month and year. Based on 

consumer testing, the proposal would 

simplify the ARM loan program 

disclosure to focus on the interest rate 

and payment and the potential risks 

associated with ARMs. Information on 

how to calculate payments, and the 

effect of rising interest rates on monthly 

payments would be moved to the early 

TILA disclosure provided after 

application. Placing the information 

there will allow the creditor to 

customize the information to the 

consumer’s potential loan, making the 

information more useful to consumers. 

The proposed ARM loan program 

disclosure would be provided in a 

tabular question and answer format to 

enable consumers to easily locate the 

most important information. 

B. Disclosures Within Three Days After 

Application 

TILA and Regulation Z currently 

require creditors to provide an early 

TILA disclosure within three business 

days after application and at least seven 

business days before consummation, 

and before the consumer has paid a fee 

other than a fee for obtaining the 

consumer’s credit history. If the APR on 

the early TILA disclosure exceeds a 

certain tolerance before consummation, 

the creditor must provide corrected 

disclosures that the consumer must 

receive at least three days before 

consummation. If any term other than 

the APR becomes inaccurate, the 

creditor must give the corrected 

disclosure no later than at 

consummation. 

The early TILA disclosure, and any 

corrected disclosure, must include 

certain loan information, including the 

amount financed, the finance charge, 

the APR, the total of payments, and the 

amount and timing of payments. The 

finance charge is the sum of all creditrelated charges, but excludes a variety of 

fees and charges. TILA requires that the 

finance charge and the APR be disclosed 

more conspicuously than other 

information. The APR is calculated 

based on the finance charge and is 

meant to be a single, unified number to 

help consumers understand the total 

cost of credit. 

Calculation of the finance charge. The 

proposal contains a number of revisions 

to the calculation of the finance charge 

and the disclosure of the finance charge 

and the APR to improve consumers’ 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43239 

understanding of the cost of credit. 

Currently, TILA and Regulation Z 

permit creditors to exclude several fees 

or charges from the finance charge, 

including certain fees or charges 

imposed by third party closing agents; 

certain premiums for credit or property 

insurance or fees for debt cancellation 

or debt suspension coverage, if the 

creditor meets certain conditions; 

security interest charges; and real-estate 

related fees, such as title examination or 

document preparation fees. 

Consumer groups, creditors, and 

government agencies have long been 

dissatisfied with the ‘‘some fees in, 

some fees out’’ approach to the finance 

charge. Consumer groups and others 

believe that the current approach 

obscures the true cost of credit. They 

contend that this approach creates 

incentives for creditors to shift the cost 

of credit from the interest rate to 

ancillary fees excluded from the finance 

charge. They further contend that this 

approach undermines the purpose of the 

APR, which is to express in a single 

figure the total cost of credit. Creditors 

maintain that consumers are confused 

by the APR and that the current 

approach creates significant regulatory 

burdens. They contend that determining 

which fees are or are not included in the 

finance charge is overly complex and 

creates litigation risk. 

The Board proposes to use its 

exception and exemption authority to 

revise the finance charge calculation for 

closed-end mortgages, including 

HOEPA loans. The proposal would 

maintain TILA’s definition of a ‘‘finance 

charge’’ as a fee or charge payable 

directly or indirectly by the consumer 

and imposed directly or indirectly by 

the creditor as an incident to the 

extension of credit. However, the 

proposal would require the finance 

charge to include charges by third 

parties if the creditor requires the use of 

a third party as a condition of or 

incident to the extension of credit (even 

if the consumer chooses the third party), 

or if the creditor retains a portion of the 

third-party charge (to the extent of the 

portion retained). Charges that would be 

incurred in a comparable cash 

transaction, such as transfer taxes, 

would continue to be excluded from the 

finance charge. Under this approach, 

consumers would benefit from having a 

finance charge and APR disclosure that 

better represent the cost of credit, 

undiluted by myriad exclusions for 

various fees and charges. This approach 

would cause more loans to be subject to 

the special protections of the Board’s 

2008 HOEPA Final Rule, special 

disclosures and restrictions for HOEPA 

loans, and certain State anti-predatory 

lending laws. However, the proposal 

could also reduce compliance burdens, 

regulatory uncertainty, and litigation 

risks for creditors. 

Disclosure of the finance charge and 

the APR. Currently, creditors are 

required to disclose the loan’s ‘‘finance 

charge’’ and ‘‘annual percentage rate,’’ 

using those terms, more conspicuously 

than the other required disclosures. 

Consumer testing indicated that 

consumers do not understand the term 

‘‘finance charge.’’ Most consumers 

believe the term refers to the total of all 

interest they would pay if they keep the 

loan to maturity, but do not realize that 

it includes the fees and costs associated 

with the loan. For these reasons, the 

proposal replaces the term ‘‘finance 

charge’’ with ‘‘interest and settlement 

charges’’ to make clear it is more than 

interest, and the disclosure would no 

longer be more conspicuous than the 

other required disclosures. 

In addition, the disclosure of the APR 

would be enhanced to improve 

consumers’ comprehension of the cost 

of credit. Under the proposal, creditors 

would be required to disclose the APR 

in 16-point font in close proximity to a 

graph that compares the consumer’s 

APR to the HOEPA average prime offer 

rate for borrowers with excellent credit 

and the HOEPA threshold for higherpriced loans. This disclosure would put 

the APR in context and help consumers 

understand whether they are being 

offered a loan that comports with their 

creditworthiness. 

Interest rate and payment summary. 

Currently, creditors are required to 

disclose the number, amount, and 

timing of payments scheduled to repay 

the loan. Under the MDIA’s 

amendments to TILA, creditors will be 

required to provide examples of 

adjustments to the regularly required 

payment based on the change in interest 

rates specified in the contract. 

Consumer testing consistently indicated 

that consumers shop for and evaluate a 

mortgage based on the contract interest 

rate and the monthly payment, but 

consumers have difficulty 

understanding such terms using the 

current TILA disclosure. Under the 

proposal, creditors would be required to 

disclose in a tabular format the contract 

interest rate together with the 

corresponding monthly payment, 

including escrows for taxes and 

property and/or mortgage insurance. 

Special disclosure requirements would 

be imposed for adjustable-rate or steprate loans to show the interest rate and 

payment at consummation, the 

maximum interest rate and payment at 

first adjustment, and the highest 

possible maximum interest rate and 

payment. Additional special disclosures 

would be required for loans with 

negatively-amortizing payment options, 

introductory interest rates, interest-only 

payments, and balloon payments. 

Disclosure of other terms. In addition 

to the interest rate and monthly 

payment, consumer testing indicated 

that consumers benefit from the 

disclosure of other key terms in a clear 

format. Thus, the proposal would 

require creditors to provide in a tabular 

format information about the loan 

amount, the loan term, the loan type 

(such as fixed-rate), the total settlement 

charges, and the maximum amount of 

any prepayment penalty. In addition, 

creditors would be required to disclose 

in a tabular question and answer format 

the ‘‘Key Questions about Risk,’’ which 

would include information about 

potentially risky loan features such as 

prepayment penalties, interest-only 

payments, and negative amortization. 

C. Disclosures Three Days Before 

Consummation 

As noted above, the creditor is 

required to provide the early TILA 

disclosure to the consumer within three 

business days after receiving the 

consumer’s written application and at 

least seven business days before 

consummation, and before the 

consumer has paid a fee other than a fee 

for obtaining the consumer’s credit 

history. If the APR on the early TILA 

disclosure exceeds a certain tolerance 

before consummation, the creditor must 

provide corrected disclosures that the 

consumer must receive at least three 

days before consummation. If any term 

other than the APR becomes inaccurate, 

the creditor must give the corrected 

disclosure no later than at 

consummation. The consumer may 

waive the seven- and three-day waiting 

periods for a bona fide personal 

financial emergency. 

There are, however, long-standing 

concerns about consumers facing 

different loan terms or increased 

settlement costs at closing. Members of 

the Board’s Consumer Advisory 

Council, participants in public hearings, 

and commenters on prior Board 

rulemakings have expressed concern 

about consumers not learning of 

changes to credit terms or settlement 

charges until consummation. In 

addition, consumer testing indicated 

that consumers are often surprised at 

closing by changes in important loan 

terms, such as the addition of an 

adjustable-rate feature. Despite these 

changes, consumers report that they 

have proceeded with closing because 

they lacked alternatives (especially in 

the case of a home purchase loan), or 

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43240 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

19See Macro International, Inc., Consumer 

Testing of Mortgage Broker Disclosures (July 10, 

2008), available at http://www.federalreserve.gov/ 

newsevents/press/bcreg/20080714regzconstest.pdf. 

were told that they could easily 

refinance with better terms in the near 

future. 

For these reasons, the proposal would 

require the creditor to provide a final 

TILA disclosure that the consumer must 

receive at least three business days 

before consummation, even if no terms 

have changed since the early TILA 

disclosure was provided. In addition, 

the Board is proposing two alternative 

approaches to address changes to loan 

terms and settlement charges during the 

three-business-day waiting period. 

Under the first approach, if any terms 

change during the three-business-day 

waiting period, the creditor would be 

required to provide another final TILA 

disclosure and wait an additional three 

business days before consummation 

could occur. Under the second 

approach, creditors would be required 

to provide another final TILA 

disclosure, but would have to wait an 

additional three business days before 

consummation only if the APR exceeds 

a designated tolerance or the creditor 

adds an adjustable-rate feature. 

Otherwise, the creditor would be 

permitted to provide the new final TILA 

disclosure at consummation. 

D. Disclosures After Consummation 

Regulation Z requires certain notices 

to be provided after consummation. 

Currently, for variable-rate transactions, 

creditors are required to provide 

advance notice of an interest rate 

adjustment. There are no disclosure 

requirements for other postconsummation events. 

ARM adjustment notice. Currently, for 

variable-rate transactions, creditors are 

required to provide a notice of interest 

rate adjustment at least 25, but no more 

than 120, calendar days before a 

payment at a new level is due. In 

addition, creditors must provide an 

adjustment notice at least once each 

year during which an interest rate 

adjustment is implemented without an 

accompanying payment change. These 

disclosures must include certain 

information, including the current and 

prior interest rates and the index values 

upon which the current and prior 

interest rates are based. 

Under the proposal, creditors would 

be required to provide the ARM 

adjustment notice at least 60 days before 

payment at a new level is due. This 

proposal seeks to address concerns that 

consumers need more than 25 days to 

seek out a refinancing in the event of a 

payment adjustment. This notice is 

particularly critical for subprime 

borrowers who may be more vulnerable 

to payment shock and may have a more 

difficult time refinancing a loan. 

Payment option statement. Currently, 

creditors are not required to provide 

disclosures after consummation for 

negatively amortizing loans, such as 

payment option loans. To ensure 

consumers receive information about 

the risks associated with payment 

option loans (e.g., payment shock), the 

proposal would require creditors to 

provide a periodic statement for 

payment option loans that have negative 

amortization. The disclosure would 

contain a table with a comparison of the 

amount and impact on the loan balance 

and property equity of a fullyamortizing payment, interest-only 

payment, and minimum negativelyamortizing payment. This disclosure 

would be provided not later than 15 

days before a periodic payment is due. 

Creditor-placed property insurance 

notice. Creditors are not currently 

required under Regulation Z to provide 

notice before charging for creditorplaced property insurance. Industry 

reports indicate that the volume of 

creditor-placed property insurance has 

increased significantly. Consumers 

struggling financially may fail to pay 

required property insurance premiums 

unaware that creditors have the right to 

obtain such insurance on their behalf 

and add the premiums to their 

outstanding loan balance. Such 

premiums are often considerably more 

expensive than premiums for insurance 

obtained by the consumer. Thus, under 

the proposal, creditors would be 

required to provide notice to consumers 

of the cost and coverage of creditorplaced property insurance at least 45 

days before a charge is imposed for such 

insurance. In addition, creditors would 

be required to provide consumers with 

evidence of such insurance within 15 

days of imposing a charge for the 

insurance. 

E. Prohibitions on Payments to Loan 

Originators and Steering 

Currently, creditors pay commissions 

to loan originators in the form of ‘‘yield 

spread premiums.’’ A yield spread 

premium is the present dollar value of 

the difference between the lowest 

interest rate a lender would have 

accepted on a particular transaction and 

the interest rate a loan originator 

actually obtained for the lender. Some 

or all of this dollar value is usually paid 

to the loan originator by the creditor as 

a form of compensation, though it may 

also be applied to other closing costs. 

Yield spread premiums can create 

financial incentives to steer consumers 

to riskier loans for which loan 

originators will receive greater 

compensation. Consumers generally are 

not aware of loan originators’ conflict of 

interest and cannot reasonably protect 

themselves against it. Yield spread 

premiums may provide some benefit to 

consumers because consumers do not 

have to pay loan originators’ 

compensation in cash or through 

financing. However, the Board believes 

that this benefit may be outweighed by 

costs to consumers, such as when 

consumers pay a higher interest rate or 

obtain a loan with terms the consumer 

may not otherwise have chosen, such as 

a prepayment penalty or an adjustable 

rate. 

In response to these concerns, the 

2007 HOEPA Proposed Rule attempted 

to address the potential unfairness 

through disclosure. The proposal would 

have prohibited a creditor from paying 

a mortgage broker more than the 

consumer had previously agreed in 

writing that the mortgage broker would 

receive. A mortgage broker would have 

had to enter into the written agreement 

with the consumer, before accepting the 

consumer’s loan application and before 

the consumer paid any fee in 

connection with the transaction (other 

than a fee for obtaining a credit report). 

The agreement also would have 

disclosed (1) that the consumer 

ultimately would bear the cost of the 

entire compensation even if the creditor 

paid part of it directly; and (2) that a 

creditor’s payment to a broker could 

influence the broker to offer the 

consumer loan terms or products that 

would not be in the consumer’s interest 

or the most favorable the consumer 

could obtain. 

Based on analysis of comments 

received on the 2007 HOEPA Proposed 

Rule, the results of consumer testing, 

and other information, the Board 

withdrew the proposed provisions 

relating to broker compensation in the 

2008 HOEPA Final Rule. In particular, 

the Board’s consumer testing raised 

concerns that the proposed agreement 

and disclosures would confuse 

consumers and undermine their 

decisionmaking rather than improve it. 

Participants often concluded, not 

necessarily correctly, that brokers are 

more expensive than creditors. Many 

also believed that brokers would serve 

their best interests notwithstanding the 

conflict resulting from the relationship 

between interest rates and brokers’ 

compensation.19 The proposed 

disclosures presented a significant risk 

of misleading consumers regarding both 

the relative costs of brokers and lenders 

and the role of brokers in their 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43241 

transactions. In withdrawing the broker 

compensation provisions of the HOEPA 

proposal, the Board stated it would 

continue to explore options to address 

potential unfairness associated with 

loan originator compensation 

arrangements. 

To address the concerns related to 

loan originator compensation, the Board 

proposes to prohibit payments to loan 

originators that are based on the loan’s 

terms and conditions. This prohibition 

would not apply to payments that 

consumers make directly to loan 

originators. The Board solicits comment 

on an alternative that would allow loan 

originators to receive payments that are 

based on the principal loan amount, 

which is a common practice today. If a 

consumer directly pays the loan 

originator, the proposal would prohibit 

the loan originator from also receiving 

compensation from any other party in 

connection with that transaction. These 

rules would be proposed under the 

Board’s HOEPA authority to prohibit 

unfair or deceptive acts or practices in 

connection with mortgage loans. 

Under the proposal, a ‘‘loan 

originator’’ would include both 

mortgage brokers and employees of 

creditors who perform loan origination 

functions. The 2007 HOEPA Proposed 

Rule covered only mortgage brokers. 

However, a creditor’s loan officers 

frequently have the same discretion as 

mortgage brokers to modify loans’ terms 

to increase their compensation, and 

there is evidence that creditors’ loan 

officers engage in such practices. 

The Board also seeks comment on an 

optional proposal that would prohibit 

loan originators from directing or 

‘‘steering’’ consumers to a particular 

creditor’s loan products based on the 

fact that the loan originator will receive 

additional compensation even when 

that loan may not be in the consumer’s 

best interest. The Board solicits 

comment on whether the proposed rule 

would be effective in achieving the 

stated purpose. In addition, the Board 

solicits comment on the feasibility and 

practicality of such a rule, its 

enforceability, and any unintended 

adverse effects the rule might have. 

F. Additional Protections 

Credit insurance or debt cancellation 

or debt suspension coverage eligibility 

for all loan transactions. Currently, 

creditors may exclude from the finance 

charge a premium or charge for credit 

insurance or debt cancellation or debt 

suspension coverage if the creditor 

discloses the voluntary nature and cost 

of the product, and the consumer signs 

or initials an affirmative request for the 

product. Concerns have been raised 

about creditors who sometimes offer 

products that contain eligibility 

restrictions, specifically age or 

employment restrictions, but do not 

evaluate whether applicants for the 

products actually meet the eligibility 

restrictions at the time of enrollment. 

Subsequently, consumers’ claims for 

benefits may be denied because they did 

not meet the eligibility restrictions at 

the time of enrollment. Consumers are 

presumably unaware that they are 

paying for a product for which they will 

derive no benefit. Under the proposal, 

creditors would be required to 

determine whether the consumer meets 

the age and/or employment eligibility 

criteria at the time of enrollment in the 

product and provide a disclosure that 

such a determination has been made. 

The proposal is not limited to mortgage 

transactions and would apply to all 

closed-end and open-end transactions. 

VI. Section-by-Section Analysis 

Section 226.1 Authority, Purpose, 

Coverage, Organization, Enforcement, 

and Liability 

1(b) Purpose 

Section 226.1(b) would be revised to 

reflect the fact that § 226.35 prohibits 

certain acts or practices for transactions 

secured by the consumer’s principal 

dwelling. In addition, § 226.1(b) would 

be revised to reflect the proposal to 

broaden the scope of § 226.36 (from 

transactions secured by the consumer’s 

principal dwelling to all transactions 

secured by real property or a dwelling). 

1(d) Organization 

1(d)(5) 

The Board proposes to revise 

§ 226.1(d)(5) to reflect the scope of 

§§ 226.32, 226.34, and 226.35. The 

Board would also revise § 226.1(d)(5) to 

reflect the proposed change in the scope 

of § 226.36, and the addition of new 

§§ 226.37 and 226.38. 

Section 226.2 Definitions and Rules 

2(a) Definitions 

2(a)(24) Residential Mortgage 

Transaction 

Regulation Z, § 226.2(a)(24), defines a 

‘‘residential mortgage transaction’’ as ‘‘a 

transaction in which a mortgage, deed of 

trust, purchase money security interest 

arising under an installment sales 

contract, or equivalent consensual 

security interest is created or retained in 

the consumer’s principal dwelling to 

finance the acquisition or initial 

construction of that dwelling.’’ 

Currently, comment 2(a)(24)–1 states 

that the term is important in five 

provisions in Regulation Z, including 

assumption under §§ 226.18(q) and 

226.20(b). However, the proposed rule 

would expand coverage of the 

assumption rules to cover any closedend credit transaction secured by real 

property or a dwelling. Thus, the Board 

proposes to revise comments 2(a)(24)–1, 

–2, and –5 to reflect this change. 

Section 226.3 Exempt Transactions 

3(b) Credit Over $25,000 Not Secured by 

Real Property or a Dwelling 

TILA and Regulation Z cover all 

credit transactions that are secured by 

real property or a principal dwelling in 

which the amount financed exceeds 

$25,000. 15 U.S.C. 1603(3). Section 

226.3(b), which implements TILA 

Section 104(3), provides that credit 

transactions over $25,000 not secured 

by real property, or by personal property 

used or expected to be used as the 

principal dwelling of the consumer, are 

exempt from Regulation Z. 15 U.S.C. 

1603(3). 

As noted in the discussion under 

§§ 226.19 and 226.38, the Board 

proposes to require creditors to provide 

certain disclosures for all closed-end 

transactions secured by real property or 

a dwelling, not just principal dwellings. 

However, the Board recognizes that, if 

personal property that is a dwelling but 

not the borrower’s principal dwelling 

secures a loan of over $25,000, it is not 

covered by TILA in the first instance. 

For example, Regulation Z does not 

apply to a $26,000 loan that is secured 

by a manufactured home that is not the 

consumer’s second or vacation home. 

Notwithstanding this exemption, the 

Board solicits comment on whether 

consumers in these transactions receive 

adequate information regarding their 

loan terms and are afforded sufficient 

protections. The Board also seeks 

comment on the relative benefits and 

costs of applying Regulation Z to these 

transactions. 

Section 226.4 Finance Charge 

Background 

Section 106(a) of TILA provides that 

the finance charge in a consumer credit 

transaction is ‘‘the sum of all charges, 

payable directly or indirectly by the 

person to whom the credit is extended, 

and imposed directly or indirectly by 

the creditor as an incident to the 

extension of credit.’’ 15 U.S.C. 1605(a). 

The finance charge does not include 

charges of a type payable in a 

comparable cash transaction. Id. The 

finance charge does not include fees or 

charges imposed by third party closing 

agents, such as settlement agents, 

attorneys, and title companies, if the 

creditor does not require the imposition 

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43242 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

20The 1998 Joint Report at 8–16. 

21See The 1998 Joint Report at 10. 

of those charges or the services 

provided, and the creditor does not 

retain the charges. Id. Examples of 

finance charges include, among other 

things, interest, points, service or 

carrying charges, credit report fees, and 

credit insurance premiums. Id. 

The finance charge is significant for 

two reasons. First, it is meant to 

represent, in dollar terms, the ‘‘cost of 

credit’’ in whatever form imposed by 

the creditor or paid by the borrower. 

Second, the finance charge is used in 

calculating the annual percentage rate 

(APR) for the loan, 15 U.S.C. 1606, 

which represents the ‘‘cost of credit, 

expressed as a yearly rate.’’ 

§ 226.22(a)(1). Together, these two 

interrelated terms are among the most 

important terms disclosed to consumers 

under TILA. 

While the test for determining what is 

included in a finance charge is very 

broad, TILA Section 106 excludes from 

the definition of the finance charge 

various fees or charges. The statute 

excludes from the finance charge: 

Premiums for credit insurance if 

coverage is not required to obtain credit, 

certain disclosures are provided to the 

consumer, and the consumer 

affirmatively requests the insurance in 

writing; and premiums for property and 

liability insurance written in connection 

with a consumer credit transaction if the 

insurance may be obtained from a 

person of the consumer’s choice and 

certain disclosures are provided to the 

consumer. 15 U.S.C. 1605(b) and (c). 

Statutory exclusions also apply to 

certain security interest charges, 

including: (1) Fees or charges required 

by law and paid to public officials for 

determining the existence of, or for 

perfecting, releasing, or satisfying, any 

security related to the credit transaction; 

(2) premiums for insurance purchased 

instead of perfecting any security 

interest otherwise required by the 

creditor; and (3) taxes levied on security 

instruments or the documents 

evidencing indebtedness if payment of 

those taxes is required to record the 

instrument securing the evidence of 

indebtedness. 15 U.S.C. 1605(d). 

Finally, the statute excludes from the 

finance charge various fees in 

connection with loans secured by real 

property, such as title examination fees, 

title insurance premiums, fees for 

preparation of loan-related documents, 

escrows for future payment of taxes and 

insurance, notary fees, appraisal fees, 

pest and flood-hazard inspection fees, 

and credit report fees. 15 U.S.C. 1605(e). 

Through the exclusions described 

above, the Congress has adopted a 

‘‘some fees in, some fees out’’ approach 

to the finance charge with some fees 

automatically excluded from the finance 

charge and other fees excluded from the 

finance charge provided certain 

conditions are met. The regulation 

tracks this approach with a three-tiered 

approach to the classification of fees or 

charges: (1) Some fees or charges are 

finance charges; (2) some fees and 

charges are not finance charges; and (3) 

some fees and charges are not finance 

charges, but only if certain conditions 

are met. As a result, neither the finance 

charge nor the corresponding APR 

disclosed to the consumer reflect the 

consumer’s total cost of credit. 

Section 226.4(a) defines the finance 

charge as ‘‘the cost of consumer credit 

as a dollar amount.’’ Consistent with 

TILA Section 106(a), the finance charge 

includes ‘‘any charge payable directly or 

indirectly by the consumer and imposed 

directly or indirectly by the creditor as 

an incident to or a condition of the 

extension of credit’’ and does not 

include ‘‘any charge of a type payable in 

a comparable cash transaction.’’ 

§ 226.4(a). The finance charge also 

includes fees and amounts charged by 

someone other than the creditor if the 

creditor requires the use of a third party 

as a condition of or incident to the 

extension of credit, even if the 

consumer can choose the third party, or 

if the creditor retains a portion of the 

third party charge (to the extent of the 

portion retained). § 226.4(a)(1). 

The Board has adopted provisions in 

the regulation to give effect to each of 

the statutory exclusions and conditional 

exclusions from the finance charge. 

Closing agent charges are not included 

in the finance charge unless the creditor 

requires the particular services for 

which the consumer is charged, requires 

imposition of the charge, or retains a 

portion of the charge (to the extent of 

the portion retained). § 226.4(a)(2). 

Premiums for credit insurance may be 

excluded from the finance charge if 

insurance coverage is not required by 

the creditor, certain disclosures are 

provided to the consumer, and the 

consumer affirmatively requests the 

insurance coverage in a writing signed 

or initialed by the consumer. 

§ 226.4(d)(1). Premiums for property 

and liability insurance may also be 

excluded from the finance charge if the 

insurance may be obtained from a 

person of the consumer’s choice and 

certain disclosures are provided to the 

consumer. § 226.4(d)(2). Certain security 

interest charges enumerated in the 

statute, such as taxes and fees 

prescribed by law and paid to public 

officials for determining the existence 

of, or for perfecting, releasing, or 

satisfying, a security interest, are 

excluded from the finance charge. 

§ 226.4(e). The regulation also excludes 

from the finance charge the real estate 

related fees enumerated in Section 

106(e) of TILA. § 226.4(c)(7). 

Over time, the Board, by regulation, 

has contributed to the ‘‘some fees in, 

some fees out’’ approach to the finance 

charge by determining that certain other 

charges not specifically excluded by the 

statute are not finance charges. These 

regulatory exclusions often sought to 

bring logical consistency to the 

treatment of fees that are similar to fees 

the statute excludes or conditionally 

excludes from the finance charge. 

Charges excluded from the finance 

charge by regulation include: Charges 

for debt cancellation or debt suspension 

coverage if the coverage is not required 

by the creditor, certain disclosures are 

provided to the consumer, and the 

consumer affirmatively requests the 

coverage in a writing signed or initialed 

by the consumer; and fees for verifying 

the information in a credit report. See 

§ 226.4(d)(3) and comment 4(c)(7)–1. 

The additional fees the Board has 

excluded from the finance charge 

generally are closely analogous or 

related to fees that the statute excludes 

or conditionally excludes from the 

finance charge. For example, premiums 

for voluntary debt cancellation coverage 

are closely analogous to premiums for 

voluntary credit insurance, which TILA 

excludes from the finance charge. 

Likewise, charges for verifying a credit 

report are related to the credit report 

itself. 

Concerns With the Current Approach to 

Finance Charges 

The ‘‘some fees in, some fees out’’ 

approach to the finance charge has been 

problematic both for consumers and for 

creditors since TILA’s inception. Many 

of these problems were described in the 

1998 Joint Report.20

One fundamental problem is that 

there are two views of what is meant by 

the ‘‘cost of credit.’’ From the creditor’s 

perspective, the cost of credit means the 

interest and fee income that the creditor 

receives or requires in exchange for 

providing credit to the consumer. From 

the consumer’s perspective, however, 

the cost of credit means what the 

consumer pays for the credit, regardless 

of the persons to whom such amounts 

are paid.21 The statute uses both of these 

approaches in designating which fees 

are and are not included in the finance 

charge. 

The influence of the creditor’s 

perspective on the cost of credit is 

evident in how the ‘‘some fees in, some 

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22See The 1998 Joint Report at 11. 

23See The 1998 Joint Report at 9. 

24U.S. Department of Housing and Urban 

Development, A Study of Closing Costs for FHA 

Mortgages at x–xi and 2–4 (May 2008). 

25See The 1998 Joint Report at 9. 

26Renuart, Elizabeth and Diane E. Thomson, The 

Truth, the Whole Truth, and Nothing but the Truth: 

Fulfilling the Promise of Truth in Lending, 25 Yale 

J. on Reg. 181, 230 (2008). 

27The 1998 Joint Report at 15–16. 

28The 1998 Joint Report at 13, 16. 

29The 1998 Joint Report at 13. 

30The 1998 Joint Report at 13. 

fees out’’ approach to the finance charge 

has evolved and been applied to loans 

secured by real property. Many services 

provided in connection with real estate 

loans are performed by third parties, 

such as appraisers, closing agents, 

inspectors, public officials, attorneys, 

and title companies. Some of these 

services are required by the creditor, 

while others are not. In either case, the 

fees for these services generally are 

remitted in whole or in part to the third 

party. In some cases, the creditor may 

have little control over the fees imposed 

by these third parties. From the 

creditor’s perspective, the creditor 

generally does not receive and retain 

these charges in connection with 

providing credit to the consumer. From 

the consumer’s perspective, however, 

these third-party charges are part of 

what the consumer pays to obtain 

credit.22

Another problem with the ‘‘some fees 

in, some fees out’’ approach is that it 

undermines the effectiveness of the APR 

as an accurate measure of the cost of 

credit expressed as a yearly rate. The 

APR is designed to be a benchmark for 

consumer shopping. In consumer testing 

conducted for the Board, however, the 

APR appeared not to be fulfilling that 

objective in connection with mortgage 

loans. 

A single figure such as the APR is 

simple to use, particularly if consumers 

can use it to evaluate and compare 

competing products, rather than having 

to evaluate multiple figures.23 This is 

especially true for a figure such as the 

APR, which has a forty-year history in 

consumer disclosures, and thus is 

familiar to consumers. Nevertheless, if 

that single figure is not understood by 

consumers or does not fully represent 

what it purports to represent, the 

usefulness of that figure is undermined. 

Consumer testing shows that most 

consumers do not understand the APR, 

and many believe that the APR is the 

interest rate. 

Under the current ‘‘some fees in, some 

fees out’’ approach to the finance 

charge, mortgage lenders also have an 

incentive to unbundle the cost of credit 

and shift some of the costs from the 

interest rate into ancillary fees that are 

excluded from the finance charge and 

not considered when calculating the 

APR, resulting in a lower APR than 

otherwise would have been disclosed. 

This further undermines the usefulness 

of the APR and has resulted in the 

proliferation of ‘‘junk fees,’’ such as fees 

for preparing loan-related documents. 

Such unbundling of the cost of credit, 

and the resulting pricing complexity, 

can have a detrimental impact on 

consumers. For example, research 

undertaken by HUD suggests that 

borrowers experience great difficulty 

when deciding whether the tradeoff 

between paying higher up-front costs or 

paying a higher interest rate is in their 

best interest, and that borrowers who do 

not pay up-front loan origination fees 

generally pay less than borrowers who 

do pay such fees.24 To the extent that 

the APR calculation includes most or all 

fees, the APR can reduce the incentive 

for lenders to include junk fees in credit 

agreements.25

Based on extensive outreach 

conducted by Board staff, there appears 

to be a broad consensus that the ‘‘some 

fees in, some fees out’’ approach to the 

finance charge and corresponding APR 

calculation and disclosure is seriously 

flawed. Many industry representatives 

consider the finance charge definition 

overly complex. For creditors, this 

complexity creates significant regulatory 

burden and litigation risk. While some 

industry representatives generally favor 

a more inclusive measure, they have not 

advocated a specific test for determining 

the finance charge. 

Consumer advocates believe that the 

exclusions from the finance charge 

undermine the purpose of the finance 

charge and the APR, which is to 

measure the cost of credit. Some 

consumer advocates have recommended 

a ‘‘but for’’ test that would include in 

the finance charge all fees except those 

that the consumer would pay if he or 

she were not ‘‘obtaining, accessing, or 

repaying the extension of credit,’’ such 

as fees paid in comparable cash 

transactions.26

In the 1998 Joint Report, the Board 

and HUD recommended that the 

Congress adopt a more comprehensive 

definition of the finance charge.27 The 

Board and HUD recommended adopting 

a ‘‘required-cost of credit’’ test that 

would include in the finance charge 

‘‘the costs the consumer is required to 

pay to get the credit.’’ 28 Under this 

approach, the finance charge would 

include (and the APR would reflect) 

costs required to be paid by the 

consumer to obtain the credit, including 

many fees currently excluded from the 

finance charge, such as application fees, 

appraisal fees, document preparation 

fees, fees for title services, and fees paid 

to public officials to record security 

interests.29 Under the ‘‘required-cost of 

credit’’ test, fees for optional services, 

such as premiums for voluntary credit 

insurance, would be excluded from the 

finance charge.30

The Board’s Proposal 

A simpler, more inclusive test for 

determining the finance charge. The 

Board believes consumers would benefit 

from having a disclosure that includes 

fees or charges that better represent the 

full cost of credit undiluted by myriad 

exclusions, the basis for which 

consumers cannot be expected to 

understand. In addition, having a single 

benchmark figure—the APR—that is 

simple to use should allow consumers 

to evaluate competing mortgage 

products by reviewing one variable. The 

Board also believes that such a 

disclosure would reduce compliance 

burdens, regulatory uncertainty, and 

litigation risks for creditors who must 

provide accurate TILA disclosures. 

Thus, the Board would retain the APR 

as a benchmark for closed-end 

transactions secured by real property or 

a dwelling but is proposing certain 

revisions designed to make the APR 

more useful to consumers. First, as 

discussed below, the Board is proposing 

to provide consumers with more helpful 

explanation of the APR and what it 

represents. Second, the Board is 

proposing to require disclosure of the 

APR together with a new disclosure of 

the interest rate, as discussed below. 

Third, the Board is proposing to replace 

the ‘‘some fees in, some fees out’’ 

approach for determining the finance 

charge with a simpler, more inclusive 

approach for determining the finance 

charge that is based on TILA Section 

106(a), 15 U.S.C. 1605(a). This approach 

is designed to ensure that the finance 

charge and the corresponding APR 

disclosed to consumers fulfills the basic 

purpose of TILA by providing a more 

complete and useful measure of the cost 

of credit. 

Pursuant to its authority under TILA 

Sections 105(a) and (f) of TILA, 15 

U.S.C. 1604(a) and (f), the Board is 

proposing to amend § 226.4 to make 

most of the current exclusions from the 

finance charge inapplicable to closedend credit transactions secured by real 

property or a dwelling. For such loans, 

the Board is proposing to replace the 

‘‘some fees in, some fees out’’ approach 

with a simpler, more inclusive test 

based on the definition of finance 

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43244 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

31To supplement the Bankrate.com survey with 

estimated recording fees and taxes, which the 

survey did not include, the Board used the 

Martindale-Hubbell service’s digest of State laws. 

As discussed below, the Board is not proposing to 

revise comment 4(a)–5, which provides principles 

for determining the treatment of taxes based on the 

party on whom the law imposes the tax. For the 

sake of simplicity, the Board did not attempt to 

distinguish such laws on this basis and, instead, 

included all recording taxes in the finance charge 

under the proposal. The analysis thus may have 

included some recording taxes in the finance charge 

under the proposal that could have been excluded 

under comment 4(a)–5. 

32 DC Code Ann. 26–1151.01(7)(A)(i); Ill. Comp. 

Stat. ch. 815, 137/10; Md. Code Ann. Com. Law 12– 

1029(a)(2). 

33 http://www.freddiemac.com/learn/pdfs/uw/ 

Pred_requirements.pdf; https:// 

www.efanniemae.com/sf/guides/ssg/annltrs/pdf/ 

2003/03-12.pdf. 

charge in TILA Section 106(a), 15 U.S.C. 

1605(a), for determining what fees or 

charges are included in the finance 

charge. The Board believes that the 

current patchwork of fee exclusions 

from the definition of the finance charge 

is not consistent with TILA’s purpose of 

disclosing the cost of credit to the 

consumer. The Board believes that a 

more inclusive approach to determining 

the finance charge would be more 

consistent with TILA’s purpose, 

enhance consumer understanding and 

use of the finance charge and APR 

disclosures, and reduce compliance 

costs. The Board also believes that the 

proposed revisions to the finance charge 

may enhance competition for thirdparty services since creditors would 

likely be more mindful of fees or 

charges that must be included in the 

finance charge and APR. 

The proposed test for determining the 

finance charge tracks the language of 

current § 226.4 but excluding 

§ 226.4(a)(2). Specifically, under this 

test, a fee or charge is included in the 

finance charge for closed-end credit 

transactions secured by real property or 

a dwelling if it is (1) ‘‘payable directly 

or indirectly by the consumer’’ to whom 

credit is extended, and (2) ‘‘imposed 

directly or indirectly by the creditor as 

an incident to or a condition of the 

extension of credit.’’ The finance charge 

would continue to exclude fees or 

charges paid in comparable cash 

transactions. See § 226.4(a). The finance 

charge also includes charges by third 

parties if the creditor: (1) Requires use 

of a third party as a condition of or 

incident to the extension of credit, even 

if the consumer can choose the third 

party; or (2) retains a portion of the 

third-party charge, to the extent of the 

portion retained. See § 226.4(a)(1). Other 

exclusions from the finance charge for 

closed-end credit transactions secured 

by real property or a dwelling would be 

limited to late fees and similar default 

or delinquency charges, seller’s points, 

and premiums for property and liability 

insurance. 

As new services are added, and new 

fees are charged, in connection with 

closed-end credit transactions secured 

by real property or a dwelling, creditors 

would have to apply the basic test in 

making judgments about whether or not 

new fees must be included in the 

finance charge. The Board requests 

comment on whether further guidance 

is needed to assist creditors in making 

these determinations, and, if so, what 

specific guidance would be helpful. 

Loans covered. Section 226.4 is part of 

Subpart A, General, as opposed to 

Subpart C, Closed-End Credit. 

Nevertheless, the proposed amendments 

to § 226.4 would apply only to closedend credit transactions secured by real 

property or a dwelling, consistent with 

the general scope of this proposed rule. 

The Board seeks comment on whether 

the same amendments should be made 

applicable to other closed-end credit 

and may consider such amendments 

under a future review of Regulation Z. 

Contemporaneous with this proposal, 

the Board is publishing separately 

proposed rules regarding home equity 

lines of credit (HELOCs). Accordingly, 

the Board is not proposing to apply the 

changes to the finance charge 

determination to HELOCs in this 

rulemaking. As discussed in the HELOC 

proposal, the Board believes that 

changing the definition of finance 

charge for HELOC accounts would not 

have a material effect on the HELOC 

disclosures and accordingly is 

unnecessary. 

Impact on coverage of other rules. 

One potential consequence of adopting 

a more inclusive test for determining the 

finance charge is that more loans may 

qualify as ‘‘HOEPA loans,’’ as described 

in TILA Section 103(aa), and therefore 

be subject to the additional disclosures 

and prohibitions applicable to such 

loans under TILA Section 129. 

Similarly, more loans may be subject to 

the Board’s recently adopted protections 

for higher-priced mortgage loans under 

§ 226.35, which become effective on 

October 1, 2009. 73 FR 44522; Jul. 30, 

2008. Finally, more loans may qualify as 

covered loans under certain State antipredatory lending laws that use the APR 

as a coverage test. The Board has 

conducted some analysis to quantify 

these impacts. 

To estimate representative charges, 

the Board obtained information from a 

2008 survey conducted by Bankrate.com 

on closing costs for each state, based on 

a $200,000 hypothetical mortgage 

loan.31 Using these estimates, and 

scaling those that are calculated as a 

percentage of loan amount as necessary, 

the Board estimated the effect on the 

APRs of first-lien loans in two 

databases: HMDA records, which 

include most closed-end home loans, 

and data obtained from Lender 

Processing Services, Inc. (LPS), which 

include mostly prime and near-prime 

home loans serviced by several large 

mortgage servicers. 

On the basis of this analysis, the 

Board estimates that proposed § 226.4 

would increase the share of first-lien 

refinance and home improvement loans 

covered by HOEPA, under § 226.32, by 

about 0.6 percent. While this increase is 

small, the Board also notes that, because 

very few HOEPA loans are originated 

overall, the absolute number of loans 

covered would increase markedly— 

more than 350 percent. Because the 

HMDA data do not include APRs for 

loans below the rate spread reporting 

thresholds, see 12 CFR 203.4(a)(12), 

2006 LPS data were used to estimate the 

impact on coverage of § 226.35. Based 

on this analysis, the Board estimates 

that about 3 percent of the first-lien 

loans in the loan amount range of the 

typical home purchase or refinance loan 

($175,000 to $225,000) that were below 

the § 226.35 APR threshold would have 

been above the threshold if proposed 

§ 226.4 had been in effect at the time. 

The Board also examined HMDA data 

for the impact of the proposed, more 

inclusive finance charge definition on 

APRs in certain states. Specifically, the 

Board considered the APR tests for 

coverage of first-lien mortgages under 

the anti-predatory lending laws in the 

District of Columbia (DC), Illinois, and 

Maryland. These laws are the only three 

State anti-predatory lending laws with 

APR coverage thresholds that are lower 

than the federal HOEPA APR threshold, 

for first-lien loans, of 800 basis points 

over the U.S. Treasury yield on 

securities with comparable maturities. 

DC and Illinois use a threshold of 600 

basis points, and Maryland uses a 

threshold of 700 basis points, over the 

comparable Treasury yield.32 Freddie 

Mac and Fannie Mae have policies 

under which they will not purchase 

loans that exceed the Illinois 

thresholds,33 but they have no such 

policies with regard to DC or Maryland. 

The Board estimates that proposed 

§ 226.4 would convert the following 

percentages of first-lien loans that are 

under the applicable APR threshold into 

loans that exceed that threshold and 

thus would become covered by the 

applicable State anti-predatory lending 

law: DC, 2.5%; Illinois, 4.0%; Maryland, 

0.0%. 

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34H.R. Conf. Rept. 103–652 at 159 (Aug. 2, 1994). 

The Board notes that the impact of the 

proposed finance charge definition on 

APRs varies among loans based on two 

significant factors. First, because many 

of the affected charges are fixed dollar 

amounts, the impact is significantly 

greater for smaller loans. Second, the 

impact likely would vary geographically 

because some charges, notably title 

insurance premiums and recording fees 

and taxes, vary considerably by state. 

The Board believes the proposal, on 

balance, would be in consumers’ 

interests but seeks comment on these 

consequences of the proposal and the 

impact it may have on loans that could 

become subject to these various laws. 

Legal authority. The Board is 

proposing to adopt the simpler, more 

inclusive test for determining the 

finance charge and corresponding APR 

pursuant to its general rulemaking, 

exception, and exemption authorities 

under TILA Section 105. Section 105(a) 

directs the Board to prescribe 

regulations to carry out the purposes of 

this title, which include facilitating 

consumers’ ability to compare credit 

terms and helping consumers avoid the 

uninformed use of credit. 15 U.S.C. 

1601(a), 1604(a). Section 105(a) 

generally authorizes the Board to make 

adjustments and exceptions to TILA to 

effectuate the statute’s purposes, to 

prevent circumvention or evasion of the 

statute, or to facilitate compliance with 

the statute. 15 U.S.C. 1601(a), 1604(a). 

The Board has considered the 

purposes for which it may exercise its 

authority under TILA Section 105(a) 

carefully and, based on that review, 

believes that the proposed adjustments 

and exceptions are appropriate. The 

proposal has the potential to effectuate 

the statute’s purpose by better informing 

consumers of the total cost of credit and 

to prevent circumvention or evasion of 

the statute through the unbundling or 

shifting of the cost of credit from 

finance charges to fees or charges that 

are currently excluded from the finance 

charge. The Board believes that 

Congress did not anticipate how such 

unbundling would undermine the 

purposes of TILA, when it enacted the 

exceptions. For example, fees for 

preparation of loan-related documents 

are excluded from the finance charge by 

TILA Section 106(e), 15 U.S.C. 1605(e); 

in practice, document preparation fees 

have become a common vehicle used by 

creditors to enhance their revenue 

without having any impact on the 

finance charge or APR. A simpler, more 

inclusive approach to determining the 

finance charge also would facilitate 

compliance with the statute. 

TILA Section 105(f) generally 

authorizes the Board to exempt any 

class of transactions from coverage 

under any part of TILA if the Board 

determines that coverage under that part 

does not provide a meaningful benefit to 

consumers in the form of useful 

information or protection. 15 U.S.C. 

1604(f)(1). The Board is proposing to 

exempt closed-end transactions secured 

by real property or a dwelling from the 

complex exclusions in TILA Section 

106(b) through (e), 15 U.S.C. 1605(b) 

through (e). TILA Section 105(f) directs 

the Board to make the determination of 

whether coverage of such transactions 

under those exclusions provides a 

meaningful benefit to consumers in light 

of specific factors. 15 U.S.C. 1604(f)(2). 

These factors are (1) the amount of the 

loan and whether the disclosure 

provides a benefit to consumers who are 

parties to the transaction involving a 

loan of such amount; (2) the extent to 

which the requirement complicates, 

hinders, or makes more expensive the 

credit process; (3) the status of the 

borrower, including any related 

financial arrangements of the borrower, 

the financial sophistication of the 

borrower relative to the type of 

transaction, and the importance to the 

borrower of the credit, related 

supporting property, and coverage 

under TILA; (4) whether the loan is 

secured by the principal residence of 

the borrower; and (5) whether the 

exemption would undermine the goal of 

consumer protection. 

The Board has considered each of 

these factors carefully and, based on 

that review, believes that the proposed 

exemptions are appropriate. Mortgage 

loans generally are the largest credit 

obligation that most consumers assume. 

Most of these loans are secured by the 

consumer’s principal residence. For 

many consumers, their mortgage loan is 

the most important credit obligation that 

they have. Consumer testing suggests 

that consumers find the finance charge 

and APR disclosures confusing and 

unhelpful when shopping for a 

mortgage. Along with other changes, 

replacing the patchwork ‘‘some fees in, 

some fees out’’ approach to determining 

the finance charge with a more inclusive 

approach that reflects the consumer’s 

total cost of credit has the potential to 

further the goals of consumer protection 

and promote the informed use of credit 

for mortgage loans. Adoption of a more 

inclusive finance charge also would 

simplify compliance, reduce regulatory 

burden, and reduce litigation risk for 

creditors. 

The Board’s exception and exemption 

authority under Sections 105(a) and (f) 

does not apply in the case of a mortgage 

referred to in Section 103(aa), which are 

high-cost mortgages generally referred to 

as ‘‘HOEPA loans.’’ The Board does not 

believe that this limitation restricts its 

ability to apply the revised provisions 

regarding finance charges to all 

mortgage loans, including HOEPA 

loans. This limitation on the Board’s 

general exception and exemption 

authority is a necessary corollary to the 

decision of the Congress, as reflected in 

TILA Section 129(l)(1), to grant the 

Board more limited authority to exempt 

HOEPA loans from the prohibitions 

applicable only to HOEPA loans in 

Section 129(c) through (i) of TILA. See 

15 U.S.C. 1639(l)(1). Here, the Board is 

not proposing any exemptions from the 

HOEPA prohibitions. This limitation 

does raise a question as to whether the 

Board could use its exception and 

exemption authority under Sections 

105(a) and (f) to except or exempt 

HOEPA loans, but not other types of 

mortgage loans, from other, generally 

applicable TILA provisions. That 

question, however, is not implicated by 

this proposal. 

Here, the Board is proposing to apply 

its general exception and exemption 

authority to enhance the finance charge 

disclosure for all loans secured by real 

property or a dwelling, including both 

HOEPA and non-HOEPA loans, in order 

to fulfill the statute’s purpose of having 

the finance charge and APR disclosures 

reflect the total cost of credit. It would 

not be consistent with the statute or 

with Congressional intent to interpret 

the Board’s authority under Sections 

105(a) and (f) in such a way that the 

proposed revisions could apply only to 

mortgage loans that are not subject to 

HOEPA. Reading the statute in a way 

that would deprive HOEPA borrowers of 

improved finance charge and APR 

disclosures is not a reasonable 

construction of the statute and 

contravenes the Congress’s goal of 

ensuring ‘‘that enhanced protections are 

provided to consumers who are most 

vulnerable to abuse.’’ 34

The Board solicits comment on all 

aspects of this proposal, including the 

cost, burden, and benefits to consumers 

and to industry regarding the proposed 

revisions to the determination of the 

finance charge. The Board also requests 

comment on any alternatives to the 

proposal that would further the 

purposes of TILA and provide 

consumers with more useful 

disclosures. 

4(a) Definition 

Comment 4(a)–5 contains guidance 

for determining whether taxes should be 

treated as finance charges. Generally, a 

tax imposed on the creditor is a finance 

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43246 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

35The Board has consistently interpreted the 

definition of finance charge as not dependent on 

whether a charge is voluntary or required. As a 

practical matter, most voluntary fees are excluded 

because they coincidentally are payable in a 

comparable cash transaction, not specifically 

because they are voluntary. See, e.g., 61 FR 49237, 

49239; Sept. 19, 1996 (charges for voluntary debt 

cancellation agreements). 

charge if the creditor passes it through 

to the consumer. If applicable law 

imposes a tax solely on the consumer, 

on the creditor and consumer jointly, on 

the credit transaction itself without 

specifying a liable party, or on the 

creditor with direction or authorization 

to pass it through to the consumer, the 

tax is not a finance charge. 

Consequently, an examination of the 

law imposing each tax that is paid by 

the consumer is required to determine 

whether such taxes are finance charges. 

This examination of laws creates burden 

for creditors and may result in 

inconsistent treatment of similar taxes. 

The resulting disclosures likely are not 

as useful to consumers as they might be 

if all taxes were treated consistently. 

The Board seeks comment on whether 

the rules for determining the finance 

charge treatment of taxes imposed by 

State and local governments should be 

simplified and, if so, how. The Board 

also seeks comment on whether any 

such simplification should be for 

purposes of closed-end transactions 

secured by real property or a dwelling 

only or should have more general 

applicability. 

Proposed new comment 4(a)–6 would 

clarify that there is no comparable cash 

transaction in a transaction where there 

is no seller, such as a refinancing, and 

thus the comparable cash transaction 

exclusion from the finance charge does 

not apply to such transactions. 

4(a)(2) Special Rule; Closing Agent 

Charges 

The Board is proposing to amend 

§ 226.4(a)(2), which set out special rules 

for closing agent charges, in light of the 

proposed new § 226.4(g), discussed 

below. As a result, this provision would 

no longer apply to closed-end credit 

transactions secured by real property or 

a dwelling because the fees excluded by 

§ 226.4(a)(2) meet the general definition 

of the finance charge in TILA Section 

106(a). The Board also proposes certain 

conforming amendments to the staff 

commentary under this provision. 

Under the general definition of 

‘‘finance charge’’ in TILA Section 

106(a), a charge is a finance charge if it 

is (1) ‘‘payable directly or indirectly by 

the person to whom the credit is 

extended,’’ and (2) ‘‘imposed directly or 

indirectly by the creditor as an incident 

to the extension of credit.’’ 15 U.S.C. 

1605(a). Application of the basic 

statutory definition as the test for 

determining which charges are finance 

charges would result in many thirdparty charges being treated as finance 

charges because such third-party 

charges often are payable directly or 

indirectly by the consumer and imposed 

indirectly by the creditor. For instance, 

because real estate settlements are 

complex financial and legal 

transactions, creditors generally require 

a licensed closing agent (often an 

attorney) to conduct closings to ensure 

that the transaction is handled with 

professional skill and care. These 

closing agents typically impose fees on 

the consumer in the course of ensuring 

that the loan is consummated 

appropriately. In some cases, the 

creditor clearly requires the particular 

third-party service for which a fee is 

charged, such as where the creditor 

instructs the closing agent to send 

documents by overnight courier. In 

other cases, however, whether the 

creditor requires the particular service is 

not clear. 

A rule that requires case-by-case 

factual determinations as to whether a 

particular third-party fee must be 

included in the finance charge results in 

complexity and inconsistent treatment 

of such fees. Such inconsistent 

treatment in turn undermines the utility 

of the finance charge and APR as 

comparison shopping tools and 

introduces uncertainty and litigation 

risk for creditors. For these reasons, the 

Board believes that fees charged by 

closing agents, both their own and those 

of other third parties they hire to 

perform particular services, should be 

treated uniformly as finance charges. 

The Board seeks comment on whether 

any such third-party charges do not fall 

within the basic test for determining the 

finance charge and could be excluded 

from the finance charge without 

requiring factual determination in each 

case. 

Requiring third-party charges to be 

included in the finance charge creates 

some risk that a creditor may understate 

the finance charge if the creditor does 

not know that a particular charge was 

imposed by a third party. This risk is 

mitigated to some extent by TILA 

Section 106(f), which provides that a 

disclosed finance charge is treated as 

accurate if it does not vary from the 

actual finance charge by more than $100 

or is greater than the amount required 

to be disclosed. 15 U.S.C. 1605(f). This 

tolerance has been incorporated into 

Regulation Z. See § 226.18(d)(1). The 

Board requests comment on whether it 

should increase the finance charge 

tolerance, for example to $200, in light 

of its proposal to require more thirdparty charges to be included in the 

finance charge. The Board also requests 

comment on whether the existing or any 

increased tolerance should be linked to 

an inflation index, such as the 

Consumer Price Index. 

Excluding fees from the finance 

charge because they are voluntary or 

optional also is not consistent with the 

statutory purpose of disclosing the ‘‘cost 

of credit,’’ which includes charges 

imposed ‘‘as an incident to the 

extension of credit.’’ 35 15 U.S.C. 

1605(a). One basis for the current 

exclusions for voluntary or optional 

charges is an implicit assumption that 

they are not ‘‘imposed directly or 

indirectly by the creditor’’ on the 

consumer. However, charges may be 

imposed by a creditor even if the 

services for which the fee is imposed are 

not specifically required by the creditor. 

Moreover, a test that depends upon 

whether a service is ‘‘voluntary’’ 

inherently requires a factual 

determination. In the current provisions 

addressing credit insurance, the Board 

has identified certain objective criteria 

for determining when the consumer’s 

purchase of such insurance is deemed to 

be voluntary. However, as discussed 

below, this approach has many 

problems and has not proven 

satisfactory. The Board believes that 

drawing a bright-line to include in the 

finance charge both voluntary and 

required charges that are imposed by the 

creditor would eliminate the difficulties 

posed by this type of fact-based analysis 

and provide a more consistent measure 

of the cost of credit. 

Another basis for the current 

exclusions for voluntary or optional 

charges in connection with the credit 

transaction is an assumption that 

creditors cannot know the amounts of 

such charges at the time the disclosure 

must be provided to the consumer. The 

Board presumes that creditors know the 

amounts of their own voluntary charges, 

if any. The Board believes that creditors 

generally know or can readily determine 

voluntary third-party charges when 

providing TILA disclosures three 

business days before consummation, as 

proposed § 226.19(a)(2)(ii) would 

require. As a practical matter, the 

primary voluntary third-party charge in 

connection with a mortgage transaction 

of which the Board is aware (and that 

is not otherwise excluded from the 

finance charge) is the premium for 

voluntary credit insurance, and 

creditors generally solicit consumers for 

such insurance. In fact, under existing 

§ 226.4(d)(1)(ii), creditors historically 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43247 

have had to disclose the premium for 

voluntary credit insurance to exclude it 

from the finance charge. The Board 

nevertheless solicits comment on 

whether there are voluntary third-party 

charges the amounts of which cannot be 

determined three business days before 

consummation. 

The Board recognizes that creditors 

may not know what voluntary or 

optional charges the consumer will 

incur when providing early TILA 

disclosures. When providing early TILA 

disclosures, creditors may rely on 

reasonable assumptions regarding 

voluntary or optional charges and label 

those amounts as estimates. The Board 

invites comment on whether further 

guidance is required regarding 

reasonable assumptions that may be 

made regarding voluntary or optional 

charges in early TILA disclosures. 

4(b) Examples of Finance Charges 

The Board is proposing technical 

amendments to comment 4(b)–1 to 

reflect the fact that the exclusions from 

the finance charge under § 226.4(c) 

through (e), other than §§ 226.4(c)(2), 

226.4(c)(5) and 226.4(d)(2), would not 

apply to closed-end credit transactions 

secured by real property or a dwelling. 

4(c) Charges Excluded From the Finance 

Charge 

The Board proposes to amend 

§ 226.4(c), which lists miscellaneous 

exclusions from the finance charge, to 

provide that § 226.4(c) is limited by 

proposed new § 226.4(g). Thus, except 

for late fees and similar default or 

delinquency charges and seller’s points, 

the exclusions in § 226.4(c) would not 

apply to closed-end credit transactions 

secured by real property or a dwelling. 

The Board also proposes certain 

conforming amendments to the staff 

commentary under those provisions. 

4(c)(2) 

The exclusion of fees for actual 

unanticipated late payment, exceeding a 

credit limit, or for delinquency, default, 

or a similar occurrence in § 226.4(c)(2) 

would be retained for closed-end credit 

transactions secured by real property or 

a dwelling. The Board believes these 

charges should be excluded because 

they necessarily occur only after the 

finance charge is disclosed to 

consumers. At the time the TILA 

disclosures must be provided to 

consumers, a creditor cannot know 

whether it will impose such charges or 

their amounts. 

4(c)(5) 

The exclusion of seller’s points from 

the finance charge in § 226.4(c)(5) 

would be retained for closed-end credit 

transactions secured by real property or 

a dwelling. Seller’s points are not 

payable by the consumer. Comment 

226.4(c)(5)–1 notes that seller’s points 

may be passed on to the buyer in the 

form of a higher sales price for the 

property or dwelling. Even then, seller’s 

points are excluded from the finance 

charge. A different rule would require a 

fact-specific determination in every 

transaction involving seller’s points 

regarding whether and to what extent 

the seller shifted those costs to the 

borrower. The Board does not believe 

that such a rule is feasible. The Board 

seeks comment on the retention of the 

seller’s points exclusion. 

4(c)(7) Real-Estate Related Fees 

The Board is proposing to amend 

§ 226.4(c)(7), which currently excludes 

from the finance charge a number of fees 

charged in transactions secured by real 

property or in residential mortgage 

transactions if those fees are bona fide 

and reasonable. Under the proposal, the 

following fees currently excluded would 

be included in the finance charge for 

closed-end credit transactions secured 

by real property or a dwelling: fees for 

title examination, abstract of title, title 

insurance, property survey, and similar 

purposes; fees for preparing loan-related 

documents, such as deeds, mortgages, 

and reconveyance or settlement 

documents; notary and credit-report 

fees; property appraisal fees or fees for 

inspections to assess the value or 

condition of the property if the service 

is performed prior to closing, including 

fees related to pest-infestation or floodhazard determinations; and amounts 

required to be paid into escrow or 

trustee accounts if the amounts would 

not otherwise be included in the finance 

charge. The commentary provisions 

under § 226.4(c)(7) would also be 

amended accordingly. 

As amended, § 226.4(c)(7) and the 

commentary provisions under 

§ 226.4(c)(7) would apply only to openend credit plans secured by real 

property and open-end residential 

mortgage transactions. Thus, for 

HELOCs, the fees specified in 

§ 226.4(c)(7) would continue to be 

excluded from the finance charge. The 

Board requests comment on whether it 

should retain § 226.4(c)(7), as proposed 

to be amended, or delete § 226.4(c)(7) 

altogether, in light of the proposed 

changes to the Regulation Z HELOC 

rules, published today in a separate 

Federal Register notice. See the 

discussion under § 226.4 in that notice. 

4(d) Insurance and Debt Cancellation 

and Debt Suspension Coverage 

The Board is proposing technical 

amendments to comment 4(d)–12 to 

reflect the fact that the exclusions from 

the finance charge under § 226.4(e) 

would not apply to closed-end 

transactions secured by real property or 

a dwelling. 

4(d)(1) and (3) Voluntary Credit 

Insurance Premiums; Voluntary Debt 

Cancellation and Debt Suspension Fees 

The Board is proposing to amend 

§§ 226.4(d)(1), exclusion for voluntary 

credit insurance premiums, and 

226.4(d)(3), exclusion for voluntary debt 

cancellation and debt suspension fees, 

to limit their application consistently 

with proposed § 226.4(g). Thus, these 

exclusions would not apply to closedend transactions secured by real 

property or a dwelling. 

Age or employment eligibility criteria. 

Under TILA Section 106(a)(5), 15 U.S.C. 

1605(a)(5), a premium or other charge 

for any guarantee or insurance 

protecting the creditor against the 

obligor’s default or other credit loss is 

a finance charge. Under §§ 226.4(b)(7) 

and 226.4(b)(10), a premium or charge 

for credit life, accident, health, or lossof-income insurance, or debt 

cancellation or debt suspension 

coverage is a finance charge if the 

insurance or coverage is written in 

connection with a credit transaction. 

TILA Section 106(b), 15 U.S.C. 1605(b), 

allows the creditor to exclude from the 

finance charge any charge or premium 

for credit life, accident, or health 

insurance written in connection with 

any consumer credit transaction if (1) 

the coverage is not a factor in the 

approval by the creditor of the extension 

of credit, and this fact is clearly 

disclosed in writing to the consumer; 

and (2) in order to obtain the insurance, 

the consumer specifically requests the 

insurance after getting the disclosures. 

Under §§ 226.4(d)(1) and 226.4(d)(3), 

the creditor may exclude from the 

finance charge any premium for credit 

life, accident, health or loss-of-income 

insurance; any charge or premium paid 

for debt cancellation coverage for 

amounts exceeding the value of the 

collateral securing the obligation; or any 

charge or premium for debt cancellation 

or debt suspension coverage in the event 

of loss of life, health, or income or in 

case of accident, whether or not the 

coverage is insurance, if (1) the 

insurance or coverage is not required by 

the creditor and the creditor discloses 

this fact in writing; (2) the creditor 

discloses the premium or charge for the 

initial term of the insurance or coverage, 

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43248 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

36The provisions regarding debt suspension 

coverage were in the December 2008 Open-End 

Final Rule. See 74 FR 5244, 5400; Jan. 29, 2009. 

These provisions will take effect on July 1, 2010. 

37See, e.g., Parker et al. v. Protective Life Ins. Co. 

of Ohio et al., Nos. 2004–T–0127 and 2004–T–0128, 

2006 Ohio App. LEXIS 3983, at *28 (Ohio Ct. App. 

Aug. 4, 2006) (reversing summary judgment for 

defendants automobile dealership and insurer 

because the automobile dealership employee did 

not evaluate whether the plaintiffs were eligible for 

credit disability insurance and the plaintiffs were 

later denied benefits based on eligibility 

restrictions); Stewart v. Gulf Guaranty Life Ins. Co., 

No. 2000–CA–01511–SCT, 2002 Miss. LEXIS 254, at 

*4 (Miss. Aug. 15, 2002) (affirming the jury award 

where the insurer did not require the bank 

employee to have the consumer fill out a credit life 

and disability insurance application regarding preexisting conditions and the insurer later denied 

coverage based on a pre-existing condition). 

38See, e.g., Fed. Trade Comm’n v. Stewart 

Finance Holdings, Inc. et al., Civ. Action No. 

103CV–2648, Final Judgment and Order at 13 (N.D. 

Ga. Nov. 9, 2005) (alleging that the finance 

company sold accidental death and dismemberment 

insurance to borrowers who were not eligible for 

the product due to age restrictions). 

39See, e.g., In the Matter of Providian Nat’l Bank, 

OCC Docket No. 2000–53, Consent Order (June 28, 

2000) (alleging that the bank marketed an 

involuntary unemployment credit protection 

program but failed to adequately disclose that such 

protection was unavailable to consumers who were 

self-employed). 

(3) the creditor discloses the term of 

insurance or coverage, if the term is less 

than the term of the credit transaction, 

and (4) the consumer signs or initials an 

affirmative written request for the 

insurance or coverage after receiving the 

required disclosures. In addition, under 

§ 226.4(d)(3)(iii), the creditor must 

disclose for debt suspension coverage 

the fact that the obligation to pay loan 

principal and interest is only 

suspended, and that interest will 

continue to accrue during the period of 

suspension.36 Under proposed 

§ 226.4(g), these provisions would not 

apply to closed-end credit transactions 

secured by real property or a dwelling. 

Some creditors offer credit insurance 

or debt cancellation or debt suspension 

products with eligibility restrictions, but 

may not evaluate whether applicants for 

the products actually meet the eligibility 

criteria at the time the applicants 

request the product.37 For instance, a 

consumer who is 70 at the time of 

enrollment could never receive the 

benefits of a product with a 65-year-old 

age limit.38 Similarly, a consumer who 

is self-employed at the time of 

enrollment would not receive benefits if 

the product requires the consumer to be 

employed as a W–2 wage employee.39

Although age and employment 

eligibility criteria may be set forth in the 

product marketing materials and/or 

enrollment forms, the Board believes 

few consumers notice this information 

when they obtain credit and choose to 

purchase the voluntary credit insurance 

or debt cancellation or debt suspension 

coverage. Because the product is sold in 

connection with a credit transaction that 

is underwritten by the creditor, the 

consumer may reasonably believe that 

the creditor has determined that the 

consumer is eligible for the product. 

This may be especially true for age 

restrictions because that information is 

typically requested by the creditor on 

the credit application form. As a result, 

many consumers may not discover until 

they file a claim that they were paying 

for a product for which they were not 

eligible when they initially purchased 

it. Consumers that do not submit claims 

may never discover that they are paying 

for products that hold no value for 

them. 

To address this problem, the Board 

proposes to add §§ 226.4(d)(1)(iv) and 

226.4(d)(3)(v) to permit creditors to 

exclude a premium or charge from the 

finance charge only if the creditor 

determines at the time of enrollment 

that the consumer meets any applicable 

age or employment eligibility criteria for 

the credit insurance or the debt 

suspension or debt cancellation 

coverage. These provisions would apply 

to open-end as well as closed-end (nonreal property) credit transactions. 

Proposed comment 4(d)–14 would state 

that a premium or charge for credit life, 

accident, health, or loss-of-income 

insurance, or debt cancellation or debt 

suspension coverage is voluntary and 

can be excluded from the finance charge 

only if the consumer meets the 

product’s age or employment eligibility 

criteria at the time of enrollment. The 

proposed comment would further 

clarify that to exclude such a premium 

or charge from the finance charge, the 

creditor would have to determine at the 

time of enrollment that the consumer is 

eligible for the product under the 

product’s age or employment eligibility 

restrictions. 

Proposed comment 4(d)–14 would 

provide that the creditor could use 

reasonably reliable evidence of the 

consumer’s age or employment status to 

satisfy the condition. Reasonably 

reliable evidence of a consumer’s age 

would include using the date of birth on 

the consumer’s credit application, on 

the driver’s license or other governmentissued identification, or on the credit 

report. Reasonably reliable evidence of 

a consumer’s employment status would 

include the consumer’s information on 

a credit application, Internal Revenue 

Service Form W–2, tax returns, payroll 

receipts, or other evidence such as a 

letter or e-mail from the consumer or the 

consumer’s employer. A determination 

of age or employment eligibility at the 

time of enrollment should not be 

unduly burdensome because in most 

cases the creditor would already have 

information about the consumer’s age 

and employment status as part of the 

credit underwriting process. The Board 

seeks comment on whether other 

examples of reasonably reliable 

evidence of the consumer’s age or 

employment status should be included. 

Proposed comment 4(d)–14 would 

clarify that, if the consumer does not 

meet the product’s age or employment 

eligibility criteria, then the premium or 

charge is not voluntary and must be 

included in the finance charge. If the 

creditor offers a bundled product (such 

as credit life insurance combined with 

credit involuntary unemployment 

insurance) and the consumer does not 

meet the age and/or employment 

eligibility criteria for all of the bundled 

products, the proposed commentary 

would clarify that the creditor must 

either: (1) treat the entire premium or 

charge for the bundled product as a 

finance charge, or (2) offer the consumer 

the option of selecting only the products 

for which the consumer is eligible and 

exclude the premium or charge from the 

finance charge if the consumer chooses 

an optional product for which the 

consumer meets the age and/or 

employment eligibility criteria at the 

time of enrollment. 

The Board proposes this rule and 

commentary to address concerns about 

the voluntary nature of this product. 

TILA Section 106(b), 15 U.S.C. 1605(b), 

states that ‘‘[c]harges or premiums for 

credit life, accident, or health insurance 

written in connection with any 

consumer credit transaction shall be 

included in the finance charge unless 

(1) the coverage of the debtor by the 

insurance is not a factor in the approval 

by the creditor of the extension of 

credit, and this fact is clearly disclosed 

in writing to the person applying for or 

obtaining the extension of credit; and (2) 

in order to obtain the insurance in 

connection with the extension of credit, 

the person to whom the credit is 

extended must give specific affirmative 

written indication of his desire to do so 

after written disclosure to him of the 

cost thereof.’’ Historically, § 226.4(d) 

has implemented this provision as a 

‘‘voluntariness’’ standard. For example, 

in 1981, comment 4(d)–5 was adopted 

as part of the TILA simplification 

process. The comment stated that the 

credit insurance ‘‘must be voluntary in 

order for the premium to be excluded 

from the finance charge.’’ 46 FR 50288, 

50301; Oct. 9, 1981 (emphasis added). 

In 1996, the Board amended Regulation 

Z to apply the rules for credit insurance 

to debt cancellation coverage. In 

adopting this provision, the Board 

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stated: ‘‘The new rule allows creditors 

to exclude fees for voluntary debt 

cancellation coverage from the finance 

charge when specified disclosures are 

made.’’ 61 FR 49237, 49240; Sept. 19, 

1996 (emphasis added). In the December 

2008 Open-End Final Rule, the Board 

applied the rules for credit insurance 

and debt cancellation coverage to debt 

suspension coverage. In adopting this 

provision, the Board referred to the May 

2007 Open-End Proposed Rule, which 

stated that the Board ‘‘proposed to 

revise § 226.4(d)(3) to expressly permit 

creditors to exclude charges for 

voluntary debt suspension coverage 

from the finance charge when, after 

receiving certain disclosures, the 

consumer affirmatively requests such as 

product.’’ 74 FR 5244, 5266; Jan. 29, 

2009 (emphasis in original). Finally, the 

model forms currently contain the 

following statement emphasizing the 

voluntary nature of the product: ‘‘Credit 

life insurance and credit disability 

insurance are not required to obtain 

credit, and will not be provided unless 

you sign and agree to pay the additional 

cost.’’ See Appendix H–1 (Credit Sale 

Model Form) and Appendix H–2 (Loan 

Model Form). The Board believes that if 

the consumer was ineligible for the 

benefits of credit insurance or debt 

cancellation or debt suspension 

coverage at the time of enrollment, then 

the purchase cannot be voluntary 

because a reasonable consumer would 

not knowingly purchase a policy for 

which he or she can derive no benefit. 

For these reasons, the Board believes 

that the requirements of proposed 

§§ 226.4(d)(1)(iv) and 226.4(d)(3)(v) 

would help ensure that the purchase of 

credit insurance or debt cancellation or 

debt suspension coverage would, in fact, 

be voluntary. 

The Board notes that although the 

proposed rule would require creditors to 

determine the consumer’s age and/or 

employment eligibility for the product 

at the time of enrollment, the proposed 

rule would not affect the creditor’s 

ability to deny coverage if the consumer 

misrepresented his or her age or 

employment status at the time of 

enrollment. Finally, the proposed rule 

does not require a creditor to determine 

if a consumer ceases to meet the age or 

employment eligibility criteria after 

enrollment. For example, the creditor 

has complied with the proposal if the 

consumer becomes ineligible for the 

policy or coverage after enrollment. 

State or other law may address these 

issues. However, the Board solicits 

comment on whether creditors should 

be required to determine whether the 

consumer meets the product’s age or 

employment eligibility criteria after the 

product is sold (e.g., before renewing an 

annual premium), or whether creditors 

should be required to provide notice 

when the consumer exceeds the age 

limit of the product after enrollment. 

Revised disclosures. As discussed 

above, TILA Section 106(b), 15 U.S.C. 

1605(b), and §§ 226.4(d)(1) and 

226.4(d)(3) allow a creditor to exclude 

from the finance charge a credit 

insurance premium or debt cancellation 

or debt suspension fee if the creditor 

provides disclosures that inform the 

consumer of the voluntary nature and 

cost of the product. Currently, 

Regulation Z does not specifically 

mandate the format of these disclosures, 

but provides sample language in the 

model forms. For example, Appendix 

H–2 (Loan Model Form) contains the 

following language: ‘‘Credit life 

insurance and credit disability 

insurance are not required to obtain 

credit, and will not be provided unless 

you sign and agree to pay the additional 

cost.’’ The model form also shows the 

type of product (e.g., credit life or credit 

disability); the cost of the premium; and 

a signature line. The signature area is 

accompanied by the following language: 

‘‘I want credit life insurance.’’ 

Concerns have been raised about 

whether the current disclosures 

sufficiently inform consumers of the 

voluntary nature and costs of the 

product. To address these concerns, a 

disclosure was tested that included a 

charge for credit life insurance and 

listed the product under the title 

‘‘Optional Features.’’ Only about half of 

the participants understood that 

accepting credit insurance was 

voluntary and that they could decline 

the product. Subsequently, a disclosure 

was tested that stated, ‘‘STOP. You do 

not have to buy this insurance to get this 

loan.’’ After reading this disclosure, all 

participants understood the voluntary 

nature of the product. 

In addition, concerns have been 

raised about the product’s cost. The 

product may be more costly than, for 

example, traditional life insurance, but 

may not provide additional benefits. To 

address this concern, the Board tested 

the following language: ‘‘If you have 

insurance already, this policy may not 

provide you with any additional 

benefits. Other types of insurance can 

give you similar benefits and are often 

less expensive.’’ Participant 

comprehension of the costs and benefits 

of the product was significantly 

increased by these plain-language 

disclosures. 

Concerns have also been raised about 

eligibility restrictions. Consumers might 

not be aware that they may incur a cost 

for a product that provides no benefit to 

them if the eligibility criteria are not 

met at the time of enrollment. 

Accordingly, the Board tested the 

following language: ‘‘Even if you pay for 

this insurance, you may not qualify to 

receive any benefits in the future.’’ 

Participants were greatly surprised to 

learn that they might purchase the 

insurance only to later discover that 

they were not eligible for benefits. A few 

participants indicated that they did not 

understand how they could pay for the 

coverage and then receive no benefits. 

To address this issue and to conform to 

the requirements of proposed 

§§ 226.4(d)(1)(iv) and 226.4(d)(3)(v), the 

following statement was added to the 

disclosure: ‘‘Based on our review of 

your age and/or employment status at 

this time, you would be eligible to 

receive benefits.’’ However, if there are 

other eligibility restrictions, such as preexisting health conditions, the creditor 

would be required to disclose the 

following statements: ‘‘Based on our 

review of your age and/or employment 

status at this time, you may be eligible 

to receive benefits. However, you may 

not qualify to receive any benefits 

because of other eligibility restrictions.’’ 

Finally, a sentence was added to the 

disclosure to refer consumers to the 

Board’s Web site to learn more about the 

product, and the cost disclosure was 

streamlined to display more clearly the 

exact cost of the product. Most 

consumer testing participants indicated 

they would visit the Board’s Web site to 

learn more about a credit insurance or 

debt cancellation or debt suspension 

product. 

Based on this consumer testing, the 

Board proposes to add model clauses 

and samples that provide clearer 

information to consumers about the 

voluntary nature and costs of credit 

insurance or debt cancellation or debt 

suspension coverage. These model 

clauses and samples would apply in 

open-end or closed-end (not secured by 

real property) transactions, if the 

product is voluntary and the consumer 

qualifies for benefits based on age or 

employment. For closed-end 

transactions secured by real property or 

a dwelling, the model clause or sample 

would be required whether or not the 

product is voluntary. Model Clauses and 

Samples are proposed at Appendix 

G–16(C) and G–16(D) and H–17(C) and 

H–17(D). These Model Clauses and 

Samples would be in addition to the 

Debt Suspension Model Clauses and 

Samples found at Appendix G–16(A) 

and G–16(B) and H–17(A) and H–17(B). 

Timing of disclosures. Currently, 

comment 4(d)–2 states that ‘‘[i]f 

disclosures are given early, for example 

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43250 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

under § 226.17(f) or § 226.19(a), the 

creditor need not redisclose if the actual 

premium is different at the time of 

consummation. If insurance disclosures 

are not given at the time of early 

disclosure and insurance is in fact 

written in connection with the 

transaction, the disclosures under 

§ 226.4(d) must be made in order to 

exclude the premiums from the finance 

charge.’’ The Board proposes to delete 

the reference to § 226.19(a) to conform 

to the new timing and redisclosure 

requirements under proposed 

§ 226.19(a). 

4(d)(2) Property Insurance Premiums 

The proposal would retain the 

exclusion from the finance charge of 

premiums for insurance against loss or 

damage to property or against liability 

arising out of the ownership or use of 

property under TILA Section 106(c) and 

§ 226.4(d)(2). Consumers typically 

purchase property and liability 

insurance to protect against a variety of 

risks, including loss of or damage to the 

property, such as damage caused by fire, 

loss of or damage to personal property 

kept on the property, such as furniture, 

and owner liability for injuries incurred 

by visitors to the property. Although 

creditors generally require such 

insurance as a condition of extending 

closed-end credit secured by real 

property or a dwelling in order to 

protect the value of the collateral that is 

securing the loan, consumers who do 

not have mortgages regularly purchase 

this type of insurance to protect 

themselves from the risks described 

above. This type of insurance is best 

viewed as a hybrid product that protects 

not only the value of the creditor’s 

collateral, but also protects the 

consumer from loss or impairment of 

the consumer’s equity in the property, 

loss or impairment of the consumer’s 

personal property, and personal liability 

if anyone is injured on the property. 

Consequently, it is impossible to 

segregate that portion of the insurance 

(and that portion of the premium) which 

protects the creditor from that portion 

which protects only the consumer. 

In addition, the Board has not 

identified significant abuses in 

connection with the sale or marketing of 

insurance against loss or damage to 

property or against liability arising out 

of the ownership or use of property. The 

market for these products appears to be 

competitive. Consumers can purchase 

this type of insurance from many 

insurance companies, including 

companies not associated with mortgage 

lenders. In addition, policies generally 

are tailored to the particular risks faced 

by the consumer. Thus, consumers have 

choices with regard to how much 

insurance to purchase to cover various 

risks and, as a result, have some control 

over the premiums they pay. 

The Board requests comment on the 

appropriateness of retaining the current 

exclusion from the finance charge of 

premiums for insurance against loss or 

damage to property or against liability 

arising out of the ownership or use of 

property. The Board notes that, under 

current § 226.4(d)(2), the category of 

property and liability insurance has 

been interpreted to include coverage 

against flood risks; the Board seeks 

comment on whether the reasons for 

retaining the exclusion discussed above 

are applicable to flood insurance 

specifically and, if not, whether it 

should be subject to separate treatment 

under Regulation Z. In addition, the 

Board requests comment on whether 

including such premiums in the finance 

charge could have adverse or 

unintended consequences for 

consumers and for creditors. 

TILA Section 106(c) states that 

charges or premiums for property 

insurance must be included in the 

finance charge unless ‘‘a clear and 

specific statement in writing is 

furnished by the creditor to the person 

to whom the credit is extended, setting 

forth the cost of the insurance if 

obtained from or through the creditor, 

and stating that the person to whom the 

credit is extended may choose the 

person through which the insurance is 

to be obtained.’’ 15 U.S.C. 1605(c) 

(emphasis added). Section 226.4(d)(2) 

permits property insurance premiums to 

be excluded from the finance charge 

under the following conditions, among 

others: ‘‘If the coverage is obtained from 

or through the creditor, the premium for 

the initial term of insurance coverage 

shall be disclosed. If the term of 

insurance is less than the term of the 

transaction, the term of insurance shall 

also be disclosed.’’ (Emphasis added). 

Comment 4(d)–8 states, in relevant part, 

that ‘‘[t]he premium or charge must be 

disclosed only if the consumer elects to 

purchase the insurance from the 

creditor; in such a case, the creditor 

must also disclose the term of the 

property insurance coverage if it is less 

than the term of the obligation.’’ 

(Emphasis added.) Currently, the 

comment does not use the statutory 

language ‘‘from or through the creditor’’ 

and does not define the phrase. To 

conform to the statutory and regulatory 

language, the Board proposes to amend 

comment 4(d)–8 to clarify that the 

premium or charge and term (if less 

than the term of the obligation) must be 

disclosed if the consumer elects to 

purchase the insurance ‘‘from or 

through the creditor.’’ In addition, the 

proposed comment would clarify that 

insurance is available ‘‘from or through 

a creditor’’ if it is available from the 

creditor’s ‘‘affiliate,’’ as that term is 

defined under the Bank Holding 

Company Act, 12 U.S.C. 1841(k). The 

Bank Holding Company Act defines an 

‘‘affiliate’’ as ‘‘any company that 

controls, is controlled by, or is under 

common control with another 

company.’’ Thus, if the consumer elects 

to purchase property insurance from a 

company that controls, is controlled by, 

or is under common control with the 

creditor, then the creditor would be 

required to disclose the cost of the 

insurance, and the term, if it is less than 

the term of the obligation. The Board 

believes that this proposed rule would 

clarify for creditors the meaning of 

‘‘through the creditor’’ and provide 

consumers with a clearer disclosure of 

the cost of property insurance. 

4(d)(4) Telephone Purchases 

Under §§ 226.4(d)(1) and 226.4(d)(3), 

creditors may exclude from the finance 

charge premiums for credit insurance or 

fees for debt cancellation or debt 

suspension coverage, if the creditor 

provides certain disclosures in writing 

and the consumer signs or initials an 

affirmative written request for the 

insurance or coverage. Over the years, 

the Board has received industry requests 

to permit creditors to provide the 

disclosures and obtain the affirmative 

consumer request orally in order to 

facilitate telephone purchases of these 

products. In addition, the OCC has 

issued telephone sales guidelines for 

national banks that sell debt 

cancellation and debt suspension 

coverage. 12 CFR 37.6(c)(3), 37.7(b). 

In the December 2008 Open-End Final 

Rule, the Board created an exception to 

the requirement to provide prior written 

disclosures and obtain written 

signatures or initials for telephone 

purchases of credit insurance and debt 

cancellation or debt suspension 

coverage in connection with open-end 

(not home-secured) plans. 74 FR 5244, 

5267; Jan. 29, 2009. This rule will take 

effect on July 1, 2010. Under new 

§ 226.4(d)(4), for telephone purchases a 

creditor may make the disclosures orally 

and the consumer may affirmatively 

request the insurance or coverage orally, 

provided that the creditor (1) maintains 

evidence that the consumer, after being 

provided the disclosures orally, 

affirmatively elected to purchase the 

insurance or coverage, and (2) mails the 

required disclosures within three 

business days after the telephone 

purchase. New comment 226.4(d)(4)–1 

provides that a creditor does not satisfy 

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the requirement to obtain a consumer’s 

affirmative request if the ‘‘request’’ was 

a response to a leading question or 

negative consent. The comment also 

provides an example of an acceptable 

enrollment question (‘‘Do you want to 

enroll in this optional debt cancellation 

plan?’’). 

The Board promulgated this rule 

pursuant to its exception and exemption 

authorities under TILA Section 105. 

Section 105(a) authorizes the Board to 

make exceptions to TILA to effectuate 

the statute’s purposes, which include 

facilitating consumers’ ability to 

compare credit terms and helping 

consumers avoid the uninformed use of 

credit. 15 U.S.C. 1601(a), 1604(a). In 

addition, the Board considered the 

exemption factors set forth in TILA 

Section 105(f)(2), 15 U.S.C. 1604(f)(2), 

and determined that an exemption for 

telephone purchases for open-end (not 

home-secured) plans was appropriate 

because the rule contained adequate 

safeguards to ensure that oral purchases 

are voluntary. 74 FR 5268. The Board 

emphasized that consumers in open-end 

(not home-secured) plans receive 

monthly statements that clearly disclose 

fees, including credit insurance and 

debt cancellation or debt suspension 

coverage charges. Id. Consumers who 

are billed for insurance or coverage they 

did not request can dispute the charge 

as a billing error. Id. The Board stated 

that as part of the closed-end review, it 

would consider whether to expand the 

telephone purchase rule to this type of 

credit. 74 FR 5267. 

The Board believes that a telephone 

purchase rule for closed-end credit is 

not appropriate. Monthly statements are 

not required for closed-end credit, and 

it would be difficult for consumers who 

do not receive monthly statements to 

detect charges for unwanted coverage. 

Moreover, there is no billing error 

resolution process for closed-end loans. 

Finally, the Board noted in the 

December 2008 Open-End Final Rule 

that an exception or exemption for the 

telephone purchase of credit insurance 

or debt cancellation or debt suspension 

coverage in connection with closed-end 

loans may be ‘‘less necessary.’’ 74 FR 

5267. For open-end (not home-secured) 

credit, new comments 4(b)(7) and (8)–2 

and 4(b)(10)–2 in the December 2008 

Open-End Final Rule clarify that credit 

insurance and debt cancellation or debt 

suspension coverage is ‘‘written in 

connection with a credit transaction’’ if 

the consumer purchases it after the 

opening of an open-end (not homesecured) plan because the consumer 

retains the ability to obtain advances of 

funds. 74 FR 5265. Therefore, in such a 

transaction, the creditor must comply 

with the disclosure and consumer 

request requirements even if the credit 

insurance and debt cancellation or debt 

suspension coverage is sold after the 

opening of the plan. A creditor in an 

open-end (not home-secured) 

transaction may be more likely to 

market the product by telephone after 

the opening of the plan, and new 

§ 226.4(d)(4) facilitates the telephone 

purchase. By contrast, a creditor in a 

closed-end transaction is more likely to 

have the opportunity to meet the 

consumer face-to-face at or before 

consummation to market the product, 

provide the disclosure, and obtain the 

consumer request. For these reasons, 

this proposal does not contain a 

telephone purchase rule for credit 

insurance or debt cancellation or debt 

suspension coverage sold in connection 

with a closed-end credit transaction. 

The Board seeks comment on this issue. 

For a discussion of the application of 

the telephone purchase rule to HELOCs, 

see the Board’s proposal for such 

transactions published simultaneously 

with this proposal. 

4(e) Certain Security Interest Charges 

The Board proposes to amend 

§ 226.4(e), which provides exclusions 

from the finance charge for certain 

government recording and related 

charges and insurance premiums 

incurred in lieu of such charges, as 

limited by proposed § 226.4(g). Thus, 

the exclusions listed in § 226.4(e) would 

not apply to closed-end credit 

transactions secured by real property or 

a dwelling. The Board also proposes 

certain conforming amendments to the 

staff commentary under this provision. 

4(g) Special Rule; Closed-End Mortgage 

Transactions 

The Board is proposing to add a new 

§ 226.4(g) as a special rule for closedend credit transactions secured by real 

property or a dwelling. Proposed 

§ 226.4(g) would provide that the 

exclusions from the finance charge 

enumerated in §§ 226.4(a)(2) (closing 

agent charges), (c) (miscellaneous 

charges), (d) (premiums for certain 

insurance and debt cancellation 

coverage), and (e) (certain securityinterest charges) do not apply to closedend credit transactions secured by real 

property or a dwelling, except that the 

exclusions in § 226.4(c)(2) for late, overlimit, delinquency, default, and similar 

fees, § 226.4(c)(5) for seller’s points, and 

§ 226.4(d)(2) for property and liability 

insurance would continue to apply to 

such transactions. As noted above, a 

cross-reference to the special rule in 

§ 226.4(g) would be added to each of the 

enumerated sections. With these 

changes, the following fees that 

currently are excluded from the finance 

charge would be included in the finance 

charge for closed-end mortgage 

transactions (unless otherwise 

excluded): Closing agent charges, 

application fees charged to all 

applicants for credit (whether or not 

credit is extended), voluntary credit 

insurance premiums, voluntary debtcancellation charges or premiums, taxes 

or fees required by law and paid to 

public officials relating to security 

interests, premiums for insurance 

obtained in lieu of perfecting a security 

interest, taxes imposed as a condition of 

recording the instruments securing the 

evidence of indebtedness, and various 

real-estate related fees. 

Proposed commentary to § 226.4(g) is 

included to clarify the rule for mortgage 

transactions. Proposed comment 4(g)–1 

clarifies that the commentary for the 

exclusions identified above no longer 

applies to closed-end credit transactions 

secured by real property or a dwelling. 

Proposed comment 4(g)–2 clarifies that 

third-party charges that meet the 

definition under § 226.4(a) and are not 

otherwise excluded generally are 

finance charges, whether or not the 

creditor requires the services for which 

they are imposed. Proposed comment 

4(g)–3 clarifies that charges payable in 

a comparable cash transaction, such as 

property taxes and fees or taxes imposed 

to record the deed evidencing transfer of 

title to the property from the seller to 

the buyer, are not finance charges 

because they would have to be paid 

even if no credit were extended to 

finance the purchase. 

Request for Comment 

The Board solicits comment on the 

benefits and costs of the proposed 

changes for determining the finance 

charge for closed-end credit transactions 

secured by real property or a dwelling. 

The Board requests comment 

specifically on whether this approach 

adequately or appropriately addresses 

the concerns raised by the ‘‘some fees 

in, some fees out’’ approach in light of 

the statute’s purposes, the need for 

consumer protection and meaningful 

disclosures, and industry concerns 

regarding complexity and burden. The 

Board also seeks comment on the 

benefits and costs of the rules for 

insurance and related products under 

the proposed amendments to § 226.4(d). 

Section 226.17 General Disclosure 

Requirements 

The Board is proposing new rules 

governing format and content of 

disclosures for transactions secured by 

real property or a dwelling under new 

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43252 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

§§ 226.37 and 226.38. Accordingly, the 

Board proposes conforming and 

technical amendments to current 

§§ 226.17 and 226.18, as discussed more 

fully below. In addition, in reviewing 

the rules for closed-end credit, 

regulatory text and associated 

commentary have been redesignated, 

and footnotes moved to the text of the 

regulation or commentary, as 

appropriate, to facilitate compliance 

with the regulation. 

17(a) Form of Disclosures 

17(a)(1) 

The Board proposes special rules in 

new § 226.37 and associated 

commentary to govern the format of 

disclosures required under proposed 

§§ 226.38 and 226.20(d), and existing 

§§ 226.19(b) and 226.20(c). These new 

format rules would be in addition to the 

rules contained in current § 226.17(a)(1). 

Current § 226.17(a)(1) requires that 

closed-end credit disclosures be 

grouped together, segregated from 

everything else, and not contain any 

information not directly related to the 

disclosures. The Board proposes to 

revise § 226.17(a)(1) to clarify that the 

general disclosure standards continue to 

apply to transactions secured by real 

property or a dwelling, but under the 

proposal, creditors would also be 

required to meet the higher standards 

under proposed § 226.37. In addition, 

§ 226.17(a)(1) would be revised to reflect 

the requirement of electronic 

disclosures in certain circumstances, as 

discussed under § 226.19(d). Under the 

proposal, the substance of footnotes 37 

and 38 would be moved to the 

regulatory text of § 226.17(a)(1). 

Footnotes 37 and 38 currently provide 

exceptions to the grouped and 

segregated requirement under 

§ 226.17(a)(1). Footnote 37 allows 

creditors to include certain information 

not directly related to the required 

disclosures, such as the consumer’s 

name, address, and account number. 

Footnote 38, which implements TILA 

Section 128(b)(1) in part, allows 

creditors to exclude certain required 

disclosures from the grouped and 

segregated requirement, such as the 

creditor’s identity under § 226.18(a). 15 

U.S.C. 1638(b)(1). The Board proposes 

to revise the substance of footnote 38 to 

require that the creditor’s identity under 

§ 226.18(a) be subject to the grouped 

together and segregated requirement for 

all closed-end credit disclosures. (See 

proposed § 226.37(a)(2), which parallels 

this approach for transactions secured 

by real property or a dwelling). The 

Board proposes to make this adjustment 

pursuant to its authority under TILA 

Section 105(a). 15 U.S.C. 1604(a). 

Section 105(a) authorizes the Board to 

make exceptions and adjustments to 

TILA to effectuate the statute’s 

purposes, which include facilitating 

consumers’ ability to compare credit 

terms, and avoiding the uninformed use 

of credit. 15 U.S.C. 1601(a). 

The Board believes requiring the 

creditor’s identity to be grouped 

together with required disclosures could 

assist consumers. The Board believes it 

is important for the disclosures to bear 

the creditor’s identity so that consumers 

can more easily identify the appropriate 

entity. As a result, the Board believes 

the proposal would help serve TILA’s 

purpose to provide meaningful 

disclosure of terms. 

Commentary to § 226.17(a)(1) 

provides guidance to creditors regarding 

the general disclosures standards 

contained in § 226.17(a)(1). The Board 

proposes to clarify the applicability of 

comments 17(a)(1)–2, –5, –6, and –7 to 

transactions secured by real property or 

a dwelling. 

Current comment 17(a)(1)–2 provides 

an exception to the grouped and 

segregated requirement for disclosures 

on variable rate transactions required 

under existing §§ 226.19(b) and 

226.20(c). For the reasons discussed 

under proposed § 226.37(a)(2), the 

Board proposes to require that ARM 

loan program disclosures under 

proposed § 226.19(b), and ARMs 

adjustment notices under proposed 

§ 226.20(c), be subject to the grouped 

and segregated requirement. As a result, 

the reference made to §§ 226.19(b) and 

226.20(c) would be removed from 

comment 17(a)(1)–2. 

Current comment 17(a)(1)–5, which 

addresses information considered 

directly related to the segregated 

disclosures, would be revised to clarify 

that it does not apply to transactions 

secured by real property or a dwelling, 

and to cross-reference proposed 

§ 226.37(a)(2). Under the proposal, 

cross-references in comments 17(a)(1)– 

5(viii), (xi), (xii), and (xvi) would be 

updated; no substantive change is 

intended. In addition, as noted below, 

proposed revisions to § 226.18(f) 

regarding variable rate transactions, and 

proposed § 226.38(j)(6) regarding 

assumption disclosure for transactions 

secured by real property or a dwelling, 

render comments 17(a)(1)–5(xiii) and 

(xiv) unnecessary and therefore those 

comments would be deleted. Finally, 

comment 17(a)(1)–5(xvi) would be 

revised to update cross-references. 

As discussed under proposed 

§§ 226.37(a)(2) and 226.38, the Board 

proposes to require that creditors make 

disclosures for transactions secured by 

real property or a dwelling only as 

applicable. Current comment 17(a)(1)–6, 

which permits creditors to design multipurpose forms for closed-end credit 

disclosures as long as they are clear and 

conspicuous, would be revised to clarify 

that it does not apply to transactions 

secured by real property or a dwelling, 

as discussed more fully below under 

proposed § 226.37(a)(2). 

Finally, the Board proposes to clarify 

in current comment 17(a)(1)–7 that 

transactions secured by real property or 

a dwelling and that have balloon 

payment financing with leasing 

characteristics are treated as closed-end 

credit under TILA and subject to its 

disclosure requirements. 

17(a)(2) 

Section 226.17(a)(2), which 

implements TILA Section 122(a), 

requires the terms finance charge and 

annual percentage rate, together with a 

corresponding amount or percentage 

rate, to be more conspicuous than any 

other disclosure, except the creditor’s 

identity under § 226.18(a). The Board 

proposes new disclosure requirements 

under proposed § 226.38(e)(5)(ii) for the 

finance charge (renamed ‘‘interest and 

settlement charges’’), and under 

proposed §§ 226.37(a)(2) and 226.38(b) 

for the APR. As a result, the Board 

would revise § 226.17(a)(2) to be 

inapplicable to transactions secured by 

real property or a dwelling. 

17(b) Time of Disclosures 

Section 227.17(b) and comment 

17(b)–1 require creditors to make 

closed-end credit disclosures before 

consummation of the transaction; 

special timing requirements apply to 

dwelling-secured transactions and 

variable-rate transactions. As discussed 

more fully under § 226.19, the Board is 

proposing to require creditors to make 

pre-consummation disclosures for 

transactions secured by real property or 

a dwelling in accordance with special 

timing requirements. As a result, the 

Board proposes to revise § 226.17(b) and 

comment 17(b)–1 to clarify that more 

specific timing rules would apply to 

transactions secured by real property or 

a dwelling. Current comment 17(b)–2, 

which addresses disclosure 

requirements for transactions converted 

from open-end to closed-end, would be 

revised to clarify that the special timing 

requirements under § 226.19(b) would 

apply for adjustable rate transactions 

secured by real property or a dwelling. 

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17(c) Basis of Disclosures and Use of 

Estimates 

17(c)(1) Legal Obligation 

Section 226.17(c)(1) requires that 

disclosures under subpart C reflect the 

terms of the legal obligation between the 

parties. Commentary to § 226.17(c)(1) 

provides guidance regarding disclosure 

of specific transaction types and loan 

features. The Board proposes to add 

new provisions in § 226.17(c)(1)(i) 

through (vi) to move certain content 

from commentary to the regulation, as 

discussed below. In addition, the Board 

would revise certain commentary to 

§ 226.17(c)(1) to reflect the new 

disclosure regime for mortgages, and 

redesignate comments as appropriate. 

Each of these proposed subsections, and 

accompanying commentary, is 

discussed below. 

Comments 17(c)(1)–1 and 17(c)(1)–2 

generally address disclosure of the legal 

obligation and modification of such 

obligation. Comment 17(c)(1)–1 would 

be revised to include the general 

principle that the consumer is presumed 

to abide by the terms of the legal 

obligation. For example, proposed 

comment 17(c)(1)–1 states that creditors 

should assume that a consumer will 

make payments on time and in full. This 

proposed revision is consistent with 

existing comment 17(c)(2)(i)–3, which 

states that creditors may base all 

disclosures on the assumption that 

payments will be made on time, 

disregarding any possible inaccuracies 

resulting from consumers’ payment 

patterns. Comment 17(c)(2)(i)–3 

specifically addresses disclosures for 

simple-interest transactions that 

potentially may be affected by late 

payments. The proposed revisions to 

comment 17(c)(1)–1 would clarify that 

disclosures for all transactions subject to 

§ 226.17 should be based on the 

assumption that the consumer will 

adhere to the terms of the legal 

obligation. 

Comment 17(c)(1)–2 would be revised 

to clarify that transactions secured by 

real property or a dwelling are subject 

to the special disclosure rules under 

proposed § 226.38(a)(3) and (c). Under 

the proposal, preferred-rate loans with a 

fixed interest rate would not be 

considered ARMs, and therefore, 

comment 17(c)(1)–2 also would be 

revised to remove the cross-reference to 

§ 226.19(b). Comment 17(c)(1)–2 would 

be redesignated as 17(c)(1)–2(i) through 

(iii). Comment 17(c)(1)–16, which 

addresses disclosure for credit 

extensions that may be treated as 

multiple transactions, would be moved 

and redesignated as comment 17(c)(1)– 

3; no substantive change is intended. 

Comment 17(c)(1)–15 states that 

where a deposit account is created for 

the sole purpose of accumulating 

payments that are applied to satisfy the 

consumer’s credit obligation—a practice 

used in Morris Plan transactions— 

payments to that account are treated the 

same as loan payments. Under the 

proposal, comment 17(c)(1)–15 would 

be removed. As discussed below, Morris 

Plan transactions are rare. In addition, 

the Board believes that such deposits 

clearly constitute loan payments and 

therefore comment 17(c)(1)–15 is 

unnecessary. 

The remaining commentary to 

§ 226.17(c)(1) would be revised and 

redesignated as discussed below under 

proposed subsections 17(c)(1)(i) through 

(vi). 

17(c)(1)(i) Buydowns 

Comments 17(c)(1)–3 through 

17(c)(1)–5 address third-party 

buydowns, consumer buydowns, and 

split buydowns, respectively. The 

proposed rule would add a new 

provision in § 226.17(c)(1)(i) that 

reflects that existing commentary about 

buydowns. Proposed § 226.17(c)(1)(i) 

requires creditors to disclose an APR 

that is a composite rate, based on the 

rate in effect during the initial period 

and the rate in effect for the remainder 

of the loan’s term, if the consumer’s 

interest rate or payments are reduced for 

all or part of the loan term. Proposed 

§ 226.17(c)(1)(i) applies to seller or 

third-party buydowns if they are 

reflected in the legal obligation, and to 

all consumer buydowns. 

Comments 17(c)(1)–3 through 

17(c)(1)–5 would be redesignated as 

comments 17(c)(1)(i)–1 through –4 and 

revised to reflect changes in the 

terminology used under the proposed 

rule to describe the finance charge, for 

transactions secured by real property or 

a dwelling. 

17(c)(1)(ii) Wrap-Around Financing 

Comment 17(c)(1)–6 provides 

guidance on disclosures for transactions 

that involve wrap-around financing; 

comment 17(c)(1)–7 provides guidance 

on disclosures for wrap-around 

transactions that include a balloon 

payment. Both comments state that, in 

transactions that involve wrap-around 

financing, the amount financed equals 

the sum of the new funds advanced by 

the wrap creditor and the remaining 

principal owed to the original creditor 

on the pre-existing loan. The proposed 

rule would incorporate this guidance 

into proposed § 226.17(c)(1)(ii). 

Comments 17(c)(1)–6 and 17(c)(1)–7 

would be redesignated as comments 

17(c)(1)(ii)–1 and 17(c)(1)(ii)–2, 

respectively; no substantive change is 

intended. 

17(c)(1)(iii) Variable- or Adjustable-Rate 

Transactions 

Comment 17(c)(1)–8 currently 

provides that creditors should base 

disclosures for variable- or adjustablerate transactions on the full term of the 

transaction and the terms in effect at the 

time of consummation and should not 

assume that the rate will increase. The 

proposed rule would incorporate that 

guidance into proposed 

§ 226.17(c)(1)(iii). Proposed 

§ 226.17(c)(1)(iii) would require 

creditors to base disclosures for 

variable- or adjustable-rate transactions 

on the full loan term, and on the terms 

in effect at the time of consummation, 

except as otherwise provided under 

proposed §§ 226.17(c)(1)(iii) or 

226.38(a)(3) and (c) for transactions 

secured by real property or a dwelling. 

As discussed below under proposed 

§ 226.38(c), creditors would be required 

to disclose specified rate and payment 

adjustments for adjustable-rate loans 

secured by real property or a dwelling. 

As a result, comment 17(c)(1)–8 would 

be revised to clarify that creditors must 

disclose specified rate and payment 

adjustments for adjustable-rate loans 

secured by real property or a dwelling 

in accordance with the requirements 

under proposed § 226.38(c). Current 

comment 17(c)(1)–8 would be 

redesignated as comment 17(c)(1)(iii)–1. 

Current comment 17(c)(1)–9, which 

states that a variable-rate feature does 

not, by itself, make the disclosures 

estimates, would be redesignated as 

comment 17(c)(1)(iii)–2. No substantive 

change is intended. 

17(c)(1)(iii)(A) and (B) Discounted and 

Premium Rates 

Comment 17(c)(1)–10 provides that if 

the initial interest for a variable-rate 

transaction is not determined by the 

index or formula used to make later 

interest-rate adjustments, disclosures 

should reflect a composite APR based 

on the initial interest rate for as long as 

it is charged and, for the remainder of 

the term, the rate that would have been 

applied using the index or formula at 

the time of consummation. The 

proposed rule would incorporate that 

commentary into proposed 

§ 226.17(c)(1)(iii)(B). 

Proposed § 226.17(c)(1)(iii) contains 

two separate disclosure rules; which 

disclosure rule applies depends on 

whether or not the initial rate is 

determined using the same index or 

formula used to make subsequent rate 

adjustments. If the initial rate is 

determined using the same index or 

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43254 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

formula used for subsequent rate 

adjustments, then the general rule that 

disclosures must reflect the terms in 

effect at the time of consummation 

applies under proposed 

§ 226.17(c)(1)(iii)(A). If the initial rate is 

set using a different index or formula, 

however, disclosures must reflect a 

composite APR under proposed 

§ 226.17(c)(1)(iii)(B). The composite 

APR would be based on the initial rate 

for as long as it is charged and, for the 

remainder of the loan term, the rate that 

would have applied if such index or 

formula had been used at the time of 

consummation. Comments 17(c)(1)– 

10(i) through (vi) would be revised to 

reflect that, under the proposed rule, for 

transactions secured by real property or 

a dwelling, new terminology would be 

used for specified disclosures (for 

example, the term ‘‘interest and 

settlement charges’’ would be used in 

place of ‘‘finance charge’’), as discussed 

below. Comments 17(c)(1)–10(i) through 

(vi) also would be redesignated as 

comments 17(c)(1)(iii)–3(i) through (vi); 

no substantive change is intended. 

Finally, a cross-reference in comment 

24(c)–4 would be updated to reflect the 

redesignation of comment 17(c)(1)–10. 

Comment 17(c)(1)–11 provides that 

variable rate transactions include the 

following transaction types, even if 

initially they feature a fixed interest 

rate: balloon-payment loans where the 

creditor is unconditionally obligated to 

renew, but can increase the interest rate 

at the time of renewal; preferred-rate 

loans where the interest rate may 

increase upon some future event; and 

price-level adjusted mortgages that 

provide for periodic payment and loan 

balance adjustments. (But see the 

discussion under proposed § 226.19(b) 

on comment 19(b)–5, which clarifies 

that creditors need not provide the 

disclosures required by § 226.19(b) for 

specified balloon-payment, preferredrate, and price-level adjusted 

mortgages.) As discussed below, 

proposed § 226.38(a)(3), which address 

disclosure of loan type for transactions 

secured by real property or a dwelling, 

would treat each of these transaction 

types as fixed-rate loans. As a result, 

comment 17(c)(1)–11 would be revised 

to clarify that balloon-payment, 

preferred-rate, and price-level adjusted 

mortgages secured by real property or a 

dwelling are considered fixed-rate 

transactions for the purposes of the loan 

type disclosure required under 

proposed § 226.38(a)(3). (See also the 

discussion under proposed § 226.38(c), 

which clarifies that the loan type 

attributed to transactions under 

proposed § 226.38(a)(3) applies for 

purposes of interest rate and payment 

summary disclosures under proposed 

§ 226.38(c).) 

Further, certain shared-equity or 

shared-appreciation mortgages are 

considered variable-rate transactions 

under comment 17(c)(1)–11. However, 

under the proposal, if a mortgage is 

secured by real property or a dwelling, 

the mortgage would not be considered 

an adjustable-rate loan solely because of 

a shared-equity or shared-appreciation 

feature. As discussed under proposed 

§§ 226.19(b)(2)(ii)(F) and 

226.38(d)(2)(vi), the Board would 

require creditors to disclose sharedequity or shared-appreciation as a loan 

feature for transactions secured by real 

property or a dwelling. As a result, 

guidance in comment 17(c)(1)–11 

relating to shared-equity and sharedappreciation mortgages would be 

deleted. 

Comment 17(c)(1)–11 would be 

redesignated as comment 17(c)(1)(iii)– 

4(i) through (iii), except that guidance 

under current comment 17(c)(1)–11 

regarding graduated payment mortgages 

and step-rate transactions without a 

variable-rate feature would be 

redesignated as comment 17(c)(1)(iii)–5. 

A cross-reference to comment 17(c)(1)– 

11 in comment 30–1 would be updated 

accordingly. Comment 17(c)(1)–12, 

which addresses graduated-payment 

ARMs, would be redesignated as 

comment 17(c)(1)(iii)–6(i) through (iii); 

no substantive change is intended. 

Current comment 17(c)(1)–13 states 

that creditors may base disclosures for 

growth-equity mortgages (also referred 

to as ‘‘payment-escalated mortgages’’) 

on estimated payment increases, using 

the best information reasonably 

available, or may disclose by analogy to 

the variable-rate disclosures in 

§ 226.18(f)(1). As discussed below, 

current § 226.18(f) contains disclosure 

requirements for variable-rate 

transactions that differ based on a loan’s 

security interest and term. Under the 

proposed rule, § 226.18(f) would be 

revised so that a loan’s security interest, 

not its term, would determine whether 

the creditor would provide variable- or 

adjustable-rate disclosures. Accordingly, 

under the proposal, the reference made 

in comment 17(c)(1)–13 to providing 

disclosures analogous to those under 

current § 226.18(f)(1) would be deleted, 

and comment 17(c)(1)–13 would be 

revised to require creditors to base 

disclosures for growth-equity mortgages 

using estimated payment increases. The 

reference to graduated-payment 

mortgages would be removed for clarity. 

Comment 17(c)(1)–13 would be 

redesignated as comment 17(c)(1)(iii)–7. 

17(c)(1)(iv) Reverse Mortgages 

Comment 17(c)(1)–14 provides that if 

a reverse mortgage has a specified 

period for disbursements but repayment 

is due only upon the occurrence of a 

future event such as the death of the 

consumer, the creditor must assume that 

repayment will occur when 

disbursements end. The proposed rule 

would incorporate this commentary into 

the regulation as proposed 

§ 226.17(c)(1)(vi). Comment 17(c)(1)–14 

would be revised to clarify that the 

disclosure requirements for reverse 

mortgage under § 226.33 apply only if 

the consumer’s death is one of the 

conditions of repayment, as provided 

under § 226.33(a). Comment 17(c)(1)–14 

also would be revised by removing the 

discussion of shared-equity and sharedappreciation features because under the 

proposed rule transactions with such 

features would not be deemed 

adjustable-rate loans solely because of 

such features, as discussed above. 

Further, comment 17(c)(1)–14 would be 

revised to state that, if a reverse 

mortgage has an adjustable interest rate 

and is secured by real property or a 

dwelling, the creditor must disclose the 

shared-equity or shared-appreciation 

feature as required under 

§§ 226.19(b)(2)(ii)(F) and 

226.38(d)(2)(vi). Finally, under the 

proposed rule comment 17(c)(1)–14 

would be redesignated as comment 

17(c)(1)(iv)–1(i) through (iii). 

17(c)(1)(v) Tax Refund-Anticipation 

Loans 

Comment 17(c)(1)–17 clarifies that if 

a consumer is required to repay a tax 

refund-anticipation loan when the 

consumer receives a tax refund, 

disclosures are to be based on the 

creditor’s estimate of the time the 

refund will be delivered. Comment 

17(c)(1)–17 further clarifies that the 

finance charge includes any repayment 

amount that exceeds the loan amount 

that is not excluded from the finance 

charge under § 226.4. The proposed rule 

would incorporate this guidance into 

the regulation as proposed 

§ 226.17(c)(1)(v). Comment 17(c)(1)–17 

which would be redesignated as 

comments 17(c)(1)(v)–1(i) and –1(ii) 

under the proposed rule. No substantive 

change is intended. 

17(c)(1)(vi) Pawn Transactions 

For pawn transactions, proposed 

§ 226.17(c)(1)(vi) would require 

creditors to: (1) Disclose the initial sum 

provided to the consumer as the amount 

financed; (2) include the difference 

between the initial sum provided to the 

consumer and the price at which the 

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item is pledged or sold in the finance 

charge; and (3) determine the APR using 

the redemption date as the end of the 

loan term. Proposed § 226.17(c)(1)(vi) is 

consistent with comment 17(c)(1)–18, 

which would be redesignated as 

comment 17(c)(1)(vi)–1. No substantive 

change is intended. 

17(c)(2) Estimates 

Under the proposal, § 226.17(c)(2) 

would be revised to clarify that 

proposed § 226.19(a) would limit 

creditors’ ability to provide estimated 

disclosures for transactions secured by 

real property or a dwelling. As 

discussed below, proposed § 226.19(a) 

requires creditors to provide disclosures 

that consumers must receive no later 

than three business days before 

consummation and which may not be 

estimated disclosures. Comments 

17(c)(2)(i)–1 and 17(c)(2)(i)–2, which 

address the basis and labeling of 

estimates, respectively, also would be 

revised to reflect this limitation. In 

addition, comment 17(c)(2)(i)–3, which 

states that creditors may base all 

disclosures on the assumption that 

consumers will make timely payments, 

would be revised to clarify that creditors 

may also assume that consumers would 

make payments in the amounts required 

by the terms of the legal obligation. In 

technical revisions, a heading would be 

added to § 226.17(c)(2) for clarity; no 

substantive change is intended. 

17(c)(3) Disregarded Effects 

In technical revisions, a heading 

would be added to § 226.17(c)(3) for 

clarity, and guidance under current 

comment 17(c)(3)–1 would be 

redesignated as 17(c)(3)–1(i) and (ii). No 

substantive change is intended. 

17(c)(4) Disregarded Irregularities 

Under the proposal, § 226.17(c)(4) 

would be revised to clarify that creditors 

may disregard period irregularities 

when disclosing the payment summary 

table, as required under proposed 

§ 226.38(c), for transactions secured by 

real property or a dwelling. No 

substantive change to the treatment of 

period irregularities is intended. 

In technical revisions, a heading 

would be added to § 226.17(c)(4) for 

clarity. Also, comment 17(c)(4)–1 would 

be redesignated as comment 17(c)(4)– 

1(i) and (ii), and comment 17(c)(4)–2 

would be redesignated as comment 

17(c)(4)–2(i) through (iii). No 

substantive change is intended. 

17(c)(5) Demand Obligations 

Under the proposal, comment 

17(c)(5)–1, which addresses demand 

obligation disclosures, would be revised 

to reflect that proposed 

§§ 226.19(b)(2)(ii)(D) and 

226.38(d)(2)(iv) contain requirements 

for disclosing a demand feature in 

transactions secured by real property or 

a dwelling. Comment 17(c)(5)–2, which 

addresses future events such as the 

maturity date, would be revised to 

clarify that certain disclosures for 

transactions not secured by real 

property or a dwelling may not contain 

estimated disclosures, as discussed 

below under proposed § 226.19(a)(2). 

Comment 17(c)(5)–3, which addresses 

demand after a stated period, would be 

revised to delete obsolete references to 

specific loan programs and update 

cross-references. Comment 17(c)(5)–4, 

which addresses balloon payment 

mortgages, would be revised to reflect 

that creditors must disclose a payment 

summary table for transactions secured 

by real property or a dwelling under 

proposed § 226.38(c) (rather than a 

payment schedule, as required for 

transactions not secured by real 

property or a dwelling under 

§ 226.18(g)) and to update a crossreference. In technical revisions, a 

heading would be added to 

§ 226.17(c)(5) for clarity; no substantive 

change is intended. 

17(c)(6) Multiple Advance Loans 

In technical revisions, a heading 

would be added to § 226.17(c)(6) for 

clarity; no substantive change is 

intended. 

17(d) Multiple Creditors; Multiple 

Consumers 

Section 226.17(d) addresses 

transactions that involve multiple 

creditors and consumers. The Board 

does not propose any changes to these 

provisions, except that the guidance 

contained in current comment 17(d)–1 

would be redesignated as comment 

17(d)–1(i) through (iii); no substantive 

change is intended. 

17(e) Effect of Subsequent Events 

Section 226.17(e) addresses whether a 

subsequent event makes a disclosure 

inaccurate or requires a new disclosure. 

Under proposed § 226.20(e), if a creditor 

obtains insurance on behalf of the 

consumer subsequent to consummation, 

the creditor would be required to 

provide notice before charging for such 

insurance. The Board proposes to revise 

comment 17(e)–1 to reflect this new 

requirement. 

17(f) Early Disclosures 

Under the proposal, in addition to 

providing early disclosures, creditors 

would be required to provide additional 

disclosures that a consumer must 

receive no later than three business days 

before consummation for transactions 

secured by real property or a dwelling. 

Accordingly, comments 17(f)–1 through 

–4 would be revised to clarify that the 

special disclosure timing requirements 

under § 226.19(a)(2) would apply to 

transactions secured by real property or 

a dwelling. In technical revisions, 

guidance in current comment 17(f)–1 

would be renumbered and headings 

revised to clarify that some of the 

current guidance would not apply to 

transactions secured by real property or 

a dwelling under the proposed rule. 

17(g) Mail or Telephone Orders—Delay 

in Disclosures 

Section 226.17(g) and comment 17(g)– 

1 permit creditors to delay disclosures 

for transactions involving mail or 

telephone orders until the first payment 

is due if certain information, such as the 

APR or finance charge, is provided to 

the consumer in advance of any request. 

As discussed under § 226.19(a) and 

226.20(c), the Board proposes special 

timing requirements for disclosures for 

transactions secured by real property or 

a dwelling and for adjustable rate 

transactions. As a result, the Board 

proposes to revise § 226.17(g) and 

comment 17(g)–1 to clarify that they do 

not apply to transactions secured by real 

property or a dwelling. 

17(h) and 17(i) Series of Sales—Delay in 

Disclosures; Interim Student Credit 

Extensions 

Sections 226.17(h) and (i) address 

delay in disclosures in transactions 

involving a series of sales and interim 

student credit extensions. The Board 

does not propose any substantive 

changes to these provisions. In technical 

revisions, a cross-reference is corrected. 

Section 226.18 Content of Disclosures 

As noted, the Board proposes to 

require creditors to provide new 

disclosures for transactions secured by 

real property or a dwelling under 

proposed § 226.38. Accordingly, the 

Board would clarify under § 226.18 that 

creditors must provide the new 

disclosures under § 226.38 for 

transactions secured by real property or 

a dwelling. In addition, the Board 

proposes conforming amendments to 

§ 226.18 and associated commentary to 

reflect the new disclosure regime for 

mortgages, and would redesignate 

comments as appropriate. 

18(a) Creditor 

Currently, § 226.18(a), which 

implements TILA Section 128(a)(1), 

requires disclosure of the identity of the 

creditor making the disclosures. 15 

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43256 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

U.S.C. 1638(a)(1). Comment 18(a)–1 

states, in part, that this disclosure may, 

at the creditor’s option, appear apart 

from the other required disclosures. As 

discussed above, currently, 

§ 226.17(a)(1) footnote 38, which 

implements TILA Section 128(b)(1), 

allows creditors to exclude from the 

grouped and segregated requirement 

certain required disclosures, such as the 

creditor’s identity. 15 U.S.C. 1638(b)(1). 

However, the Board proposes to revise 

the substance of footnote 38 to require 

the creditor’s identity under § 226.18(a) 

to be subject to the grouped together and 

segregated requirement for all closedend credit disclosures. Thus, the Board 

proposes to revise comment 18(a)–1 to 

reflect this change. 

18(b) Amount Financed 

Section 226.18(b) addresses the 

disclosure and calculation of the 

amount financed. The Board proposes to 

revise comment 18(b)–2, which 

provides guidance regarding treatment 

of rebates and loan premiums for the 

amount financed calculation required 

under § 226.18(b). Comment 18(b)–2 

primarily addresses credit sales, such as 

automobile financing, and provides that 

creditors may choose whether to reflect 

creditor-paid premiums and seller- or 

manufacturer-paid rebates in the 

disclosures required under § 226.18. 

The Board believes that creditor-paid 

premiums and seller- or manufacturerpaid rebates are analogous to buydowns. 

Like buydowns, such premiums and 

rebates may or may not be funded by the 

creditor and reduce costs that otherwise 

would be borne by the consumer. 

Accordingly, their impact on the 

amount financed, like that of buydowns, 

properly depends on whether they are 

part of the legal obligation. See 

comments 17(c)(1)–1 through –5. The 

Board is proposing to revise comment 

18(b)–2 to clarify that the disclosures, 

including the amount financed, must 

reflect loan premiums and rebates 

regardless of their source, but only if 

they are part of the terms of the legal 

obligation between the creditor and the 

consumer. As discussed below, 

proposed comment 38(e)(5)(iii)–2 would 

parallel this approach for transactions 

secured by real property or a dwelling. 

In addition, the Board proposes to 

revise comment 18(b)(2)–1, which 

addresses amounts included in the 

amount financed calculation that are not 

otherwise included in the finance 

charge, to remove reference to real estate 

settlement charges for the reasons 

discussed more fully under § 226.4. 

18(c) Itemization of Amount Financed 

Section 226.18(c) requires a separate 

disclosure of the itemization of amount 

financed and provides guidance on the 

amounts that must be included in such 

itemization. As discussed below, the 

Board proposes new § 226.38(e)(5)(iii) to 

address the calculation and disclosure 

requirements of the amount financed for 

transactions secured by real property or 

a dwelling. Under the proposal, the 

substance of footnote 40, which permits 

creditors to substitute good faith 

estimates required under RESPA for the 

itemization of the amount financed for 

dwelling-secured transactions, would be 

moved to new § 226.38(j)(1)(iii). 

Comment 18(c)–2 affords creditors 

flexibility in the information that may 

be included in the itemization of 

amount financed. Under the proposal, 

the Board would revise comment 18(c)– 

2(i) to remove references made to 

escrow items and to the commentary 

under § 226.18(g) because the proposal 

renders them unnecessary, and 18(c)– 

2(vi) to reflect a technical revision with 

no intended change in substance or 

meaning. The Board also proposes to 

move comment 18(c)–4 regarding the 

exemption afforded to RESPA 

transactions, and 18(c)(1)(iv)–2 

regarding prepaid mortgage insurance 

premiums to proposed comments 

38(j)(1)(iii)–1 and 38(j)(1)(i)(D)–2, 

respectively, because they apply only to 

dwelling-secured transactions. 

18(d) Finance Charge 

Section 226.18(d) requires disclosure 

of the finance charge for closed-end 

credit. As discussed below, the Board 

proposes new § 226.38(e)(5)(ii) to 

address disclosure of the finance charge 

(renamed ‘‘interest and settlement 

charges’’) for transactions secured by 

real property or a dwelling. As a result, 

reference to the finance charge 

tolerances for mortgage loans would be 

moved from § 226.18(d) to proposed 

§ 226.38(e)(5)(ii); no substantive change 

is intended. Technical amendments to 

comment 18(d)(2) would reflect this 

revision. 

18(e) Annual Percentage Rate 

Section 226.18(e) requires disclosure 

of the annual percentage rate, using that 

term. The substance of footnote 42 

would be moved to the regulatory text 

of § 226.18(e). Technical amendments to 

comment 18(e)–2 would reflect this 

revision; no substantive change is 

intended. 

18(f) Variable Rate 

Section 226.18(f)(1) contains 

disclosure requirements for variable-rate 

transactions not secured by a 

consumer’s principal dwelling and 

variable-rate transactions secured by a 

consumer’s principal dwelling if the 

loan term is one year or less. Section 

226.18(f)(1) requires creditors to make 

the following disclosures within three 

business days after receiving the 

consumer’s application: (1) 

Circumstances under which the APR 

may increase; (2) any limitations on the 

increase; (3) the effect of an increase; 

and (4) an example of the payment 

terms that would result from an 

increase. Section 226.18(f)(2) applies to 

variable-rate transactions secured by a 

consumer’s principal dwelling with a 

loan term greater than one year, and 

requires creditors to disclose that the 

loan has a variable-rate feature together 

with a statement that variable-rate 

program disclosures (required by 

current § 226.19(b)) have been provided 

earlier. 

The Board adopted § 226.18(f)(2) in 

1987, at the same time that it adopted 

§ 226.19(b) (disclosures for variable-rate 

mortgages with terms greater than one 

year). The Board adopted those 

provisions based on recommendations 

by the Federal Financial Institutions 

Examination Council (FFIEC). 52 FR 

48665; Dec. 24, 1987. However, the 

Board applied the requirements of those 

provisions only to loans secured by a 

principal dwelling with a term greater 

than one year. Loans secured by a 

principal dwelling with a term of one 

year or less, and loans not secured by 

a principal dwelling remained subject to 

rules in § 226.18(f)(1). The Board did 

not apply the new variable-rate loan 

disclosure requirements to such loans 

because public comments expressed 

concern about potential compliance 

problems for creditors making shortterm loans. 52 FR at 48666. 

Proposed §§ 226.19(b) and 226.38(c) 

contain disclosure requirements for 

closed-end adjustable-rate loans secured 

by real property or a dwelling, and 

would apply the same rules to loans 

with a term of one year or less as for 

loans with a term greater than one year. 

Disclosures required by those provisions 

are discussed below. As a result, 

§ 226.18(f)(2) and comment 18(f)(2)–1, 

which address requirements and 

guidance for closed-end adjustable-rate 

loans secured by real property or a 

dwelling, are unnecessary and would be 

deleted. The substance of footnote 43, 

which permits creditors to substitute 

information required under 

§ 226.18(f)(2) and 226.19(b) for the 

disclosures required by § 226.18(f)(1), 

would also be deleted. Section 

226.18(f)(1)(i) through (iv) would be 

redesignated as § 226.18(f)(1) through 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43257 

(4), and references in comment 18(f)–1 

would be updated. 

As discussed below, proposed 

§§ 226.19(b)(3)(iii) and 226.38(d)(2)(iii) 

regarding disclosure of shared-equity or 

shared-appreciation loan features would 

render guidance about shared-equity or 

shared-appreciation mortgages in 

comment 18(f)–1 unnecessary, and 

therefore that comment would be 

deleted. Comment 18(f)(1)–1 regarding 

terms used in disclosures, and comment 

18(f)(1)(i)–2 regarding conversion 

features would be redesignated as 

comments 18(f)–2 and –3, respectively. 

Finally, comments 18(f)(1)(i)–1, 

18(f)(1)(ii)–1, 18(f)(1)(iii)–1, and 

18(f)(1)(iv)–1 would be redesignated as 

comments 18(f)(1)–1, 18(f)(2)–1, 

18(f)(3)–1, and 18(f)(4)–1, respectively. 

18(g) Payment Schedule 

Section 226.18(g) and associated 

commentary address the disclosure of 

the payment schedule for all closed-end 

credit. As discussed under proposed 

§ 226.38(c), the Board would require 

creditors to provide disclosures 

regarding interest rates and monthly 

payments in a tabular format for 

transactions secured by real property or 

a dwelling. As a result, creditors would 

not need to comply with the disclosure 

requirements of § 226.18(g) for such 

transactions. However, as discussed 

under proposed § 226.38(e)(5)(i), 

creditors would be required to disclose 

the number and total amount of 

payments that the consumer would 

make over the full term of the loan for 

transactions secured by real property or 

a dwelling. Proposed comment 

18(e)(5)(i)–1 would require creditors to 

calculate the total payments following 

the rules under § 226.18(g) and 

associated commentary. As a result, the 

Board proposes to revise comment 

18(g)–3 to require creditors to disclose 

the total number of payments for all 

payment levels as a single figure for 

transactions secured by real property or 

a dwelling, and to cross-reference 

proposed § 226.38(e)(5)(i). 

18(h) Total of Payments 

In a technical revision, the substance 

of footnote 44 would be moved to the 

regulation text of § 226.18(e); technical 

amendments to comment 18(h)–3 would 

reflect this revision. 

18(i) Demand Feature 

Section 226.18(i) and associated 

commentary address the following for 

all closed-end credit: disclosure of a 

demand feature; the type of demand 

features covered; and the relationship to 

payment schedule disclosures. The 

Board does not propose any change to 

this provision, except that comments 

18(i)–2 and –3 would be updated to 

cross-reference proposed 

§§ 226.38(d)(2)(iv) and 226.38(c), which 

address the disclosure requirements for 

a demand feature and payment 

schedule, respectively, for transactions 

secured by real property or a dwelling. 

No substantive change is intended. 

18(k) Prepayment 

Section 226.18(k)(1) provides that, 

when an obligation includes a finance 

charge computed from time to time by 

application of a rate to the unpaid 

principal balance, the creditor must 

disclose a statement that indicates 

whether or not a penalty may be 

imposed if the obligation is prepaid in 

full. Comment 18(k)(1)–1 provides 

examples of charges considered 

penalties under § 226.18(k)(1). One such 

example is ‘‘interest charges for any 

period after prepayment in full is 

made.’’ When the loan is prepaid in full, 

there is no balance to which the creditor 

may apply the interest rate. 

Accordingly, the proposed rule would 

revise this example for clarity; no 

substantive change is intended. 

Proposed § 226.38(a)(5) contains 

requirements for disclosing prepayment 

penalties for transactions secured by 

real property or a dwelling. As 

discussed below, commentary on 

proposed § 226.38(a)(5) is consistent 

with the commentary on § 226.18(k), as 

proposed to be revised. 

18(j) Through 18(m) Total Sale Price; 

Prepayment; Late Payment; Security 

Interest 

Sections 226.18(j), (k), (l), and (m) 

address, respectively, disclosures 

regarding: total sale price; prepayment; 

late payment; and security interest. The 

Board does not propose any changes to 

these provisions, except for a minor 

technical amendment to comment 

18(k)(1)–1, as discussed above. 

However, as noted below, the Board 

proposes new disclosure requirements 

under §§ 226.38(a)(5) and 

226.38(d)(1)(iii) regarding prepayment 

penalties, § 226.38(j)(3) regarding late 

payment, and § 226.38(f)(2) regarding 

security interest, for transactions 

secured by real property or a dwelling. 

18(n) Insurance and Debt Cancellation 

Section 226.18(n) requires disclosure 

of insurance and debt cancellation in 

accordance with the requirements under 

§ 226.4(d) to exclude such fees from the 

finance charge. For the reasons 

discussed under § 226.4(d), the Board 

proposes to revise § 226.18(n) and 

comment 18(n)–2 to clarify that this 

disclosure requirement also applies to 

debt suspension policies. 

18(o) and 18(p) Certain Security-Interest 

Charges; Contract Reference 

Sections 226.18(o) and (p) address, 

respectively, disclosures regarding 

certain security-interest charges and 

contract reference. The Board does not 

propose any changes to these 

provisions. However, as noted below, 

the Board would require creditors to 

provide parallel contract references for 

transactions secured by real property or 

a dwelling under proposed 

§ 226.38(j)(5). No parallel disclosure for 

security-interest charges is proposed for 

transactions secured by real property or 

a dwelling because such disclosures 

would not apply to those transactions 

under the Board’s proposed revisions to 

§ 226.4, discussed above. 

18(q) Assumption Policy 

Section 226.18(q) and associated 

commentary require disclosure of 

assumption policies for residential 

mortgage transactions. Under the 

proposal, the Board proposes to move 

§ 226.18(q) and comments 18(q)–1 and 

–2 to proposed § 226.38(j)(6) and 

comments 38(j)(6)–1 and –2, 

respectively, because assumption 

policies apply only to transactions 

secured by real property or a dwelling. 

No substantive change is intended. 

18(r) Required Deposit 

Section 226.18(r) addresses disclosure 

requirements when creditors require 

consumers to maintain deposits as a 

condition to the specific transaction. 

Footnote 45 provides additional 

guidance on such required deposits and 

includes a reference to payments made 

under Morris Plans. Although at least 

one Morris Plan bank remains active, 

Morris Plans essentially are obsolete 

today. Accordingly, the Board proposes 

to move the substance of footnote 45 to 

the regulation text but delete the 

reference to Morris Plans. Comments 

18(r)–1, –3, and –5 would also be 

similarly revised. In addition, under the 

proposal, comment 18(r)–2 on pledgedaccount mortgages would be moved to 

comment 38(i)–2 because it applies only 

to transactions secured by real property. 

(See also comment 17(c)(1)–15 on 

Morris Plans, which the Board proposes 

to delete as unnecessary.) Comment 

18(r)–6 would be redesignated as 

comment 18(r)–6(i) through (vii). 

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43258 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

Section 226.19 Early Disclosures and 

Adjustable-Rate Disclosures for 

Transactions Secured by Real Property 

or a Dwelling 

Section 226.19(a) currently contains 

timing requirements for providing 

disclosures for closed-end transactions 

secured by a dwelling and subject to 

RESPA. Section 226.19(b) contains 

disclosure timing and content 

requirements for variable-rate loans 

secured by a consumer’s principal 

dwelling. The Board proposes to revise 

§ 226.19(a) and (b) to apply the 

disclosures to any closed-end 

transaction secured by real property or 

a dwelling, for reasons discussed below. 

Section 226.19(a) also would be revised 

to require creditors to provide new 

disclosures that a consumer must 

receive at least three business days 

before consummation, in addition to the 

existing requirement to provide early 

disclosures within three business days 

of application. The Board also proposes 

to revise the content of disclosures for 

ARMs required under § 226.19(b), 

require new disclosures about risky loan 

features in proposed § 226.19(c), and to 

include existing rules about disclosures 

provided through an intermediary agent 

or broker, or by telephone or electronic 

communication, in proposed 

§ 226.19(d). 

19(a) Good Faith Estimates of Mortgage 

Transaction Terms and New Disclosures 

TILA Section 128(b)(2), 15 U.S.C. 

1638(b)(2), requires creditors to mail or 

deliver to consumers good faith 

estimates of disclosures required by 

TILA Section 128(a), 15 U.S.C. 1638(a) 

(early disclosures), for a transaction 

secured by a dwelling and subject to 

RESPA. As amended by the MDIA, TILA 

Section 128(b)(2) requires creditors to 

deliver or mail the early disclosures at 

least seven business days before 

consummation. Further, TILA Section 

128(b)(2), as amended by the MDIA, 

requires that the creditor provide 

corrected disclosures if the disclosed 

APR changes in excess of a specified 

tolerance. The consumer must receive 

the corrected disclosures no later than 

three business days before 

consummation. The Board implemented 

these MDIA requirements in § 226.19(a) 

through a final rule effective July 30, 

2009 (MDIA Final Rule). 74 FR 23289; 

May 19, 2009. 

The Board proposes to expand the 

coverage of § 226.19(a) so that the 

timing provisions would apply to 

closed-end mortgage transactions 

secured by real property or a dwelling, 

and would not be limited to RESPAcovered transactions. Thus, proposed 

§ 226.19(a) would apply to transactions 

secured by real property that does not 

include a dwelling, such as vacant land, 

and transactions that are not subject to 

RESPA, such as construction loans. 

The Board also proposes to revise 

§ 226.19(a) so that, in addition to the 

early disclosures, the creditor must 

provide final disclosures that the 

consumer must receive no later than 

three business days before 

consummation. Under existing 

§ 226.19(a), by contrast, a consumer 

must receive new disclosures at least 

three business days before 

consummation only if changes to the 

previously disclosed APR exceed a 

specified tolerance. The Board is 

proposing two alternative provisions to 

address circumstances where terms 

change after the consumer has received 

the final disclosures. 

19(a)(1)(i) Time of Good Faith Estimates 

of Disclosures 

TILA Section 128(b)(2), 15 U.S.C. 

1638(b)(2), as amended by the MDIA, 

requires creditors to provide early 

disclosures if a transaction is secured by 

a dwelling and subject to RESPA. 

However, TILA’s early disclosure 

requirements do not apply to mortgage 

transactions for personal, family, or 

household purposes if they are secured 

by real property that is not a dwelling, 

for example a consumer’s business 

property. Creditors need not provide 

early disclosures for transactions 

secured by property of 25 acres or more, 

temporary financing (such as a 

construction loan), or transactions 

secured by vacant land because RESPA 

does not apply to such transactions. 24 

CFR 3500.5(b)(1), (3), and (4). 

The Board proposes to expand 

§ 226.19(a) to cover transactions secured 

by real property, even if the property is 

not a dwelling and even if the 

transaction is not subject to RESPA. 

(Transactions secured by a consumer’s 

interest in a timeshare plan would be 

treated differently, as discussed under 

§ 226.19(a)(5) below.) Under TILA 

Section 128(b)(2), 15 U.S.C. 1638(b)(2), 

if the transaction is not secured by a 

dwelling, or is not covered by RESPA, 

the creditor is only required to provide 

disclosures before consummation. The 

Board proposes to require creditors to 

provide early disclosures under TILA 

for all closed-end transactions secured 

by real property or a dwelling to 

facilitate compliance. 

Section 226.18 currently contains 

requirements for the content of 

transaction-specific disclosures secured 

by real property or a dwelling, whether 

or not creditors are required to provide 

that content in early disclosures. 

Although under the proposed rule 

§ 226.38 rather than § 226.18 would 

contain requirements for disclosure 

content for transactions secured by real 

property or a dwelling, the content 

required in early disclosures is the same 

as the content of disclosures provided in 

cases where early disclosures are not 

required. Applying the requirement to 

provide early disclosures to all 

transactions secured by real property or 

a dwelling would simplify creditors’ 

determination of the time by which 

creditors must make the disclosures 

required by § 226.38. The Board 

requests comment about operational or 

other issues involved in providing early 

disclosures for temporary loans, 

however. The Board also solicits 

comment on whether there are other 

types of loans exempt from RESPA to 

which it is not appropriate to apply 

proposed § 226.19(a). 

Proposed new comment 19–1 states 

that proposed § 226.19 applies to 

transactions secured by real property or 

a dwelling even if such transactions are 

not subject to RESPA. The proposed 

comment clarifies that TILA does not 

apply to transactions that are primarily 

for business, commercial, or agricultural 

purposes, however. (Proposed comment 

19–1 addresses the introductory text to 

proposed § 226.19, which provides that 

all of § 226.19, not only § 226.19(a), 

applies to closed-end transactions 

secured by real property or a dwelling.) 

Comment 19(a)(1)(i)–1, which 

discusses the coverage of § 226.19(a), 

would be removed because proposed 

comment 19–1 would discuss the 

coverage of all of proposed § 226.19. 

Comment 19(a)(1)(i)–2 would be revised 

to clarify that under the proposed rule 

disclosures required by proposed 

§ 226.19(a)(2) may not contain estimated 

disclosures, with limited exceptions. 

The comment also would be revised to 

reflect that proposed § 226.37 contains 

requirements for disclosure of estimates 

and contingencies, as discussed below. 

Comment 19(a)(1)(i)–3 would be revised 

to reflect that creditors may rely on 

RESPA and Regulation X to determine 

when an application is received, even 

for transactions not subject to RESPA. 

Comment 19(a)(1)(i)–5 would be revised 

to refer to the itemization of the amount 

financed disclosures in proposed 

§ 226.38(j) rather than in § 226.18(c), as 

currently referenced. Finally, comments 

19(a)(1)(i)–2 through –5 would be 

redesignated as comments 19(a)(1)(i)–1 

through –4. 

19(a)(1)(ii) Imposition of Fees 

On July 30, 2008, the Board published 

the 2008 HOEPA Final Rule amending 

Regulation Z, which implements TILA 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43259 

40On the same day the July 2008 final rule was 

published, the Congress passed the MDIA. Under 

the MDIA, if the APR stated in the early disclosures 

changes in excess of a specified tolerance, the 

creditor must provide corrected disclosures that the 

consumer must receive no later than three business 

days before consummation. The MDIA provides 

that if the creditor mails the corrected disclosures, 

the consumer is considered to have received them 

three business days after they are mailed. These 

early disclosure rules are contained in TILA Section 

128(b)(2)(E) (to be codified at 15 U.S.C. 

1638(b)(2)(E)). Section 226.19(a)(2)(ii) implements 

these rules. 

and HOEPA. The July 2008 final rule 

requires creditors to give transactionspecific cost disclosures no later than 

three business days after receiving a 

consumer’s application, for closed-end 

mortgage transactions secured by a 

consumer’s principal dwelling, under 

§ 226.19(a)(1)(i). Further, the 2008 

HOEPA Final Rule prohibits creditors 

and other persons from imposing a fee 

on the consumer, other than a fee for 

obtaining the consumer’s credit history, 

before the consumer receives the early 

disclosures, under § 226.19(a)(1)(ii) and 

(iii). Section 226.19(a)(1)(ii) provides 

that if the early disclosures are mailed 

to the consumer, the consumer is 

considered to have received them three 

business days after they are mailed. 73 

FR 44522, 44600–44601. 

The proposed rule would revise 

§ 226.19(a)(1)(ii) to conform to the 

presumption of receipt provision the 

Board subsequently adopted in the 

MDIA Final Rule in § 226.19(a)(2)(ii).40

Under the proposed rule 

§ 226.19(a)(1)(ii) would be revised to 

provide that if the early disclosures are 

mailed to the consumer or delivered to 

the consumer by means other than 

delivery in person, the consumer is 

deemed to have received the corrected 

disclosures three business days after 

they are mailed or delivered. This is 

consistent with comment 19(a)(1)(ii)–1, 

which provides that creditors may 

impose a fee any time after midnight 

following the third business day after 

the creditor delivers or mails the early 

disclosures in all cases, regardless of the 

method the creditor uses to provide the 

early disclosures. The Board does not 

intend to make substantive changes by 

conforming the presumption of receipt 

provisions under §§ 226.19(a)(1)(ii) and 

226.19(a)(2)(ii). 

The Board also proposes to revise 

comment 19(a)(1)(ii)–1 to clarify that the 

three-business-day presumption of 

receipt applies in all cases, including 

where a creditor uses electronic mail or 

a courier to provide the early 

disclosures. Proposed comment 

19(a)(1)(ii)–1 provides that creditors that 

use electronic mail or a courier other 

than the postal service may use the 

three-business-day presumption of 

receipt. This comment is consistent 

with existing comment 19(a)(2)(ii)–3 

adopted through the MDIA Final Rule. 

(Comment 19(a)(2)(ii)–3 would be 

redesignated as comment 19(a)(2)(v)–1 

and conforming edits would be made in 

connection with the proposed 

requirement that creditors provide final 

disclosures that the consumer must 

receive no later than three business days 

before consummation, as discussed 

below.) 

An additional change would be made 

to comment 19(a)(1)(ii)–1 under the 

proposed rule. Currently, comment 

19(a)(1)(ii)–1 provides that if the 

creditor places the early disclosures in 

the mail, the creditor may impose a fee 

in all cases ‘‘after midnight on the third 

business day following mailing of the 

disclosures.’’ The Board recognizes that 

the phrase ‘‘after midnight on the third 

business day’’ may be construed to 

mean either that the creditor may 

impose a fee at the beginning of the 

third business day after the creditor 

receives the consumer’s application, or 

at the beginning of the fourth business 

day after the creditor receives the 

consumer’s application. Thus, the Board 

proposes to revise comment 19(a)(1)(ii)– 

1 to provide that the creditor may 

impose a fee after the consumer receives 

the early disclosures or, in all cases, 

after midnight following the third 

business day after mailing the early 

disclosures. For example, proposed 

comment 19(a)(1)(ii)–1 provides that 

(assuming that there are no intervening 

legal public holidays) a creditor that 

receives the consumer’s written 

application on Monday and mails the 

early mortgage loan disclosure on 

Tuesday may impose a fee on the 

consumer on Saturday. 

19(a)(2)(ii) Three-Business-Day Waiting 

Period 

Under § 226.19(a), as revised by the 

MDIA Final Rule, if changes to the APR 

disclosed for a closed-end transaction 

secured by a dwelling and subject to 

RESPA exceed a specified tolerance, 

creditors must provide corrected 

disclosures. The consumer must receive 

the corrected disclosures no later than 

three business days before 

consummation. The tolerance specified 

for closed-end ‘‘regular transactions’’ 

(those that do not involve multiple 

advances, irregular payment periods, or 

irregular payment amounts) is 1⁄8 of 1 

percentage point and for closed-end 

‘‘irregular transactions’’ (those that 

involve multiple advances, irregular 

payment periods, or irregular payment 

amounts, such as an ARM with a 

discounted initial interest rate) is 1⁄4 of 

1 percentage point. See § 226.22(a) and 

footnote 46; comment 17(c)(1)–10(iv). 

Currently, if an APR stated in early 

disclosures for a closed-end transaction 

not subject to § 226.19(a) remains 

accurate but other terms that were not 

labeled as estimates change, the creditor 

must disclose those changed terms 

before consummation under § 226.17(f). 

Creditors also must provide corrected 

disclosures if a variable-rate feature is 

added to a closed-end transaction under 

§ 226.17(f), whether or not the 

transaction is subject to § 226.19(a). See 

comment 17(f)–2. In practice, most 

creditors provide ‘‘final’’ disclosures to 

a consumer on the day of 

consummation, whether or not the loan 

terms stated in the early disclosures 

have changed. 

Under the proposed rule, after 

providing early disclosures for a closedend transaction secured by real property 

or a dwelling, creditors would provide 

a second set of disclosures in all cases, 

under § 226.19(a)(2)(ii). The consumer 

would have to receive these final 

disclosures no later than three business 

days before consummation. Proposed 

§ 226.19(a)(2)(ii) is designed to address 

long-standing concerns that consumers 

may find out about different loan terms 

or increased settlement costs only at 

consummation. Members of the Board’s 

Consumer Advisory Council and 

commenters on prior Board rulemakings 

have expressed concern about 

consumers not learning of changes to 

credit terms until consummation. 

Further, several participants in the 

Board’s consumer testing stated that 

they had been surprised at closing by 

important changes in loan terms. For 

example, some participants said that 

they had been told at closing that a loan 

would have an adjustable rate even 

though previously they had been told 

they would receive a fixed-rate loan. 

Participants said that they closed 

despite unfavorable changes in loan 

terms because they lacked alternatives, 

especially in the case of a loan financing 

a home purchase. Some participants 

stated that they accepted changed terms 

because the loan originator advised 

them that they could easily obtain a 

refinance loan with better terms in the 

near future. 

Terms or costs may change after early 

disclosures are given for a variety of 

reasons, including that the consumer 

did not lock the interest rate at 

application or an appraisal report 

developed after early disclosures are 

provided shows a different property 

value than the creditor assumed when 

providing the early disclosure. 

Regardless of the reason for the changed 

terms, a consumer who receives notice 

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43260 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

41Under existing and proposed § 226.19(a)(2), a 

consumer is deemed to receive corrected 

disclosures three business days after a creditor 

mails them. Under existing and proposed 

§ 226.19(a)(2), creditors may but need not rely on 

the presumption of receipt to determine when the 

three-business-day waiting period begins, whether 

creditors mail TILA disclosures using the postal 

service, use a courier other than the postal service, 

or provide disclosures electronically. Alternatively, 

creditors may rely on evidence of receipt. 74 FR at 

23293; 73 FR 44522, 44593; July 30, 2008. 

of changed loan terms at consummation 

that differ from those originally 

disclosed does not have a meaningful 

opportunity to make an informed credit 

decision. 

To address concerns about changes to 

loan terms, proposed § 226.19(a)(2)(ii) 

requires creditors to provide final 

disclosures that a consumer would have 

to receive no later than the third 

business day before consummation. 

Under proposed § 226.38(a)(4), the early 

disclosures and final disclosures would 

contain total estimated settlement costs 

disclosed under RESPA and HUD’s 

Regulation X, which implements 

RESPA. Regulation X permits final 

settlement charges to be disclosed at 

consummation; the consumer may 

request that final settlement charges be 

disclosed twenty-four hours in advance, 

however. 24 CFR 3500.10(a) and (b). 

Thus, under RESPA, creditors, 

settlement agents, and settlement 

service providers have until the day of 

consummation to determine the 

amounts of the various settlement costs. 

Effective January 1, 2010, Regulation X 

provides that the sum of most lenderrequired third party settlement costs 

may vary no more than 10 percent from 

the same costs disclosed on the good 

faith estimate (GFE) delivered earlier. 

Certain other changes, such as the 

lender’s origination fee, cannot vary, 

unless the consumer did not lock the 

interest rate. 

The Board believes that proposed 

§ 226.19(a)(2) would not conflict with 

tolerance and timing rules under 

Regulation X—that is, creditors could 

comply with both Regulation Z and 

Regulation X. However, the Board’s 

proposal would require creditors to 

finalize settlement costs earlier than 

RESPA does: At least three business 

days before consummation, and as 

much as a week before consummation if 

the creditor mails the disclosures to the 

consumer.41 The Board recognizes that 

requiring that loan terms and costs be 

finalized several days before 

consummation would require 

significant changes to current settlement 

practices. These changes would generate 

costs that creditors and third-party 

service providers would pass on to 

consumers. The Board solicits comment 

on the operational and other practical 

effects of requiring that consumers 

receive final TILA disclosures for 

closed-end loans secured by real 

property or a dwelling no later than 

three business days before 

consummation. 

Proposed comment 19(a)(2)(ii)–1 

provides that creditors must provide 

final disclosures even if the terms 

disclosed have not changed since the 

creditor provided the early disclosures. 

Proposed comment 19(a)(2)(ii)–2 

provides that disclosures made under 

§ 226.19(a)(2)(ii) must contain each of 

the applicable disclosures required by 

§ 226.38. 

If escrows for taxes and insurance will 

be required, creditors may disclose 

periodic payments of taxes and 

insurance as estimates under 

§ 226.38(c). If the creditor includes 

escrowed amounts when calculating the 

total of payments under § 226.38(e)(5)(i), 

then the total of payments also would be 

disclosed as estimated disclosures, as 

discussed in comment 38(e)(5)–1. 

Periodic payment disclosures that 

include escrowed amounts must be 

estimated disclosures because the 

creditor cannot know with certainty the 

amounts for property taxes and 

insurance after the first year of the loan. 

Proposed comment 19(a)(2)(ii)–3 

clarifies that other disclosures may not 

be estimated under proposed 

§ 226.19(a)(2)(ii). Finally, comment 

19(a)(2)(ii)–4 provides an example that 

illustrates when consummation may 

occur after the consumer receives the 

final disclosures. 

19(a)(2)(iii) Additional Three-BusinessDay Waiting Period 

The Board is proposing two 

alternative requirements for creditors to 

provide corrected disclosures after 

making the final disclosures required by 

§ 226.19(a)(2)(ii), to be designated as 

§ 226.19(a)(2)(iii). Consumers would 

have to receive the corrected disclosures 

required by proposed § 226.19(a)(2)(iii) 

no later than the third business day 

before consummation. Under both 

Alternative 1 and Alternative 2, 

comment 19(a)(2)–2 would be revised to 

reflect that there is more than one threebusiness-day waiting period under 

§ 226.19(a). 

Alternative 1. The first alternative 

would require that a creditor provide 

corrected disclosures if any terms stated 

in the final disclosures required by 

proposed § 226.19(a)(2)(ii) change. This 

would ensure that consumers are aware 

of the final loan terms and costs at least 

three business days before 

consummation. The consumer would 

have to receive the corrected disclosures 

no later than the third business day 

before consummation. 

Under Alternative 1, proposed 

comment 19(a)(2)(iii)–1 clarifies that a 

disclosed APR is accurate for purposes 

of § 226.19(a)(2)(iii) if the disclosure is 

accurate under proposed 

§ 226.19(a)(2)(iv). (Under proposed 

§ 226.19(a)(2)(iv), an APR disclosed 

under proposed § 226.19(a)(2)(ii) or (iii) 

is considered accurate as provided by 

§ 226.22, except that in certain 

circumstances the APR is considered 

accurate if the APR decreases from the 

APR disclosed previously, as discussed 

below.) Proposed comment 19(a)(2)(iii)– 

2 states that disclosures made under 

§ 226.19(a)(2)(ii) must contain each of 

the disclosures required by § 226.38. 

Proposed comment 19(a)(2)(iii)–3 

clarifies that creditors may rely on 

proposed comment 19(a)(2)(ii)–3 in 

determining which of the disclosures 

required by § 226.19(a)(2)(iii) may be 

estimated disclosures. Proposed 

comment 19(a)(2)(iii)–4 provides an 

example that shows when 

consummation may occur after the 

consumer receives corrected 

disclosures. Existing comments 

19(a)(2)(ii)–1 through –4 would be 

removed under Alternative 1. 

Alternative 2. It is not clear that it is 

always in a consumer’s interest to delay 

consummation until three business days 

after the consumer receives corrected 

disclosures if any terms or costs change. 

Thus, the Board proposes an alternative 

§ 226.19(a)(2)(iii) that incorporates the 

existing tolerance for APR changes 

under § 226.22 and incorporates an 

additional tolerance discussed under 

§ 226.19(a)(iv). If the APR changes 

beyond the specified tolerances, 

creditors would be required to provide 

corrected disclosures that the consumer 

must receive no later than three 

business days before consummation. 

Under the second alternative, after the 

creditor provides the final disclosures, 

only APR changes beyond the specified 

tolerances or the addition of a variablerate feature to the loan would trigger a 

requirement that consumers receive 

corrected disclosures no later than three 

business days before consummation. In 

other cases, the creditor would have to 

disclose changed terms no later than the 

day of consummation, under existing 

§ 226.17(f). Under this alternative, a 

consumer would be alerted to 

significant increases in loan costs and 

would have three business days to 

investigate the reason for the change or 

to consider other options. Smaller APR 

increases or other changes to loan terms 

would not trigger a three-day delay in 

consummation, however. This 

alternative is designed to prevent 

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relatively minor changes in loan terms 

from repeatedly delaying 

consummation. 

Under Alternative 2, comment 

19(a)(2)(ii)–1 would be redesignated as 

comment 19(a)(2)(iii)–1 and revised to 

clarify that creditors must provide 

corrected disclosures if the APR 

disclosed pursuant to § 226.19(a)(ii) 

becomes inaccurate under proposed 

§ 226.19(a)(2)(iv), which incorporates 

existing tolerances under § 226.22, or an 

adjustable-rate feature is added. 

Comment 19(a)(2)(ii)–2 would be 

redesignated as comment 19(a)(2)(iii)–2 

and revised to: (1) Reflect that corrected 

disclosures must comply with the 

format requirements of proposed 

§ 226.37 as well as those of § 226.17(a); 

(2) reflect that a different APR will 

almost always result in changes in 

‘‘interest and settlement charges’’ and 

the ‘‘payment summary’’ (currently 

designated as the finance charge and 

payment schedule, respectively); (3) 

clarify that the addition of an 

adjustable-rate feature triggers the 

requirement to provide corrected 

disclosures, by moving a cross-reference 

to comment 17(f)–2; and (4) remove 

guidance on the timing and conditions 

of new disclosures from guidance on 

disclosure content, for clarity. Proposed 

comment 19(a)(2)(iii)–3 clarifies that 

creditors may rely on proposed 

comment 19(a)(2)(ii)–3 in determining 

which of the disclosures required by 

§ 226.19(a)(2)(iii) creditors may 

estimate. Under the proposed rule, 

comment 19(a)(2)(iii)–4 would be 

revised to update a cross-reference 

consistent with the proposed rule and 

reflect that consumers must receive 

disclosures under § 226.19(a)(2)(ii) 

whether or not the disclosures correct 

the early disclosures. 

The Board solicits comment on 

whether, under Alternative 2, changes 

other than APR changes in excess of the 

specified tolerance or the addition of an 

adjustable-rate feature after the creditor 

makes the new disclosures should 

trigger an additional three-business-day 

waiting period. For example, should the 

addition of a prepayment penalty, 

negative amortization, interest-only, or 

balloon payment feature trigger a 

waiting period requirement? 

Proposed § 226.19(a)(2)(iii) (under 

Alternative 2) would require corrected 

disclosures and a new three-businessday waiting period if the previously 

disclosed APR has become inaccurate. 

Under current rules, a disclosed APR is 

considered accurate and does not trigger 

corrected disclosures if it results from a 

disclosed finance charge that is greater 

than the finance charge required to be 

disclosed (i.e., the finance charge is 

‘‘overstated’’). See §§ 226.22(a)(4) and 

226.18(d)(1)(ii). In some transactions, 

the finance charge at consummation 

might be lower than the amount 

previously disclosed, for example, if the 

parties agree to a smaller principal loan 

amount after early disclosures were 

made. In the same transaction, the APR 

might increase because of an increase in 

the interest rate after the early 

disclosures were made. In this 

transaction, at consummation the 

previously disclosed finance charge 

would be overstated and the previously 

disclosed APR understated. In such a 

case, the question has been raised as to 

whether the previously disclosed APR, 

which was derived from the overstated 

finance charge, should be deemed 

accurate even though it is understated at 

consummation. The Board believes the 

APR in this case is not accurate. The 

Board believes an APR ‘‘results from’’ 

an overstated finance charge only if the 

APR also is overstated. The Board 

solicits comment on whether, should 

Alternative 2 be adopted, the Board also 

should adopt commentary under 

§ 226.22(a)(4) to clarify this 

interpretation. 

Proposed § 226.19(a)(2)(iv) contains 

APR tolerances, and proposed 

§ 226.38(e)(5)(ii) contains tolerances for 

interest and settlement charges (as the 

finance charge would be referred to 

under the proposed rule), for 

transactions secured by real property or 

a dwelling. The Board solicits comment 

on whether, under § 226.38(e)(5)(ii), 

tolerances would be appropriate for 

numerical disclosures other than the 

APR and interest and settlement 

charges. For example, would dollar 

tolerances for overstatements of periodic 

payment disclosures required by 

§ 226.38(c) be appropriate? What 

standards should be used to prevent 

overstated disclosures from 

undermining the integrity of the early 

disclosures and their usefulness as a 

shopping tool? 

19(a)(2)(iv) Annual Percentage Rate 

Accuracy 

Under proposed § 226.19(a)(2)(iv), an 

APR disclosed under proposed 

§ 226.19(a)(2)(ii) or (iii) is considered 

accurate as provided by § 226.22, except 

that the APR also is considered accurate 

if the APR decreases due to a discount 

(1) the creditor gives the consumer to 

induce periodic payments by automated 

debit from a consumer’s deposit account 

or (2) the title insurer gives the 

consumer on owner’s title insurance. 

Thus, such APR changes would not 

trigger a new three-business-day waiting 

period. Comment 19(a)(2)(iv)–1 clarifies 

that if a change occurs that does not 

render the APR inaccurate under 

§ 226.19(a)(iv), the creditor must 

disclose the changed terms before 

consummation, consistent with 

§ 226.17(f). The Board solicits comment 

on whether a disclosed APR that is 

higher than the actual APR at 

consummation should be considered 

accurate in other circumstances. 

19(a)(2)(v) Timing of Receipt 

As adopted by the MDIA Final Rule, 

§ 226.19(a)(2)(ii) provides that 

consumers must receive corrected 

disclosures, if required, no later than 

three business days before 

consummation. Further, 

§ 226.19(a)(2)(ii) provides that if the 

corrected disclosures are mailed to the 

consumer or delivered to the consumer 

by means other than delivery in person, 

the consumer is deemed to have 

received the disclosures three business 

days after they are mailed or delivered. 

The proposed rule applies this 

presumption for purposes of both the 

waiting period under proposed 

§ 226.19(a)(2)(ii) and the waiting period 

under proposed § 226.19(a)(2)(iii). The 

presumption would be moved to 

§ 226.19(a)(2)(v) under the proposed 

rule. 

Proposed comment 19(a)(2)(v)–1 

states that whether the creditor provides 

disclosures by delivery, postal service, 

electronic mail, or courier other than the 

postal service, consumers are deemed to 

receive the disclosures three business 

days after the creditor so provides them, 

for purposes of determining when a 

three-business-day waiting period 

required by § 226.19(a)(2)(ii) or (iii) 

begins. Further, proposed comment 

19(a)(2)(v)–1 clarifies that creditors may 

rely on evidence of earlier receipt, 

regardless of how the creditor provides 

disclosures to the consumer. This 

commentary is consistent with the 

Board’s discussion of delivery and 

mailing under the MDIA Final Rule and 

the 2008 HOEPA Final Rule. See 74 FR 

at 23292–23293; 73 FR at 44593. 

19(a)(3) Consumer’s Waiver of Waiting 

Period 

Section 226.19(a)(3) and comment 

19(a)(3)–1 would be revised to reflect 

that under the proposed rule the 

disclosures required for transactions 

secured by real property or a dwelling 

are contained in § 226.38 rather than in 

§ 226.18. Section 226.19(a)(3) also 

would be revised to reflect that there is 

more than one three-business-day 

waiting period under proposed 

§ 226.19(a)(2); comment 19(a)(3)–1 

would be revised to clarify that a 

separate waiver is required for each 

waiting period to be waived. 

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43262 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

Section 226.19(a)(2)(ii) currently 

requires creditors to provide corrected 

disclosures to a consumer if changes to 

the disclosed APR exceed the specified 

tolerance (APR correction disclosures). 

The consumer must receive APR 

correction disclosures no later than 

three business days before 

consummation. Comment 19(a)(3)–2 

provides examples that show whether or 

not the three-business-day waiting 

period would need to be waived to 

allow consummation to occur during 

the seven-business-day waiting period 

required by § 226.19(a)(2)(i), in the 

event of a bona fide personal financial 

emergency. This example would be 

removed because proposed 

§ 226.19(a)(2)(ii) provides that, after the 

creditor provides the early disclosures, 

consumers must receive final 

disclosures no later than three business 

days before consummation in all cases. 

Comment 19(a)(3)–3 provides examples 

illustrating whether or not, after the 

seven-business-day waiting period 

required by § 226.19(a)(2)(i), the threebusiness-day waiting period triggered by 

APR correction disclosures would need 

to be waived to allow consummation to 

occur, in the event of a bona fide 

personal financial emergency. Comment 

19(a)(3)–3 would be revised to reflect 

that in all cases consumers would have 

to receive final disclosures after the 

creditor provides the early disclosures 

under the proposed rule and that under 

proposed § 226.19(a)(2)(iv) a disclosed 

APR that is overstated is considered 

accurate in specified circumstances. 

Comment 19(a)(3)–3 would be 

redesignated as comment 19(a)(3)–2 

under the proposed rule. 

19(a)(4) Notice 

Section 226.19(a)(4) currently requires 

creditors to disclose that a consumer 

need not enter into a loan agreement 

because the consumer has received 

disclosures or signed a loan application. 

This requirement would be moved to 

§ 226.38(f)(1) under the proposed rule. 

Proposed § 226.38 contains all content 

requirements for disclosures for 

transactions secured by real property or 

a dwelling. 

19(a)(5) Timeshare Transactions 

Section 226.19(a)(5) excludes 

transactions secured by a consumer’s 

interest in a timeshare plan described in 

11 U.S.C. 101(53(D)) (timeshare 

transactions) from § 226.19(a)(1) through 

(a)(4), which address the following: (1) 

The period within which the creditor 

must provide the early disclosures and 

the fact that creditors and other persons 

cannot collect fees from the consumer 

before the consumer receives the early 

disclosures; (2) waiting periods after the 

creditor provides the early disclosures 

and after the consumer receives 

corrected disclosures (if any) and before 

consummation; (3) waiver of waiting 

periods; and (4) the requirement to 

disclose a statement that the consumer 

is not required to consummate a 

transaction merely because the 

consumer has received disclosures or 

signed a loan application. 

Section 226.19(a)(5)(ii) contains 

timing requirements for early 

disclosures, and § 226.19(a)(5)(iii) 

contains timing requirements for 

corrected disclosures, for timeshare 

transactions. Waiting periods are not 

required for timeshare transactions, so 

§ 226.19(a)(5) does not contain 

requirements similar to the 

requirements in § 226.19(a)(3) for 

waiving waiting periods for nontimeshare transactions. Section 

226.19(a)(5) also does not contain a 

requirement similar to that in 

§ 226.19(a)(4) that disclosures contain a 

statement that a consumer need not 

consummate a transaction simply 

because the consumer receives 

disclosures or signs a loan application. 

Section 226.19(a)(4) would be removed 

under the proposed rule, and a 

substantially similar requirement would 

apply under proposed § 226.38(f)(1). 

Proposed § 226.38(f)(1) requires 

creditors to disclose a statement that a 

consumer is not obligated to 

consummate a loan and that the 

consumer’s signature only confirms 

receipt of a disclosure statement. 

Proposed § 226.38(f)(1) applies to 

timeshare transactions. The MDIA 

exempts timeshare transactions from the 

requirements of TILA Section 

128(b)(2)(C), which existing 

§ 226.19(a)(4) implements. However, the 

Board does not believe that the Congress 

intended to exempt timeshare 

transactions from any requirement to 

disclose to a consumer that the 

consumer is not obligated to 

consummate a loan. Thus, the proposed 

rule does not exempt timeshare 

transactions from § 226.38(f)(1). 

Section 226.19(a)(5) would be 

redesignated as § 226.19(a)(4) and crossreferences adjusted accordingly under 

the proposed rule because § 226.19(a)(4) 

would be removed, as discussed above. 

Comment 19(a)(5)(ii)–1 would be 

revised to reflect that the coverage of 

§ 226.19 has been expanded to include 

transactions not subject to RESPA, as 

discussed above. Comment 19(a)(5)(iii)– 

1 would be revised to clarify that 

timeshare transactions are subject to the 

general requirement to disclose changed 

terms under § 226.17(f). Further, 

comment 19(a)(5)(iii)–1 would be 

revised to reflect that cross-referenced 

commentary on variable- or adjustablerate transactions would be incorporated 

into proposed § 226.17(c)(1)(iii). Finally, 

commentary on § 226.19(a)(5)(ii) and 

(iii) would be redesignated as 

commentary on § 226.19(a)(4)(ii) and 

(iii), respectively. 

19(b) Adjustable-Rate Loan Program 

Disclosures 

Section 226.19(b) currently requires 

creditors to provide detailed disclosures 

about adjustable-rate loan programs and 

a CHARM booklet if a consumer 

expresses an interest in ARMs. Section 

226.19(b) applies to closed-end 

transactions secured by a consumer’s 

principal dwelling with a term greater 

than one year. Creditors must provide 

these disclosures at the time an 

application form is provided or before 

the consumer pays a non-refundable fee, 

whichever is earlier. Creditors need not 

provide these disclosures, however, if a 

loan is secured by a dwelling other than 

a principal dwelling (such as a second 

home) or real property that is not a 

dwelling (such as vacant land) or with 

a term of one year or less. For such 

transactions, creditors instead must 

provide the less detailed variable-rate 

disclosures required by § 226.18(f)(1) 

within three business days after 

receiving the consumer’s application, as 

discussed above. 

The Board proposes to require 

creditors to provide ARM loan program 

disclosures, and additional disclosures 

discussed below, at the time an 

application form is provided, for all 

closed-end transactions secured by real 

property or a dwelling, regardless of the 

length of the loan’s term. The ARM 

disclosures and the new disclosures are 

intended to alert consumers to certain 

risks before they apply for a loan. The 

Board believes that consumers should 

receive this information, even where the 

loan would be secured by a second 

home or unimproved real property, and 

where the loan term is one year or less. 

In these circumstances, the transaction 

likely involves a significant asset and 

consumers should receive information 

about risks, so that they can decide 

whether the program or loan feature is 

appropriate. The Board solicits 

comment on whether loan program 

disclosures should be given at the time 

an application form is provided to a 

consumer or before the consumer pays 

a non-refundable fee, whichever is 

earlier, for transactions other than 

ARMs. 

The Board proposes to require 

creditors to provide the following 

disclosures at the time an application is 

provided: 

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• The ARM loan program disclosure, 

for each program in which the consumer 

expresses an interest (proposed 

§ 226.19(b)); 

• The ‘‘Key Questions about Risk’’ 

document published by the Board 

(proposed § 226.19(c)); and 

• The ‘‘Fixed vs. Adjustable-Rate 

Mortgages’’ document published by the 

Board (proposed § 226.19(c)). 

Creditors no longer would be required 

to provide the CHARM booklet, as 

discussed under § 226.19(c). 

Current content of ARM loan program 

disclosures. For adjustable-rate mortgage 

transactions secured by a consumer’s 

principal dwelling with a term greater 

than one year, § 226.19(b)(2) requires 

the creditor to provide disclosures to 

consumers at the time an application 

form is provided or before the consumer 

pays a nonrefundable fee, whichever is 

earlier. Section 226.19(b)(2) requires 

creditors to provide the following 

disclosures, as applicable, for each 

adjustable-rate loan program in which 

the consumer expresses an interest: (1) 

The fact that interest rate, payment, or 

term of the loan can change, (2) the 

index or formula used in making 

adjustments, and a source of 

information about the index or formula, 

(3) an explanation of how the interest 

rate and payment will be determined, 

including an explanation of how the 

index is adjusted, such as by the 

addition of a margin, (4) a statement that 

the consumer should ask about the 

current margin value and current 

interest rate, (5) the fact that the interest 

rate will be discounted, and a statement 

that the consumer should ask about the 

amount of the interest rate discount, (6) 

the frequency of interest rate and 

payment changes, (7) any rules relating 

to changes in the index, interest rate, 

payment amount, and outstanding loan 

balance, (8) pursuant to TILA Section 

128(a)(14), 15 U.S.C. 1638(a)(14), either 

(a) an historical example based on a 

$10,000 loan amount that illustrates 

how interest rate changes implemented 

according to the terms of the loan 

program would have affected payments 

and the loan balance over the past 

fifteen years or (b) the maximum 

interest rate and payment for a $10,000 

loan originated at an initial interest rate 

in effect as of an identified month and 

year and a statement that the periodic 

payments may increase or decrease 

substantially, (9) an explanation of how 

the consumer may calculate the 

payments for the loan, (10) the fact that 

the loan program contains a demand 

feature, (11) the type of information that 

will be provided in notices of 

adjustments and the timing of such 

notices, and (12) a statement that the 

disclosure forms are available for the 

creditor’s other variable-rate loan 

programs. 

Amendments to maximum rate and 

historical example disclosures. TILA 

Section 128(a)(14), 15 U.S.C. 

1638(a)(14), requires creditors to 

disclose at application (a) a statement 

that the periodic payments may increase 

or decrease substantially and the 

maximum interest rate and payment for 

a $10,000 loan originated at a recent 

interest rate, assuming the maximum 

periodic increases in rates and 

payments under the program or (b) an 

historical example illustrating the 

effects of interest rate changes 

implemented according to the loan 

program. Section 226.19(b)(2)(viii) 

implements TILA Section 128(a)(14). 

For the reasons discussed below, the 

Board proposes not to require creditors 

to provide either the historical example 

or the maximum interest rate and 

payment based on a $10,000 loan. 

The Board proposes to eliminate the 

disclosure of the historical example or 

the maximum interest rate and payment 

based on a $10,000 loan pursuant to the 

Board’s exception and exemption 

authorities in TILA Section 105. Section 

105(a) authorizes the Board to make 

exceptions to TILA to effectuate the 

statute’s purposes, which include 

facilitating consumers’ ability to 

compare credit terms and helping 

consumers avoid the uniformed use of 

credit. See 15 U.S.C. 1601(a), 1604(a). 

Section 105(f) authorizes the Board to 

exempt any class of transactions from 

coverage under any part of TILA if the 

Board determines that coverage under 

that part does not provide a meaningful 

benefit to consumers in the form of 

useful information or protection. See 15 

U.S.C. 1604(f)(1). The Board must make 

this determination in light of specific 

factors. See 15 U.S.C. 1604(f)(2). These 

factors are (1) the amount of the loan 

and whether the disclosure provides a 

benefit to consumers who are parties to 

the transaction involving a loan of such 

amount; (2) the extent to which the 

requirement complicates, hinders, or 

makes more expensive the credit 

process; (3) the status of the borrower, 

including any related financial 

arrangements of the borrower, the 

financial sophistication of the borrower 

relative to the type of transaction, and 

the importance to the borrower of the 

credit, related supporting property, and 

coverage under TILA; (4) whether the 

loan is secured by the principal 

residence of the borrower; and (5) 

whether the exemption would 

undermine the goal of consumer 

protection. 

The Board has considered each of 

these factors carefully and based on that 

review believes that the proposed 

exemption is appropriate. Consumer 

testing conducted by the Board showed 

that examples based on hypothetical 

loan amounts and interest rates may be 

confusing to consumers and may not 

provide meaningful benefit. Several 

participants thought the historical 

example showed payments and rates 

that actually would apply if the 

participant chose the loan program 

described in the disclosure. Some 

participants mistakenly thought that the 

disclosures described an ARM with a 

fifteen-year term because the disclosure 

showed fifteen years’ worth of index 

changes under an ARM program. Some 

consumer testing participants said that 

disclosures based on a hypothetical 

$10,000 loan amount are not useful to 

them; these consumers said they wanted 

to see information about rates and terms 

that would actually apply in the context 

of their own loan amount. 

The Board’s exception and exemption 

authority under Sections 105(a) and (f) 

does not apply in the case of a mortgage 

referred to in Section 103(aa), which are 

high-cost mortgages generally referred to 

as ‘‘HOEPA loans.’’ The Board does not 

believe that this limitation restricts its 

ability to apply the proposed changes to 

all mortgage loans, including HOEPA 

loans. This limitation on the Board’s 

general exception and exemption 

authority is a necessary corollary to the 

decision of the Congress, as reflected in 

TILA Section 129(l)(1), to grant the 

Board more limited authority to exempt 

HOEPA loans from the prohibitions 

applicable only to HOEPA loans in 

Section 129(c) through (i) of TILA. See 

15 U.S.C. 1639(l)(1). Here, the Board is 

not proposing any exemptions from the 

HOEPA prohibitions. This limitation 

does raise a question as to whether the 

Board could use its exception and 

exemption authority under Sections 

105(a) and (f) to except or exempt 

HOEPA loans, but not other types of 

mortgage loans, from other, generally 

applicable TILA provisions. That 

question, however, is not implicated by 

this proposal. 

Here, the Board is proposing to apply 

its general exception and exemption 

authority to eliminate information from 

the ARM loan program disclosure that 

consumers find confusing or not useful, 

for all loans secured by real property or 

a dwelling, including both HOEPA and 

non-HOEPA loans, in order to fulfill the 

statute’s purpose of facilitating 

consumers’ ability to compare credit 

terms and helping consumers avoid the 

uninformed use of credit. It would not 

be consistent with the statute or with 

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43264 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

42H.R. Conf. Rept. 103–652 at 159 (Aug. 2, 1994). 

43See 24 CFR 203.49(g) (HUD); 12 CFR 560.210 

(OTS). Some of those agencies have issued 

regulations that apply to adjustable rate mortgages. 

See, e.g., 12 CFR 34.22 (OCC) (requiring that an 

index specified in a national bank’s loan documents 

for an ARM subject to § 226.19(b) be readily 

available to and verifiable by a borrower and 

beyond the bank’s control). Those requirements do 

not establish comprehensive disclosure 

requirements, however. 

Congressional intent to interpret the 

Board’s authority under Sections 105(a) 

and (f) in such a way that the proposed 

revisions could apply only to mortgage 

loans that are not subject to HOEPA. 

Reading the statute in a way that would 

deprive HOEPA borrowers of improved 

ARM loan program disclosures is not a 

reasonable construction of the statute 

and contravenes the Congress’s goal of 

ensuring ‘‘that enhanced protections are 

provided to consumers who are most 

vulnerable to abuse.’’ 42

The Board notes that proposed 

§ 226.38(c) would require creditors to 

provide consumers with the maximum 

possible interest rate and payment 

within three business days after the 

consumer applies for an ARM or a loan 

in which payments may vary. See 

discussion of § 226.38(c). Consumer 

testing indicated that consumers find 

this information very useful when 

provided in the context of an actual loan 

offer, in contrast to the information for 

a hypothetical loan amount in relation 

to an historical interest rate or the 

interest rate or for a recently originated 

loan, as required by TILA Section 

128(a)(14). 

In addition to removing 

§ 226.19(b)(2)(viii), the proposed rule 

would remove the related requirement 

under § 226.19(b)(2)(ix) that creditors 

explain how a consumer may calculate 

payments for the consumer’s loan 

amount based on either the initial 

interest rate used to calculate the 

maximum interest rate and payment 

disclosure or the most recent payment 

shown in the historical example. The 

proposed rule also would eliminate 

commentary on § 226.19(b)(2)(viii) and 

(ix). Further, the proposed rule would 

eliminate comment 19(b)(2)–2(i)(I), 

which provides that if a loan feature 

must be taken into account in preparing 

the historical example of payment and 

loan balance movements required by 

§ 226.19(b)(2)(viii), variable-rate loans 

that differ as to that feature constitute 

separate loan programs under 

§ 226.19(b)(2). 

Amendments to other regulations and 

comments. Comment 19(b)–1 currently 

provides that in an assumption of an 

adjustable-rate mortgage transaction 

secured by the consumer’s principal 

dwelling with a term greater than one 

year, disclosures need not be provided 

under §§ 226.18(f)(2)(ii) or 226.19(b). 

Comment 19(b)–2(iv) currently provides 

that in cases where an open-end credit 

account will convert to a closed-end 

transaction subject to § 226.19(b), the 

creditor must provide the disclosures 

required by § 226.19(b). The proposed 

rule would integrate the foregoing 

commentary into § 226.19(b). Proposed 

§ 226.19(b) would apply to all closedend mortgage transactions secured by 

real property or a dwelling regardless of 

loan security or term, however, as 

discussed above. 

The proposed rule would not require 

program disclosures to contain an 

explanation of how payments will be 

determined, a disclosure that creditors 

must make under existing 

§ 226.19(b)(2)(iii). In general, consumer 

testing participants preferred to receive 

specific information about the amount 

of the payments they would have to 

make, which generally is not available 

at the time the consumer submits a loan 

application. Most participants found 

model loan program disclosures based 

on current requirements to be confusing 

because they contained complex 

terminology. Participants responded 

much more positively to revised model 

disclosures, which did not discuss 

technical issues about how payments 

are determined. If a creditor chooses to 

include an explanation of how 

payments will be determined, the 

explanation must be disclosed apart 

from the segregated disclosures that 

proposed § 226.19(b) requires, as a 

general rule under proposed 

§ 226.37(a)(2), discussed below. 

Footnote 45a to § 226.19(b) currently 

states that creditors may substitute 

information provided in accordance 

with variable-rate regulations of other 

federal agencies for the disclosures 

required by § 226.19(b). The proposed 

rule would remove and reserve that 

footnote and comment 19(b)–4. The 

footnote was designed to account for the 

fact that disclosure rules for variablerate loans issued by HUD, the Federal 

Home Loan Bank Board, and the Office 

of the Comptroller of the Currency 

(OCC) were in effect when the Board 

adopted § 226.19(b). No comprehensive 

disclosure requirements for variable-rate 

loans currently are in effect under the 

rules of HUD, the OCC, or the Office of 

Thrift Supervision (OTS), the successor 

agency to the FHLBB. No such 

requirements are in effect under the 

rules of the Federal Deposit Insurance 

Corporation (FDIC) or the National 

Credit Union Administration (NCUA) 

either. Moreover, HUD and the OTS 

have incorporated the disclosure 

requirements for variable-rate loans 

under TILA and Regulation Z into their 

own regulations by cross-reference.43

Accordingly, footnote 45a no longer 

appears to be necessary. The Board 

requests comment, however, on whether 

there are potential inconsistencies 

between any ARM loan disclosures 

required by other federal financial 

institution supervisory agencies that 

Regulation Z should specifically 

address. 

Comment 19(b)–5 currently states that 

creditors must provide disclosures 

under § 226.19(b) for certain renewable 

balloon-payment, preferred-rate, and 

price-level adjusted mortgages with a 

fixed interest rate, if they are secured by 

a dwelling and have a term greater than 

one year. However, such mortgages lack 

most of the adjustable interest rate and 

payment features required to be 

disclosed under proposed § 226.19(b)(1). 

For example, the frequency of rate and 

payment changes for a preferred-rate 

loan with a fixed interest rate likely 

cannot be known because the loss of the 

preferred rate is based on factors other 

than a formula or a change in the value 

of an index. Accordingly, under the 

proposed rule creditors would not be 

required to provide ARM loan program 

disclosures under § 226.19(b) for such 

mortgages. Creditors would be required 

to provide ARM loan program 

disclosures for such mortgages if their 

interest rate is adjustable, however. 

Cross-references in comment 19(b)–5 

would be updated and the comment 

would be redesignated as comment 

19(b)–3 under the proposed rule. 

Existing comment 19(b)(2)–2(i) 

provides examples of particular loan 

features that distinguish separate loan 

programs. That commentary would be 

redesignated as comment 19(b)–5(i) but 

generally would be unchanged under 

the proposal, with one exception. 

Differences among rules relating to loan 

balance changes would be removed as 

an example of a particular loan feature 

that distinguishes separate loan 

programs. However, differences in the 

possibility of negative amortization 

would continue to distinguish separate 

loan programs, as discussed above. 

Also, existing comment 19(b)(2)(vii)–2(i) 

on disclosing a negative amortization 

feature would be redesignated as 

comment 19(b)–5 under the proposal. 

The requirement to provide loan 

program disclosures for each loan 

program in which a consumer expresses 

an interest generally would remain 

unchanged. However, comment 

19(b)(2)–4 would be revised to state that 

a creditor ‘‘must describe’’—rather than 

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‘‘must fully describe’’—an ARM loan 

program. The proposal would reduce 

some of the material that creditors must 

disclose about ARM loan programs to 

highlight information that is most 

important to consumers, as discussed 

above. 

Use of term ‘‘Adjustable-Rate 

Mortgage’’ or ‘‘ARM.’’ Proposed 

§ 226.19(b) requires the creditor to 

disclose the heading ‘‘Adjustable-Rate 

Mortgage’’ or ‘‘ARM.’’ Participants in 

the Board’s consumer testing showed 

greater familiarity with the term 

‘‘adjustable-rate mortgage’’ than with 

‘‘variable-rate mortgage.’’ Format 

requirements in proposed 

§ 226.19(b)(4)(iii) state that the 

statement must be more conspicuous 

than, and must precede, the other 

disclosures required by § 226.19(b) and 

must be located outside of the tables 

required by proposed § 226.19(b)(4)(iv). 

Finally, proposed § 226.19(b)(4)(iii) 

states that creditors may make the 

‘‘Adjustable-Rate Mortgage’’ or ‘‘ARM’’ 

disclosure in a heading that states the 

name of the creditor and the name of the 

loan program, such as ‘‘ABC Bank 3/1 

Adjustable Rate Mortgage.’’ 

19(b)(1) Interest Rate and Payment 

Disclosures 

Proposed § 226.19(b)(1) requires the 

creditor to disclose the following 

information, as applicable, grouped 

together under the heading ‘‘Interest 

Rate and Payment,’’ using that term: 

(1) The introductory period, (2) the 

frequency of the rate and payment 

change, (3) the index, (4) the limit on 

rate changes, (5) the conversion feature, 

and (6) the preferred rate. 

Introductory period. Proposed 

§ 226.19(b)(1)(i) requires the creditor to 

disclose the period during which the 

interest rate or payment remains fixed 

and a statement that the interest rate 

may vary or the payment may increase 

after that period. This disclosure is 

similar to that required under existing 

§ 226.19(b)(2)(i). Proposed 

§ 226.19(b)(1)(i) also requires the 

creditor to provide an explanation of the 

effect on the interest rate of having an 

initial interest rate that is not 

determined using the index or formula 

that applies for interest rate 

adjustments, that is, of having a 

discounted or premium interest rate. 

This disclosure requirement is similar to 

that required under existing 

§ 226.19(b)(2)(v). However, the proposed 

rule would eliminate the requirement 

that ARM loan program disclosures state 

that the consumer should ask about the 

amount of the interest rate discount. 

Frequency of rate and payment 

change. Proposed § 226.19(b)(1)(ii) 

requires the creditor to disclose the 

frequency of interest rate and payment 

changes, as currently is required under 

§ 226.19(b)(2)(vi). 

Index. Proposed § 226.19(b)(1)(iii) 

requires the creditor to disclose the 

index or formula used in making 

adjustments and a source of information 

about the index or formula. Proposed 

§ 226.19(b)(1)(iii) also requires the 

creditor to provide an explanation of 

how the interest rate will be 

determined, including an explanation of 

how the index is adjusted, such as by 

the addition of a margin. Those 

requirements are contained in existing 

§ 226.19(b)(2)(ii) and (iii). However, the 

proposed rule eliminates 

§ 226.19(b)(2)(iv), which requires the 

creditor to disclose that the consumer 

should ask about the current margin 

value and current interest rate. 

Limit on rate changes. Currently, 

requirements for disclosing interest rate 

or payment limitations and carryover 

are contained in existing 

§ 226.19(b)(2)(vii). The proposed rule 

would retain these requirements, under 

proposed § 226.19(b)(1)(iv). (Existing 

§ 226.19(b)(2)(vii) also contains a 

requirement to disclose negative 

amortization. The proposed rule would 

retain that requirement as proposed 

§ 226.19(b)(2)(ii)(B), as discussed 

below.) 

Conversion feature. Existing comment 

19(b)(2)(vii)–3 provides that if a loan 

program permits consumers to convert a 

variable-rate loan to a fixed-rate loan, 

the creditor must disclose that the fixed 

interest rate after conversion may be 

higher than the adjustable interest rate 

before conversion. Comment 

19(b)(2)(vii)–3 further provides that the 

creditor must disclose any limitations 

on the period during which the loan 

may be converted, a statement that 

conversion fees may be charged, and 

any interest rate and payment 

limitations that apply if the consumer 

exercises the conversion option. The 

proposed rule would integrate this 

commentary into proposed 

§ 226.19(b)(1)(v). 

Preferred rate. Currently, if the 

variable-rate mortgage transaction is a 

preferred-rate loan, the creditor must 

disclose any event that would allow the 

creditor to increase the interest rate, for 

example, upon the termination of the 

consumer’s employment with the 

creditor, whether voluntary or 

involuntary. See comment 19(b)(2)(vii)– 

4. The creditor also must disclose that 

fees may be charged when the preferred 

rate no longer is in effect, if applicable. 

The Board proposes to retain these 

requirements in proposed 

§ 226.19(b)(1)(vi). 

19(b)(2) Key Questions About Risk 

Currently, TILA Section 128(a)(14), 15 

U.S.C. 1638(a)(14), and § 226.19(b)(2), 

require the creditor to disclose only 

certain information about certain 

adjustable-rate mortgage features early 

in the mortgage application process. The 

Board believes, however, that the 

consumer should be aware early in the 

process of other risky features, in 

addition to adjustable-rate features. For 

this reason, the Board proposes to 

require ‘‘Key Question’’ disclosures 

several times during the process to 

allow consumers to become aware of 

and track potentially risky features of 

their loan. Consumer testing and 

document design principles suggest that 

keeping language and design elements 

consistent between forms improves 

consumers’ ability to identify and track 

any changes in the information being 

disclosed. As discussed more fully 

below, proposed § 226.19(c)(1) would 

require the creditor to provide a Board 

publication entitled ‘‘Key Questions to 

Ask about Your Mortgage’’ at the time 

an application form is provided to the 

consumer or before the consumer pays 

a non-refundable fee, whichever is 

earlier. The content of this disclosure 

would be published by the Board and 

would address important terms related 

to any type of mortgage, whether fixedrate or adjustable-rate. At the same time, 

if the consumer expresses an interest in 

an ARM loan program, proposed 

§ 226.19(b)(2) would require the creditor 

to disclose the ‘‘Key Questions about 

Risk’’ as part of the ARM loan program 

disclosure. These ‘‘Key Questions’’ 

would be tailored to the specific ARM 

loan program in which the consumer 

has expressed an interest. Subsequently, 

within three days of the creditor 

receiving the consumer’s application for 

a specific loan program, proposed 

§ 226.38(d) would require the creditor to 

make a similar disclosure of ‘‘Key 

Questions about Risk’’ in the 

transaction-specific TILA disclosure. 

The list of the ‘‘Key Questions about 

Risk’’ for the transaction-specific TILA 

disclosure required under proposed 

§ 226.38(d) would be the same as that 

required for the ARM loan program 

disclosure under proposed 

§ 226.19(b)(2), but the information in the 

TILA disclosure would be specific to the 

loan program for which the consumer 

applied and would apply to fixed-rate or 

adjustable-rate loan programs. The 

Board believes that consistently using 

the ‘‘Key Questions’’ terminology would 

enhance consumers’ ability to identify, 

review, and understand the disclosed 

terms across all disclosures, and, 

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43266 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

therefore, avoid the uninformed use of 

credit. 

Key questions about risk. As 

discussed above, current § 226.19(b)(2) 

requires the creditor to disclose over 12 

loan features. Consumer testing showed 

that the current format for these 

disclosures was very difficult for 

participants to understand. In addition, 

because the content was so general, 

participants felt the current disclosure 

would not help them shop for a 

mortgage. Therefore, the Board proposes 

to replace existing § 226.19(b)(2) with a 

new streamlined ARM loan program 

disclosure that would contain key 

information specific to that loan 

program. The proposed rule would 

require creditors to disclose certain 

information grouped together under the 

heading ‘‘Key Questions about Risk,’’ 

using that term, to draw the consumer’s 

attention to information about the 

potential adverse impact that certain 

loan features could have on the 

consumer’s ability to repay the loan. 

Proposed § 226.19(b)(2)(i) requires the 

creditor to always disclose information 

about the following three terms: (1) Rate 

increases, (2) payment increases, and (3) 

prepayment penalties. Proposed 

§ 226.19(b)(2)(ii) would require the 

creditor to disclose information about 

the following six terms, but only if they 

are applicable to the loan program: (1) 

Interest-only payments, (2) negative 

amortization, (3) balloon payment, (4) 

demand feature, (5) no-documentation 

or low-documentation loans, and (6) 

shared-equity or shared-appreciation. 

The ‘‘Key Questions about Risk’’ 

disclosure would be subject to special 

format requirements, including a tabular 

format and a question and answer 

format, as described under proposed 

§ 226.19(b)(4). The Board believes it is 

critical that consumers be alerted to 

certain risk factors before they have 

applied for an ARM, so that they can 

decide whether they want a loan with 

those terms. The Board solicits 

comment on whether there are other 

risk factors that loan program 

disclosures or publications should 

identify. 

Required disclosures. As noted above, 

proposed § 226.19(b)(2)(i) requires the 

creditor to disclose information about 

the following three terms: (1) Rate 

increases, (2) payment increases, and (3) 

prepayment penalties. The Board 

believes that these three factors should 

always be disclosed. Rate and payment 

increases pose the most direct risk of 

payment shock. In addition, consumer 

testing showed that interest rate and 

monthly payment were by far the two 

most common terms that participants 

used to shop for a mortgage. The Board 

also believes that the prepayment 

penalty is a key risk factor because it is 

critical to the consumer’s ability sell the 

home or to refinance the loan to obtain 

a lower rate and payments. While the 

other risk factors are important, those 

factors are only required to be disclosed 

as applicable to avoid information 

overload. 

Rate and payment increases. With 

respect to rate increases, proposed 

§ 226.19(b)(2)(i)(A) would require the 

creditor to disclose a statement that the 

interest rate on the loan may increase, 

along with a statement indicating when 

the first rate increase may occur and the 

frequency with which the interest rate 

may increase. With respect to payment 

increases, proposed § 226.19(b)(2)(i)(B) 

would require the creditor to disclose a 

statement indicating whether or not the 

periodic payment on the loan may 

increase. If the periodic payment on the 

loan may increase, then the creditor 

would disclose a statement indicating 

when the first payment may increase. 

For payment option loans, if the 

periodic payment may increase, the 

creditor would disclose a statement 

indicating when the first minimum 

payment would increase. Proposed 

comment 19(b)(2)(i)–1 would clarify 

that the requirement to disclose when 

the first rate or payment increase may 

occur refers to the time period in which 

the increase may occur, not the exact 

calendar date. For example, the 

disclosure may state, ‘‘Your interest rate 

may increase at the end of the 3-year 

introductory period.’’ 

Prepayment penalties. If the 

obligation includes a finance charge 

computed from time to time by 

application of a rate to the unpaid 

principal balance, proposed 

§ 226.19(b)(2)(i)(C) would require the 

creditor to disclose a statement 

indicating whether or not a penalty 

could be imposed if the obligation is 

prepaid in full. If the creditor could 

impose a prepayment penalty, the 

creditor would disclose the 

circumstances under which and the 

period in which the creditor could 

impose the penalty. Because of the 

importance of prepayment penalties, the 

proposed rule would also require 

disclosure of this feature under 

proposed § 226.38(a)(5). To avoid 

duplication, proposed comments 

19(b)(2)(i)(C)–1 to –3 cross-reference 

proposed comments 38(a)(5)–1 to –3 for 

information about whether there is a 

prepayment penalty and examples of 

charges that are or are not prepayment 

penalties. 

Some consumers take out ARM loans 

planning to refinance or sell the home 

securing the loan before the rate or 

payment increases. Consumer testing 

showed that while most participants 

understood the general meaning of the 

phrase ‘‘prepayment penalty,’’ they did 

not realize that the penalty would apply 

if they refinanced their loan or sold 

their home. The Board believes it is 

important for consumers to understand 

that a prepayment penalty may be 

imposed in various circumstances, 

including paying off the loan, 

refinancing, or selling the home early. 

Additional disclosures. As noted 

above, proposed § 226.19(b)(2)(ii) 

requires the creditor to disclose 

information about the following six 

terms, as applicable: (1) Interest-only 

payments, (2) negative amortization, (3) 

balloon payment, (4) demand feature, 

(5) no-documentation or lowdocumentation loans, and (6) sharedequity or shared-appreciation. The 

Board proposes to require these 

disclosures only when the feature is 

present, in contrast to the required 

disclosures of proposed § 226.19(b)(2)(i). 

Proposed comment 19(b)(2)(ii)–1 would 

clarify that ‘‘as applicable’’ means that 

any disclosure not relevant to a 

particular ARM loan program may be 

omitted. Although consumer testing 

showed that some participants felt 

reassured by seeing all of the risk factors 

whether they were a feature of the loan 

or not, the Board is concerned about the 

potential for information overload if the 

entire list is included on every ARM 

loan program disclosure. 

Interest-only payments. Proposed 

§ 226.19(b)(2)(ii)(A) requires the creditor 

to disclose a statement that periodic 

payments will be applied only toward 

interest on the loan. The creditor would 

also disclose a statement of any 

limitation on the number of periodic 

payments that will be applied only 

toward interest on the loan and not 

towards the principal, that such 

payments will cover the interest owed 

each month, but none of the principal, 

and that making these periodic 

payments means the loan amount will 

stay the same and the consumer will not 

have paid any of the loan amount. For 

payment option loans, the creditor 

would disclose a statement that the loan 

gives the consumer the choice to make 

periodic payments that cover the 

interest owed each month, but none of 

the principal, and that making these 

periodic payments means the loan 

amount will stay the same and the 

consumer will not have paid any of the 

loan amount. Consumer testing showed 

that many participants did not 

understand that there are loans where 

the periodic payments do not pay down 

the mortgage principal. The Board 

believes it is important to alert 

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consumers to this feature in order to 

avoid payment shock when the 

principal becomes due or the periodic 

payment increases. 

Negative amortization. Proposed 

§ 226.19(b)(2)(ii)(B) would require the 

creditor to disclose a statement that the 

loan balance may increase even if the 

consumer makes the required periodic 

payments. In addition, the creditor 

would disclose a statement that the 

minimum payment covers only a part of 

the interest the consumer owes each 

period and none of the principal, that 

the unpaid interest will be added to the 

consumer’s loan amount, and that over 

time this will increase the total amount 

the consumer is borrowing and cause 

the consumer to lose equity in the 

home. The proposed requirement would 

replace existing § 226.19(b)(2)(vii), 

which requires the creditor to disclose 

any rules relating to changes in the 

outstanding loan balance, including an 

explanation of negative amortization. 

The Board believes that information 

regarding negative amortization should 

be disclosed because it is a complicated 

feature that significantly impacts a 

consumer’s ability to repay the loan. 

Consumer testing showed that 

participants were generally unfamiliar 

with the term or concept. However, 

participants generally understood the 

revised transaction-specific plainlanguage explanation of negative 

amortization’s causes and effects when 

disclosed in the ‘‘Key Questions’’ 

format. 

Balloon payment. Proposed 

§ 226.19(b)(2)(ii)(C) requires the creditor 

to disclose a statement that the 

consumer will owe a balloon payment, 

along with a statement of when it will 

be due. Proposed comment 

19(b)(2)(ii)(C)–1 would clarify that the 

creditor must make this disclosure if the 

loan program includes a payment 

schedule with regular periodic 

payments that when aggregated do not 

fully amortize the outstanding principal 

balance. Proposed comment 

19(b)(2)(ii)(C)–2 would clarify that the 

requirement to disclose when the 

balloon payment is due refers to the 

time period when it is due, not the exact 

calendar date. For example, the 

disclosure may state, ‘‘You would owe 

a balloon payment due in seven years.’’ 

The Board believes it is important for 

the consumer to be aware early in the 

process of any potential payment shock. 

Demand feature. Proposed 

§ 226.19(b)(2)(ii)(D) would require the 

creditor to disclose a statement that the 

creditor may demand full repayment of 

the loan, along with a statement of the 

timing of any advance notice the 

creditor will give the consumer before 

the creditor exercises such right. 

Proposed comment § 226.19(b)(2)(ii)(D)– 

1 would clarify that this requirement 

would apply not only to transactions 

payable on demand from the outset, but 

also to transactions that convert to a 

demand status after a stated period. 

Proposed comments 

§ 226.19(b)(2)(ii)(D)–2 and –3 crossreference comment 18(i)–2 regarding 

covered demand features and comment 

18(i)–3 regarding the relationship to the 

payment schedule disclosures. The 

proposed rule replaces existing 

§ 226.19(b)(2)(x). The Board believes 

that demand features are rare in 

consumer mortgage transactions, but 

pose a considerable risk when present 

and, therefore, should be brought to the 

consumer’s attention. Consumer testing 

showed that participants understood the 

revised language regarding a demand 

feature and thought it was important 

information. 

No-documentation or lowdocumentation loans. Proposed 

§ 226.19(b)(2)(ii)(E) would require the 

creditor to disclose a statement that the 

consumer’s loan could have a higher 

rate or fees if the consumer does not 

document employment, income, or 

other assets. In addition, the creditor 

would disclose a statement that if the 

consumer provides more 

documentation, the consumer could 

decrease the interest rate or fees. The 

Board is concerned that consumers who 

obtain loans with such features may not 

understand that they may pay a higher 

price for this feature. 

Shared-equity or shared-appreciation. 

Proposed § 226.19(b)(2)(ii)(F) requires 

the creditor to disclose a statement that 

any future equity or appreciation in the 

real property or dwelling that secures 

the loan must be shared, along with a 

statement of the percentage of future 

equity or appreciation to which the 

creditor is entitled, and the events that 

may trigger such an obligation. The 

Board is aware that a number of sharedequity and shared-appreciation 

programs are being offered to 

consumers, including low- and 

moderate-income borrowers, on various 

terms. Consumer testing showed that 

participants were generally unfamiliar 

with the concept of shared-equity or 

shared-appreciation. However, to the 

extent that a shared-equity or a sharedappreciation feature is being offered as 

one of the loan terms, participants 

stated that they would want it disclosed 

clearly and prominently. 

19(b)(3) Additional Information and 

Web Site 

Currently, § 226.19(b)(2)(iv) and (v) 

require the creditor to disclose a 

statement that consumers should ask the 

creditor about the current margin value 

and current interest rate or the amount 

of any interest rate discount. Existing 

§ 226.19(b)(2)(xii) requires a notice that 

disclosure forms are available for the 

creditor’s other variable-rate programs. 

Consumer testing indicated that many 

consumers skim disclosures quickly and 

become frustrated if they cannot quickly 

locate the key information they seek. 

Reducing the number of non-specific 

notices in the loan program disclosures 

would increase the likelihood that 

consumers will read and understand 

specific disclosures. Under proposed 

§ 226.19(b)(3), the creditor would be 

required to disclose that the consumer 

may visit the Web site of the Federal 

Reserve Board for more information 

about adjustable-rate mortgages and for 

a list of licensed housing counselors in 

the consumer’s area that can help the 

consumer understand the risks and 

benefits of the loan. The Board believes 

that streamlining the notice will reduce 

information overload. 

19(b)(4) Format Requirements 

Proposed § 226.19(b)(4) contains 

format requirements for ARM loan 

program disclosures. As discussed more 

fully in proposed § 226.37, consumer 

testing showed that the location and 

order in which information was 

presented affected consumers’ ability to 

locate and comprehend the information 

disclosed. Based on these findings, the 

Board proposes, under § 226.19(b)(4)(i), 

to require that creditors disclose the 

‘‘Key Questions about Risk’’ using the 

format requirements for similar 

disclosures required by § 226.38, except 

as otherwise provided in proposed 

§ 226.19(b)(4). Proposed 

§ 226.19(b)(4)(ii) would require that the 

disclosures required by paragraphs 

(b)(1) through (b)(3) be grouped together 

and placed in a prominent location. 

Proposed § 226.19(b)(4)(iii) would 

require that the heading ‘‘Adjustable 

Rate Mortgage’’ or ‘‘ARM’’ required 

under § 226.19(b) be more conspicuous 

than and precede the other disclosures. 

The heading would be required to be 

outside the tables required under this 

paragraph. The creditor would be 

permitted to use a heading with the 

name of the loan program and the name 

of the creditor, such as ‘‘XXX Bank 

3/1 ARM.’’ Proposed § 226.19(b)(4)(viii) 

would require the disclosure of the 

Board’s Web site and list of licensed 

housing counselors to be disclosed 

outside of the required tables described 

below. 

Proposed § 226.19(b)(4)(iv) to (vii) 

would require the following special 

formats for the ARM loan program 

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43268 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

disclosure: tabular format, question and 

answer format, highlighted answers, and 

special order of disclosures. Proposed 

§ 226.19(b)(4)(iv) would require the 

creditor to provide the interest rate 

disclosure required under § 226.19(b)(1) 

and the ‘‘Key Questions about Risk’’ 

disclosure required under § 226.19(b)(2) 

in the form of two tables with headings, 

content and format substantially similar 

to Model Form H–4(B) in Appendix H. 

Consumer testing showed that using a 

tabular format improved participants’ 

ability to readily identify and 

understand key information. Only the 

information required or permitted by 

paragraphs (b)(1) and (b)(2) would be in 

this table. In addition, under 

§ 226.19(b)(4)(v), the ‘‘Key Questions 

about Risk’’ disclosures would be 

required to be grouped together and 

presented in the format of a question 

and answer in a manner substantially 

similar to Model Form H–4(B) in 

Appendix H. The table with interest rate 

information would precede the table 

with the ‘‘Key Questions about Risk.’’ 

Consumer testing showed that using a 

question and answer format improved 

participants’ ability to recognize and 

understand potentially risky or costly 

features of a loan. Proposed 

§ 226.19(b)(4)(vi) would require the 

creditor to disclose each affirmative 

answer in bold text and in all 

capitalized letters to highlight the fact 

that a risky feature is present in the 

loan. Negative answers (required under 

proposed § 226.19(b)(2)(i) but not under 

proposed § 226.(b)(2)(ii)) would be 

disclosed in non-bold text. Finally, 

proposed § 226.19(b)(4)(vii) would 

require the creditor to make the 

disclosures, as applicable, in the 

following order: Rate increases under 

§ 226.19(b)(2)(i)(A), payment increases 

under § 226.19(b)(2)(i)(B), interest-only 

payments under § 226.19(b)(2)(ii)(A), 

negative amortization under 

§ 226.19(b)(2)(ii)(B), balloon payments 

under § 226.19(b)(2)(ii)(C), prepayment 

penalties under § 226.19(b)(2)(i)(C), 

demand feature under 

§ 226.19(b)(2)(ii)(D), no-documentation 

or low-documentation loans under 

§ 226.19(b)(2)(ii)(E), and shared-equity 

or shared-appreciation under 

§ 226.19(b)(2)(ii)(F). This order would 

ensure that consumers receive critical 

information about their payments first. 

Model Clauses and Samples are 

proposed at Appendix H–4(C) through 

H–4(F). 

19(c) Publications for Transactions 

Secured by Real Property or a Dwelling 

Based on the results of consumer 

testing, under the proposal creditors 

would be required to provide to 

consumers two Board publications for 

closed-end transactions secured by real 

property or a dwelling. The first 

publication, entitled ‘‘Key Questions to 

Ask about Your Mortgage,’’ discusses 

loan terms and conditions that are 

important for consumers to consider 

when selecting a closed-end mortgage 

loan. The second publication, entitled 

‘‘Fixed vs. Adjustable Rate Mortgages,’’ 

discusses the respective costs and 

benefits of fixed-rate mortgages and 

ARMs. 

Under existing § 226.19(b)(1), the 

creditor must provide to the consumer 

a copy of the CHARM booklet published 

by the Board, or a suitable substitute. 

The Board consumer tested the CHARM 

booklet and a sample current loan 

program disclosure. Few of the 

consumer testing participants who had 

obtained an ARM recalled having seen 

the CHARM booklet. Although many 

participants thought that the 

information in the CHARM booklet is 

useful, particularly the descriptions of 

‘‘payment shock,’’ prepayment 

penalties, and negative amortization, 

most participants thought that the 

CHARM booklet is too long and that 

they likely would not read it. 

The proposed rule would eliminate 

the requirement under § 226.19(b)(1) for 

creditors to provide the CHARM booklet 

to consumers who express interest in an 

ARM transaction, and instead, under 

proposed § 226.38(c)(2) require a brief 

Board publication showing the principal 

differences between a fixed-rate loan 

and an ARM. Comment 19(b)(1)– and –2 

on the CHARM booklet would be 

removed accordingly. Also, proposed 

§ 226.38(c)(1) would require creditors to 

provide to all consumers—regardless of 

whether they express interest in an 

ARM—two new single-page Board 

publications. These new disclosure 

forms would contain a notice stating 

where consumers may obtain additional 

information about ARMs. The Board 

believes that requiring that creditors 

provide the ‘‘Key Questions to Ask 

about Your Mortgage’’ publication and 

the ‘‘Fixed versus Adjustable Rate 

Mortgages’’ publication without 

modifications would promote 

consistency in the information 

consumers receive about ARMs. 

Accordingly, proposed § 226.19(c) 

would require creditors to provide this 

information ‘‘as published.’’ 

The Board proposes to require 

creditors to provide these publications 

at the time a consumer is given an 

application form or pays a nonrefundable fee, whichever is earlier, for 

fixed-rate mortgage loans as well as 

variable-rate mortgage loans. Special 

rules for when a consumer accesses an 

application form electronically and 

when the creditor receives a consumer’s 

application from an intermediary agent 

or broker are discussed below. The 

Board solicits comment on whether 

there are other loan types for which loan 

program publications should be given at 

the time an application form is provided 

to a consumer or before the consumer 

pays a non-refundable fee, whichever is 

earlier. 

19(d) Timing of Disclosures 

Proposed comment 19(c)–1 states that 

creditors are not required to provide 

disclosures under proposed § 226.19(c) 

in cases where an open-end credit 

account will convert to a closed-end 

transaction. The ‘‘Key Questions to Ask 

About Your Mortgage’’ disclosure and 

the ‘‘Fixed vs. Adjustable Rate 

Mortgages’’ disclosure would not be 

helpful at that time, because the creditor 

and consumer already will have entered 

into a written agreement. By contrast, 

transaction-specific disclosures are 

required in such cases under 

§ 226.19(b), both as in effect (see 

comment 19(b)–2(iv)) and as proposed 

(see proposed § 226.19(b) and comment 

19(b)–2). 

Existing § 226.19(b) requires that 

creditors provide variable-rate loan 

program disclosures at the time an 

application form is provided to a 

consumer or before the consumer pays 

a non-refundable fee, whichever is 

earlier. Comment 19(b)–2 currently 

discusses when a creditor should 

provide such disclosures in cases where 

the creditor receives a consumer’s 

application through an intermediary 

agent or broker or a consumer requests 

an application by telephone. The 

comment also clarifies that if the 

creditor solicits applications by mailing 

application forms, the creditor must 

send the ARM loan program disclosures 

with the application form. Existing 

§ 226.19(c) contains requirements for 

providing variable-rate loan program 

disclosures when a consumer accesses 

an application form electronically. 

(Section 226.17(a)(1) currently permits 

creditors to provide the ARM loan 

program disclosures electronically, 

without regard to the consumer-consent 

or other provisions of the Electronic 

Signatures in Global and National 

Commerce Act, 15 U.S.C. 7001 et seq. 

(E-Sign Act)). 

Under the Board’s proposal, timing 

requirements for ARM loan program 

disclosures would be consolidated in 

proposed § 226.19(d). These timing 

requirements also would apply to the 

provision of the proposed new ‘‘Key 

Questions to Ask About Your Mortgage’’ 

and ‘‘Fixed vs. Adjustable Rate 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43269 

Mortgages’’ disclosures. Proposed 

§ 226.19(d)(1) contains the general 

requirement to provide ARM loan 

program disclosures (if a consumer 

expresses interest in ARMs) at the time 

an application form is provided or 

before the consumer pays a nonrefundable fee, whichever is earlier. 

Proposed § 226.19(d)(1) also specifies 

that creditors must provide ARM loan 

program disclosures before charging a 

fee for obtaining a consumer’s credit 

report. 

Proposed § 226.19(d)(2) states that if a 

consumer accesses an ARM loan 

application electronically, a creditor 

must provide the disclosures in 

electronic form, except as provided in 

§ 226.19(d)(2). Proposed § 226.19(d)(2), 

in turn, states that if a consumer who is 

physically present in a creditor’s office 

accesses an ARM loan application 

electronically, the creditor may provide 

disclosures in either electronic or paper 

form. These provisions are consistent 

with existing comment 19(c)–1(i) and 

(ii). Comment 19(c)–1 on the form of 

electronic disclosures would be 

redesignated as comment 19(d)(2)(i)–1. 

Commentary on the timing of electronic 

disclosures, currently contained in 

comment 19(b)–2(v), would be 

redesignated as comments 19(d)(2)(i)–2 

and 19(d)(2)(ii)–1. Further, under the 

proposed rule existing § 226.17(a) 

would be revised to include the 

proposed new Key Questions to Ask 

About Your Mortgage’’ and ‘‘Fixed vs. 

Adjustable Rate Mortgages’’ disclosures 

among the disclosures creditors may 

provide without regard to the consumerconsent or other provisions of the 

E-Sign Act. 

Proposed § 226.19(d)(3) contains rules 

for applications made by telephone or 

through an intermediary. These rules 

are consistent with existing comment 

19(b)–2. Existing comments 19(b)–2(i) 

through –2(iii) are redesignated as 

comments 19(d)(3)–1 through 19(d)(3)– 

3. Existing comment 19(b)–2(iii) states 

that the creditor must include the 

disclosures required by § 226.19(b) with 

any application form the creditor sends 

by mail to solicit consumers. This 

comment is redesignated as proposed 

comment 19(d)(3)–3 and revised to 

cover the Key Questions and Fixed 

versus Adjustable Rate Mortgages 

disclosures required by proposed 

§ 226.19(c). 

Proposed § 226.19(d)(4) provides that, 

where a consumer does not express 

interest in an ARM until after receiving 

or accessing an application form or 

paying a non-refundable fee, the 

creditor must provide an ARM loan 

program disclosure(s) within three 

business days after the consumer 

expresses such interest to the creditor or 

the creditor receives notice from an 

intermediary broker or agent that the 

consumer has expressed interest in an 

ARM. This is consistent with existing 

footnote 45b. Existing comment 19(b)–3 

is redesignated as comments 19(d)(3)–1 

through 19(d)(3)–3 under the proposed 

rule. 

Proposed § 226.19(d)(5) provides that 

if the consumer expresses an interest in 

negotiating loan terms that are not 

generally offered, the creditor need not 

provide the disclosures required by 

§ 226.19(b) before an application form is 

provided. Proposed § 226.19(d)(5) 

requires that the creditor provide such 

disclosures as soon as reasonably 

possible after the terms to be disclosed 

have been determined and not later than 

the time the consumer pays a nonrefundable fee. Further, proposed 

§ 226.19(d)(5) provides that in all cases 

the creditor must provide the 

disclosures required by § 226.19(c) of 

this section at the time an application 

form is provided or before the consumer 

pays a non-refundable fee, including a 

fee for obtaining a consumer’s credit 

history, whichever is earlier. 

Comment 19(b)(2)–1 currently 

provides that, if ARM loan program 

disclosures cannot be provided because 

a consumer expresses an interest in 

individually negotiating loan terms that 

the creditor generally does not offer, the 

creditor may provide disclosures 

reflecting those terms as soon as 

reasonably possible after the terms have 

been decided upon, but not later than 

the time the consumer pays a nonrefundable fee. Proposed § 226.19(d)(5) 

incorporates that guidance into the 

regulation. Further, comment 19(b)(2)–1 

provides that if, after an application 

form is provided or the consumer pays 

a non-refundable fee, a consumer 

expresses an interest in an adjustablemortgage loan program for which the 

creditor has not provided the ARM loan 

program disclosures, the creditor must 

provide such disclosures as soon as 

reasonably possible. Proposed 

§ 226.19(d)(6) incorporates that 

guidance into the regulation. The 

foregoing guidance is removed from 

comment 19(b)(2)–1 (which the 

proposed rule would redesignate as 

comment 19(b)–4) because under the 

proposed rule timing rules for ARM 

loan program disclosures are contained 

in § 226.19(d) rather than § 226.19(b). 

Section 226.20 Subsequent Disclosure 

Requirements 

20(b) Assumptions 

Section 226.20(b) currently requires 

post-consummation disclosures if the 

creditor expressly agrees in writing with 

a subsequent consumer to accept that 

consumer as a primary obligator on an 

existing residential mortgage 

transaction. The Board proposes 

technical changes to § 226.20(b) and 

associated commentary to reflect the 

new format and content disclosure 

requirements for transactions secured by 

real property or a dwelling under 

§§ 226.37 and 226.38. 

20(c) Rate Adjustments 

For ARM transactions subject to 

§ 226.19(b), § 226.20(c) currently 

requires creditors to mail or deliver to 

consumers a notice of interest rate 

adjustment at least 25, but no more than 

120, calendar days before a payment at 

a new level is due. Section 226.20(c) 

also requires creditors to mail or deliver 

to consumers an adjustment notice at 

least once each year during which an 

interest rate adjustment is implemented 

without an accompanying payment 

change. 

Those adjustment notices must state: 

(1) The current and prior interest rates 

for the loan; (2) the index values upon 

which the current and prior interest 

rates are based; (3) the extent to which 

the creditor has foregone any increase in 

the interest rate; (4) the contractual 

effects of the adjustment, including the 

payment due after the adjustment is 

made, and a statement of the loan 

balance; and (5) the payment, if 

different from the payment due after 

adjustment, that would be required to 

fully amortize the loan at the new 

interest rate over the remainder of the 

loan term. Model clauses in Appendix 

H–4(H) illustrate how creditors may 

comply with the requirements of 

§ 226.20(c). 

Discussion 

The Board adopted the requirements 

for post-consummation disclosures 

(subsequent disclosures) in 1987. The 

minimum advance notice of a rate 

adjustment was set at 25 days to track 

the rules of the Office of the Comptroller 

of the Currency (OCC) and to provide 

creditors with flexibility in giving 

adjustment notices for a variety of 

ARMs. See 52 FR 48665, 48668; Dec. 24, 

1987. Since 1987, ARMs have grown in 

popularity, especially from 2003 to 

2007. Beginning in 2007, ARM growth 

began to slow as consumers experienced 

difficulty repaying such loans and 

concerns grew about the risk of payment 

shock ARMs pose. 

Because ARMs pose the risk of 

payment shock, it is critical that 

consumers receive notice of ARM 

payment changes so they can prepare to 

make higher payments if necessary. If 

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43270 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

44HMDA data consist of information reported by 

about 8,600 home lenders, including all of the 

nation’s largest mortgage originators. Reported 

loans are estimated to represent about 80 percent 

of all home lending nationwide. Accordingly, 

HMDA data likely provide a broadly representative 

view of U.S. home lending. Robert B. Avery, 

Kenneth P. Brevoort, and Glenn B. Canner, The 

2007 HMDA Data, 94 Fed. Reserve Bulletin A107 

(Dec. 23, 2008). 

the new payments are unaffordable, 

borrowers need time to seek a refinance 

loan with lower payments or make other 

arrangements. Even if a consumer can 

afford a higher payment, the consumer 

may want to refinance into a fixed-rate 

loan for payment certainty or into 

another ARM loan with lower 

payments. It is particularly important 

that consumers with subprime loans 

receive adequate notice before a 

payment increase, as these borrowers 

tend to be more vulnerable to payment 

shock. 

The Board believes the current 25-day 

notice is insufficient to allow many 

consumers to refinance into a loan with 

affordable payments or to make other 

arrangements. In the ‘‘Subprime 

Mortgage Guidance’’ issued in 2007, the 

Board, the OCC, FDIC, OTS, and NCUA 

stated that consumers should be given at 

least 60 days before an ARM adjustment 

in which to refinance without paying a 

prepayment penalty. Several consumer 

advocates who commented on the 

Board’s 2008 HOEPA Final Rule stated 

that consumers with subprime ARMs 

may need significant time in which to 

seek out a refinancing, in some cases as 

much as 6 months. 

The Board’s Proposal 

The Board proposes to require 

creditors to mail or deliver a notice of 

an interest rate adjustment at least 60 

days before payment at a new level is 

due, instead of the current 25-day 

provision. Creditors would provide 

notice annually where interest rate 

changes are made without 

accompanying payment changes under 

the proposed. Proposed § 226.20(c)(1)(i) 

contains timing requirements for 

circumstances where a payment change 

accompanies an interest rate 

adjustment, and proposed § 226.20(c)(ii) 

contains timing requirements for 

circumstances where no payment 

change accompanies interest rate 

changes made during a year. 

Proposed § 226.20(c)(2) contains 

content requirements for disclosures 

required where a payment change 

accompanies an interest rate 

adjustment. Proposed § 226.20(c)(3) 

contains content requirements for 

disclosures required once each year 

where no payment change accompanies 

an interest rate change. Whether or not 

a payment change is made, under 

proposed § 226.20(c)(4) creditors would 

disclose the following information: (1) 

The date until which the creditor may 

impose a prepayment penalty if the 

consumer prepays the obligation in full, 

if applicable; (2) a phone number the 

consumer may call to obtain additional 

information about the loan; and (3) a 

telephone number and Internet Web site 

for HUD-licensed housing counselors. 

Proposed § 226.20(c)(5) contains 

formatting requirements for discloses 

required by proposed § 226.20(c). 

Section 226.20(c) currently provides 

that an adjustment to the interest rate 

with or without a corresponding 

adjustment to the payment in an 

adjustable-rate mortgage subject to 

§ 226.19(b) is an event requiring new 

disclosures to the consumer. The 

proposed rule would retain this 

provision. Comment 20(c)–1 provides 

that the requirements of § 226.20(c) 

apply where the interest rate and 

payment change due to the conversion 

of an adjustable-rate mortgage subject to 

§ 226.19(b) to a fixed-rate mortgage. The 

proposed rule would incorporate this 

guidance into proposed § 226.20(c). 

Further, the proposed rule would revise 

comment 20(c)–1 for clarity and to 

remove commentary on timing 

requirements, because timing 

requirements are contained in proposed 

§ 226.20(c)(1). 

The proposed rule would revise 

comment 20(c)–2 to clarify that pricelevel adjusted mortgages and similar 

mortgages are not subject to the 

disclosure requirements of § 226.20(c) 

because they are not subject to the 

disclosure timing requirements of 

§ 226.19(b), as discussed above. The 

proposed rule would remove the 

commentary stating that ‘‘sharedequity’’ and ‘‘shared-appreciation’’ 

mortgages are not subject to the 

disclosure requirements of § 226.20(c) to 

conform with the removal of reference 

to such mortgages as examples of 

variable-rate transactions from comment 

17(c)(1)–11 (redesignated as proposed 

comment 17(c)(1)(iii)–4), as discussed 

above. Under the proposed rule, 

whether or not creditors must provide 

ARM adjustment notices for a sharedequity or shared-appreciation mortgage 

depends on whether such mortgage has 

an adjustable rate or a fixed rate. 

Shared-equity and shared-appreciation 

mortgages with a fixed rate would not 

be considered adjustable-rate mortgages 

under the proposed rule. 

20(c)(1) Timing of Disclosures 

The Board proposes to require 

creditors to mail or deliver a notice of 

an interest rate adjustment for a closedend ARM at least 60, but no more than 

120, days before payment at a new level 

is due. This proposal is designed to 

provide borrowers with enough advance 

notice about an impending rate and 

payment change to enable them to 

refinance the loan if they cannot afford 

the adjusted payment. Even if 

consumers do not need or want to 

refinance a loan, they may need time to 

adjust other spending in order to afford 

higher mortgage loan payments. 

The Board issued the current rule 

requiring 25 days’ notice before a 

payment at a new level is due in 1987. 

Home Mortgage Disclosure Act (HMDA) 

data for the years 2004 through 2007 

suggest that a requirement to provide 

ARM adjustment 60, rather than 25, 

days before payment at a new level is 

due more closely reflects the time 

needed for consumers to refinance a 

loan.44 In each of those years, for firstlien refinance loans, the period between 

loan application and origination was 25 

days or less for 50 percent of the loans 

originated, 45 days or less for 75 percent 

of the loans originated, and 65 days or 

less for 90 percent of the loans 

originated. (These data do not include 

time needed to compare available 

refinance loans.) Requiring creditors to 

provide an ARM adjustment notice at 

least 60 days before payment at a new 

level is due would better enable 

consumers to arrange to make a higher 

payment (if applicable) without missing 

a payment or paying less than the 

amount due. 

The Board believes that a 60-day 

minimum notice requirement is 

consistent with many existing ARM 

agreements. For most ARMs, creditors 

base the calculation of interest rate 

changes on the value of an index 30 or 

45 days prior to the effective date of a 

rate change (calculation date). Creditors 

generally refer to the period from the 

calculation date to the effective date of 

the interest rate change as the ‘‘lookback period.’’ (Interest rate change dates 

tend to be the first of a month to 

correspond with payment due dates.) In 

turn, payment in the new amount is due 

on the first day of the month following 

the month in which interest accrued at 

the new rate. 

Thus, for most ARM loans creditors 

know what the new interest rate and 

payment will be well before payment at 

a new level is due, even assuming a 

week-long lag between publication of an 

index’s level and the creditor’s 

verification of that level. In fact, many 

creditors mail or deliver notice of an 

interest rate and payment change 60 or 

more days before payment at a new 

level is due. 

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However, some ARM agreements may 

provide for shorter look-back periods. 

For example, the calculation date for 

some ARM products is the first business 

day of the month that precedes the 

effective date of the interest rate change. 

The first day of that month may not be 

a business day, in which case the lookback period would be fewer than 30 

days. In addition, it takes time for index 

levels to be reported and for creditors to 

confirm the index level and prepare 

disclosures for delivery or mailing. 

Proposed § 226.20(c)(1) requires 

creditors to provide advance notice of 

an adjustment at least 60, but no more 

than 120, days before payment at a new 

level is due, not before the interest rate 

changes. Comment 20(c)–1 would be 

revised to reflect the increase in the 

required advance notice of a payment 

adjustment. Proposed comment 

20(c)(1)–1 provides that if an adjustablerate feature is added when an open-end 

credit account is converted to an 

adjustable-rate transaction, creditors 

must provide disclosures under 

§ 226.20(c)(1) where payments change 

due to conversion of a transaction 

subject to § 226.19(b) to a fixed-rate 

transaction. Because relevant payment 

changes under existing and proposed 

§ 226.20(c) are those due to interest 

changes, proposed comment 20(c)(1)–2 

clarifies that payment changes due to 

adjustments in property tax obligations 

or premiums for mortgage-related 

insurance do not trigger requirements to 

disclose interest rate and payment 

adjustments. 

The Board solicits comment on the 

operational changes creditors and 

servicers would need to make to provide 

disclosures at least 60 days before 

payment at a new level is due. Are there 

indices that are published at times that 

would make compliance with such a 

rule difficult? Are reported levels for 

particular indices difficult to confirm 

within a few days? The Board requests 

comment on whether requiring creditors 

to provide 45, rather than 60, days’ 

advance notice of a payment change 

better balance concerns about providing 

sufficient notice to consumers and 

sufficient time for creditors to verify 

reported indices and prepare 

disclosures. 

A look-back period of 45 days likely 

provides ample time for a creditor to 

determine a loan’s new interest rate and 

provide disclosures at least 60 days 

before payment at a new level is due, as 

discussed above. Are there reasons why 

a look-back period of forty-five days is 

not feasible for certain loan types for 

which a shorter look-back period is 

common, for example, subordinate-lien 

loans? Also, where an interest rate and 

payment adjustment is due to the 

conversion of an adjustable-rate 

mortgage to a fixed-rate mortgage under 

a written agreement, should creditors 

continue to be required to provide an 

adjustment notice at least 25, rather 

than at least 60, days before payment at 

a new level is due? 

Coverage. Section 226.20(c) currently 

applies to transactions subject to 

§ 226.19(b), which applies to closed-end 

ARMs secured by a consumer’s 

principal dwelling with a term greater 

than one year. The Board is proposing 

to apply § 226.19(b) to all closed-end 

ARMs secured by real property or a 

dwelling, as discussed above. Proposed 

§ 226.20(c) would apply to the same 

category of transactions. 

The Board recognizes that currently 

creditors need not provide ARM 

adjustment notices under existing 

§ 226.20(c) for a short-term transaction, 

such as a construction loan, with an 

adjustable rate. The Board solicits 

comment on whether a 60-day notice 

period is appropriate for such loans and 

if not, what period would be 

appropriate and still provide consumers 

sufficient notice of a payment change. 

Existing ARM loan agreements. The 

Board is aware that some ARM loan 

agreements may provide for a look-back 

period that is too short for the creditor 

to be able to provide an adjustment 

notice at least 60 days before payment 

at a new level is due. The Board seeks 

comment on the number or proportion 

of existing ARM loan agreements under 

which creditors or servicers could not 

comply with a minimum 60-day 

advance notice requirement. 

20(c)(2)(i) 

Where a payment change 

accompanies an interest rate change, 

proposed § 226.20(c)(2)(i) requires 

creditors to disclose a statement that 

changes are being made to the interest 

rate and the date such change is 

effective. Proposed § 226.20(c)(2)(i) also 

requires creditors to state that more 

detailed information is available in the 

loan agreements. Proposed 

§ 226.20(c)(5)(ii) requires that these 

disclosures appear before the other 

required disclosures, as discussed 

below. 

20(c)(2)(ii) 

Proposed § 226.20(c)(2)(ii) requires 

creditors to provide the following 

disclosures for covered loans in the 

form of a table: (1) The current and new 

interest rates; (2) if payments are 

interest-only or negatively amortizing, 

the amount of the current and new 

payment allocated to pay interest, 

principal, and property taxes and 

mortgage-related insurance, as 

applicable; and (3) the current and new 

periodic payment amounts and the due 

date for the first new payment. This 

content is substantially similar to the 

content of the ‘‘Payment Summary’’ 

table in the TILA disclosures provided 

before consummation for most types of 

ARMs. (Under proposed § 226.38, the 

‘‘Payment Summary’’ table for 

negatively amortizing ARMs differs 

from the ‘‘Payment Summary’’ table for 

other ARMs, as discussed below.) Under 

proposed § 226.20(c)(5)(iii), this table 

would have to contain headings, 

content, and format substantially similar 

to those in Appendix H–4(G), as 

discussed below. 

Currently, ARM adjustment notices 

need not state how payments are 

allocated among principal, interest, and 

escrow accounts. The Board believes 

that a table showing payment 

allocations would benefit consumers 

with interest-only or negatively 

amortizing loans. Participants in the 

Board’s consumer testing generally 

understood a sample form with a table 

showing the transition from interestonly payments to payments of both 

principal and interest. Further, all 

participants correctly identified the new 

payment and the due date of the first 

payment at the new level shown in the 

table. Almost all participants recognized 

the increase in the interest rate and 

amounts escrowed for taxes and 

property-related insurance and that part 

of the new payment would be allocated 

to pay principal. 

Comment 20(c)(1)–1 on disclosing 

‘‘current’’ and ‘‘prior’’ interest rates 

would be revised for clarity to refer 

instead to ‘‘current’’ and ‘‘new’’ interest 

rates. Under the proposed rule, 

§ 226.20(c)(3) contains content 

requirements for annual notice 

disclosures and § 226.20(c)(2) contains 

content requirements for payment 

change notices. Accordingly, 

commentary on disclosure where no 

payment change has occurred during a 

year would be removed from comment 

20(c)(1)–1. 

20(c)(2)(iii) 

Creditors currently must disclose the 

index values upon which the prior and 

new interest rates are based, under 

existing § 226.19(c)(2). Some consumer 

testing participants had difficulty 

understanding the relationship among 

an index, a margin, and an interest rate. 

Accordingly, proposed § 226.20(c)(2)(iii) 

substitutes a requirement that 

disclosures contain a description of the 

change in the index or formula for the 

disclosure required under existing 

§ 226.20(c)(2). For example, rather than 

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disclose that payments previously were 

based on a 1-year LIBOR rate of 3.75 and 

now would be based on a new rate of 

5.75, a creditor might disclose the 

following: ‘‘Your interest rate will 

change due to an increase in the 1-year 

LIBOR index.’’ Further, proposed 

§ 226.20(c)(2)(iii) requires creditors to 

disclose any application of previously 

foregone increases together with the 

description of the change in the index 

or formula. 

A simple statement of the occurrence 

that caused the interest rate and 

payment to change likely conveys a 

level of information suitable for most 

consumers’ needs. In consumer testing 

conducted for the Board, participants 

indicated that they found explanations 

of interest rates difficult to follow. Thus, 

providing more information would 

likely result in information overload. 

Consumers who prefer more 

information can review the loan 

agreement to determine the interaction 

between the interest rate and the index 

and margin or to learn more about the 

formula used to determine the interest 

rate. The loan agreement also will 

contain information about how the 

creditor may apply previously foregone 

interest. For these reasons, proposed 

§ 226.20(c)(2)(ii) does not require 

creditors to disclose the current and 

prior index values. Comment 20(c)(2)–1 

would be removed accordingly. 

Comment 20(c)(4)–1, which discusses 

the types of contractual effects 

§ 226.20(c) requires creditors to 

disclose—for example, effects on the 

loan term and balance—also would be 

removed under the proposed rule. 

Proposed comments 20(c)(2)(vi)–2, 

20(c)(2)(vii)–1, and 20(c)(3)(v)–1 reflect 

the removed commentary, however. 

20(c)(2)(iv) 

Existing § 226.20(c)(3) requires that a 

creditor disclose the extent to which the 

creditor has foregone any increase in the 

interest rate. This requirement would be 

redesignated as proposed 

§ 226.20(c)(2)(iv). Further, proposed 

§ 226.20(c)(iv) would require creditors 

to disclose the earliest date a creditor 

may apply foregone interest to future 

adjustments, subject to any rate caps. 

Proposed comment 20(c)(3)(iv)–1 states 

that creditors may rely on proposed 

comment 20(c)(2)(iv)–1 in determining 

to which transactions the requirement to 

disclose foregone interest applies and 

how to disclose such increases. 

Proposed comment 20(c)(3)(iv)–1 

clarifies that creditors need not disclose 

the earliest date the creditor may apply 

foregone interest in notices provided 

annually when no payment change 

occurs during a year. 

20(c)(2)(v) 

Proposed § 226.20(c)(2)(v) would 

require creditors to disclose limits on 

interest rate or payment increases at 

each adjustment, if any, and the 

maximum interest rate or payment over 

the life of the loan. This is consistent 

with the disclosure of rate change limits 

in the ‘‘More Information about Your 

Payments’’ section of the disclosures 

provided within three business days of 

application. See proposed § 226.38(e). 

20(c)(2)(vi) 

Currently, where the required loan 

payment is different from the payment 

disclosed under § 226.20(c)(4), 

§ 226.20(c)(5) requires a creditor to 

disclose the payment required to fully 

amortize the loan over the remainder of 

the loan term. This requirement would 

be redesignated as proposed 

§ 226.20(c)(2)(vi). Further, in all cases 

creditors would disclose a statement 

regarding whether or not part of the new 

payment will be allocated to pay the 

loan principal. This is consistent with 

the focus on the impact of loan 

payments on loan principal in the 

proposed new ‘‘Key Questions’’ 

disclosure in § 226.19(c) and the ‘‘Key 

Questions about Risk’’ section of the 

disclosure creditors provide within 

three business days of application in 

proposed § 226.38(d). 

Existing comment 20(c)(5)–1, on fully 

amortizing payments, would be 

redesignated as comment 20(c)(2)(vi)–1. 

The comment also would be revised for 

clarity and to update cross-references. 

Consistent with existing comment 

20(c)(4)–1, proposed comment 

20(c)(2)(vi)–2 clarifies that the creditor 

must disclose any change in the term or 

maturity of the loan if the change 

resulted from the rate adjustment. 

20(c)(2)(vii) 

Existing § 226.20(c)(4) requires 

creditors to disclose the loan balance. 

This requirement would be redesignated 

as proposed § 226.20(c)(2)(vii) and 

would require creditors to disclose the 

loan balance as of the effective date of 

the interest rate adjustment. Proposed 

comment 20(c)(2)(vii)–1 clarifies that 

the balance required to be disclosed is 

the balance on which the new adjusted 

payment is based. This is consistent 

with existing comment 20(c)(4)–1. 

20(c)(3) Content of Annual Interest Rate 

Notice 

Existing § 226.20(c) requires creditors 

to provide ARM adjustment notices at 

least once each year during which an 

interest rate adjustment is implemented 

without an accompanying payment 

change. This requirement would be 

redesignated as proposed § 226.20(c)(3). 

Currently, § 226.20(c) contains a single 

list of required disclosures creditors 

must provide as applicable, in a 

payment change notice and an annual 

notice of interest rate changes without 

payment changes. Proposed 

§ 226.20(c)(3) specifies the disclosures 

that are applicable for purposes of 

annual notices. 

20(c)(3)(i) 

Under proposed § 226.20(c)(3)(i), 

where no payment adjustment has been 

made during a year, the creditor must 

disclose that the interest rate on the loan 

has changed without changing the 

payments the consumer must make. 

Further, proposed § 226.20(c)(3)(i) 

requires creditors to disclose the 

specific time period for which the 

annual notice discloses interest rates 

that were not accompanied by payment 

changes. Proposed § 226.20(c)(5)(ii) 

requires that this disclosure appear 

before the other required disclosures, as 

discussed below. 

20(c)(3)(ii) 

Under proposed § 226.20(c)(3)(ii), a 

creditor must disclose the highest and 

lowest interest rates applied during the 

year in which no payment change has 

accompanied interest rate changes. 

Creditors would not disclose all interest 

rates applied to a transaction if the 

payment has not changed. By contrast, 

existing comment 20(c)–1 provides that 

creditors either may disclose all interest 

rates that applied or the highest and 

lowest rates. The Board believes that a 

simple and clear disclosure of the 

highest and lowest interest rates applied 

better conveys to consumers the impact 

of interest rate changes than does a list 

of all of the interest rates applied. This 

is especially true where interest rates 

change more frequently than monthly. 

20(c)(3)(iii) 

Creditors disclose the extent to which 

the creditor has foregone any increase in 

the interest rate under existing 

§ 226.20(c)(3). This requirement would 

be contained in proposed 

§ 226.20(c)(3)(iii) for notices where 

payment changes do not accompany 

interest rate changes made during a 

year. 

20(c)(3)(iv) 

Proposed § 226.20(c)(3)(iv) requires 

creditors to disclose the maximum 

interest rate that may apply over the life 

of the loan. This is consistent with the 

disclosure of rate change limits in the 

‘‘More Information about Your 

Payments’’ section of the disclosures 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43273 

provided within three business days of 

application in proposed § 226.38(e). 

20(c)(3)(v) 

Existing § 226.20(c)(4) requires 

creditors to disclose the loan balance. 

Under the proposal, this requirement 

would be contained in proposed 

§ 226.20(c)(3)(v) for purposes of annual 

notices where payment changes do not 

accompany interest rate changes. 

Creditors would disclose the loan 

balance as of the last date of the year 

covered by the disclosure. Proposed 

comment 20(c)(3)(v)–1 clarifies that the 

balance required to be disclosed is the 

balance on which the new adjusted 

payment is based. This is consistent 

with existing comment 20(c)(4)–1. 

20(c)(4) Additional Information 

Proposed § 226.20(c)(4) requires that 

ARM adjustment notices creditors 

provide information about prepayment 

penalties, contacting the creditor, and 

locating housing counseling resources. 

Proposed § 226.20(c)(5)(ii) requires that 

these additional disclosures be located 

directly below the required interest rate 

disclosures, as discussed below. 

20(c)(4)(i) 

Proposed § 226.20(c)(4)(i) requires 

creditors to disclose the last date the 

creditor may impose a penalty if the 

consumer prepays the obligation in full 

and the amount of the maximum 

penalty possible before that date, if 

applicable. Under proposed 

§ 226.20(c)(4)(i), if an ARM has a 

prepayment penalty, the creditor must 

disclose the required information 

whether or not a payment change 

accompanies the interest rate change. 

The Board believes that disclosures 

regarding a prepayment penalty would 

assist consumers in determining when 

to seek a refinance loan. When 

presented with a sample ARM 

adjustment notice for a loan with a 

prepayment penalty, almost all 

consumer testing participants 

recognized that a prepayment penalty 

would apply if they obtained a refinance 

loan before a specified date. 

Proposed § 226.20(c)(4)(i) provides 

that the creditor shall disclose the 

maximum prepayment penalty possible 

if the consumer prepays in full between 

the date the creditor delivers or mails 

the ARM adjustment notice and the last 

day the creditor may impose the 

penalty. The Board requests comment 

on whether creditors should determine 

the maximum prepayment penalty 

during some other period, for example 

between the date the creditor prepares 

the ARM adjustment notice and the last 

day the creditor may impose the 

penalty. 

20(c)(4)(ii) 

Proposed § 226.20(c)(4)(ii) requires 

creditors to disclose a phone number to 

call for additional information about the 

consumer’s loan. Creditors must provide 

this information whether or not a 

payment change accompanies an 

interest rate change, under the proposed 

rule. Most consumer testing participants 

responded positively to tested 

disclosures stating how to contact their 

lender with questions and stated that 

they would call their lender if they 

realized they were unable to afford 

higher payments on an ARM. 

20(c)(4)(iii) 

Proposed § 226.20(c)(4)(iii) requires 

creditors to disclose a phone number 

and an Internet Web site consumers may 

use to obtain a list of HUD-licensed 

housing counselors. The proposed rule 

requires creditors to provide this 

disclosure whether or not a payment 

change accompanies an interest rate 

change. Most consumer testing 

participants thought that information 

about how to locate a HUD-licensed 

housing counselor would be useful to 

consumers. Some said that they would 

use the information themselves if they 

had difficulty affording payments. 

20(c)(5) Format of Disclosures 

20(c)(5)(i) 

Proposed § 226.20(c)(5)(i) requires 

that the heading, content, and format of 

the disclosures required by § 226.20(c) 

be substantially similar to the heading, 

content, and format of the model form 

in Appendix H–4(G), where an interest 

rate adjustment is accompanied by a 

payment change, or the model form in 

Appendix H–4(K), where a creditor 

provides an annual notice of interest 

rate adjustments without an 

accompanying payment change. 

Proposed § 226.20(c)(5)(i) also requires 

that the disclosures required by 

§ 226.20(c) be placed in a prominent 

location. (Comment 37(d)–1 states that 

disclosures meet the prominent location 

standard if they are located on the first 

page and on the front side of the 

disclosure statement.) 

Further, under proposed 

§ 226.20(c)(5)(i) the interest rate 

disclosures required by § 226.20(c)(2) 

(where a payment change accompanies 

an interest rate change) or § 226.20(c)(3) 

(where no payment change occurs 

during a year) must be grouped together 

with the additional disclosures on 

prepayment penalties, contacting the 

creditor or servicer for loan information, 

and locating housing counseling 

resources required by proposed 

§ 226.20(c)(4). These grouped 

disclosures must be segregated from 

everything else. 

20(c)(5)(ii) 

Under proposed § 226.20(c)(5)(ii), the 

statement that changes are being made 

to the interest rate and payments (under 

proposed § 226.20(c)(2)(i)) or that the 

interest rate has changed without 

accompanying payments changes (under 

proposed § 226.20(c)(3)(i)) must precede 

the other required disclosures. The 

additional disclosures on information 

on prepayment penalties, contacting the 

creditor, and housing counseling 

resources required by proposed 

§ 226.20(c)(4) must follow the interest 

rate disclosures, under proposed 

§ 226.20(c)(5)(ii). 

20(c)(5)(iii) 

Under proposed § 226.20(c)(5)(iii), 

where a payment change accompanies 

an interest rate adjustment, the interest 

rate and payment change disclosures 

required by proposed § 226.20(c)(2)(ii) 

must contain headings, content, and 

format substantially similar to those in 

the table contained in Appendix H– 

4(G). The textual disclosures required 

by proposed § 226.20(c)(2)(iii) through 

(vii) must be located directly below the 

table. Further, the format requirements 

in § 226.37 apply to ARM adjustment 

notices, as discussed below. 

Regulations of other agencies. 

Footnote 45c to § 226.20(c) currently 

states that creditors may substitute 

information provided in accordance 

with variable-rate subsequent disclosure 

regulations of other federal agencies for 

the disclosure required by § 226.20(c). 

The Board adopted footnote 45c in 

1987, a time when OCC, FHLBB, and 

HUD regulations contained subsequent 

disclosure requirements for ARMs. See 

52 FR 48665, 48671; Dec. 24, 1987. The 

proposed rule would remove footnote 

45c. No comprehensive disclosure 

requirements for variable-rate mortgage 

transactions presently are in effect 

under the regulations of the other 

Federal financial institution supervisory 

agencies, as discussed above. 

20(d) Periodic Statement for Negative 

Amortization Loans 

The Board proposes to require 

creditors to provide periodic statements 

for payment option ARMs with a 

negative amortization feature that are 

secured by real property or a dwelling. 

Such ARMs permit consumers to choose 

the amount paid (above a specified 

minimum) each period. In 2006, the 

Board, the OCC, the OTS, the FDIC, and 

the NCUA expressed concerns about 

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45The Federal financial institution supervisory 

agencies (the Board, the OCC, the OTS, the FDIC, 

and the NCUA (collectively, the agencies)) 

expressed concerns about consumer understanding 

of how such loans function and of the effect of 

negative amortization on a loan’s balance in the 

Interagency Guidance on Nontraditional Mortgage 

Product Risks issued in 2006. 71 FR 58609; October 

4, 2006. The agencies issued related sample 

illustrations that include a payment summary table 

showing the impact of various payment options on 

the loan balance that creditors may include with 

periodic statements for payment option ARMs. 72 

FR 31825, 31831; Jun. 8, 2007. Proposed § 226.20(d) 

requires creditors to provide periodic statements 

that disclose payment options in the form of a table. 

The proposed model table is similar to the summary 

table the agencies issued but has been revised based 

on consumer testing. 

consumer understanding of how such 

loans function and of the effect of 

negative amortization on a loan’s 

balance in the Interagency Guidance on 

Nontraditional Mortgage Product Risks 

issued in 2006. 71 FR 58609; October 4, 

2006. The agencies issued related 

sample illustrations that include a 

payment summary table showing the 

impact of various payment options on 

the loan balance that creditors may 

include with periodic statements for 

payment option ARMs. 72 FR 31825, 

31831; Jun. 8, 2007. The illustrations 

were not consumer-tested. The Board’s 

proposed model table showing payment 

options is similar to the summary table 

the agencies issued but has been revised 

based on consumer testing. 

Payment option ARMs are complex 

products. Most participants in the 

Board’s consumer testing were 

unfamiliar with such loans and with 

negative amortization generally. These 

loans present consumers with choices 

each month, and how the consumer 

exercises his or her choice may result in 

negative amortization and much higher 

payments when the consumer must 

begin to make fully amortizing 

payments or a balloon payment. The 

Board believes that consumers should 

be informed of the consequences of 

making minimum payments on such a 

loan. Thus, the Board proposes to 

require creditors to provide a periodic 

statement that describes a consumer’s 

payment options and the effects of 

making payments in those amounts.45

20(d)(1) Timing and Content of 

Disclosures 

For closed-end transactions secured 

by real property or a dwelling that 

permit the consumer to select among 

multiple payment options that include 

an option that results in negative 

amortization, proposed § 226.20(d) 

requires creditors to provide a periodic 

statement that discloses payment 

options not later than fifteen business 

days before a payment is due. Where 

payment at a new level is due, however, 

proposed § 226.20(c) requires creditors 

to provide an ARM adjustment notice 

no later than 60 days beforehand, as 

discussed above. 

20(d)(1)(i) Payment 

Proposed § 226.20(d)(1)(i) would 

require creditors to disclose, based on 

the interest rate in effect at the time the 

disclosure is made, the payment amount 

required to: (1) Pay off the loan balance 

in full by the end of the term through 

regular periodic payments, without a 

balloon payment; (2) prevent negative 

amortization, if the legal obligation 

explicitly permits the consumer to elect 

to pay interest only without paying 

principal; and (3) pay the minimum 

payment required under the legal 

obligation. Under the proposed rule, 

creditors would provide each disclosure 

as applicable. For example, if the terms 

of the loan obligation did not provide 

the option for consumers to make 

interest-only payments, creditors would 

disclose only the required minimum 

payment and the fully amortizing 

payment. 

In consumer testing conducted for the 

Board, participants generally 

understood the options presented in the 

table. Most were able to understand that 

making the minimum required payment 

would cause their loan balance to grow. 

They also understood that making a 

fully amortizing payment would be a 

safe choice and would pay their loan 

balance off over time. 

Proposed comment 20(d)(1)–1 

clarifies that creditors must provide a 

summary table under § 226.20(d) for 

covered loans that allow a consumer to 

choose to make a payment that results 

in negative amortization even if the 

initial payments required do not 

negatively amortize the loan. Proposed 

comment 20(d)(1)–1 states that a 

payment summary table need only 

contain those disclosures that apply to 

payment options available to a 

consumer, however. For example, the 

proposed comment states that if a 

negatively amortizing loan recasts and a 

consumer must begin to make fully 

amortizing payments, the payment 

summary table need not disclose 

payments other than the fully 

amortizing payment. 

Proposed comment 20(d)(1)–2 states 

that creditors may base all disclosures 

on the assumption that payments will 

be made on time and in the amounts 

required by the terms of the legal 

obligation, disregarding any possible 

inaccuracies resulting from consumers’ 

payment patterns. This is consistent 

with existing comment 17(c)(2)(i)–3 and 

proposed revisions to comment 

17(c)(1)–1, discussed above. Proposed 

comment 20(d)(1)–2 clarifies, however, 

that creditors may not base disclosures 

for loans with a negatively amortizing 

feature on the fully amortizing, interestonly, or other payment unless that 

payment is the amount the consumer is 

required to pay under the legal 

obligation. Finally, proposed comment 

20(d)(1)(i)–1 states that creditors may 

rely on comment 38(c)(5)–1 to 

determine whether a payment is a 

regular periodic payment or a balloon 

payment. 

20(d)(1)(ii) Effects 

Proposed § 226.20(d)(1)(ii) requires 

creditors to disclose the effects of 

making payments in the amounts 

required to be disclosed under proposed 

§ 226.20(d). Appendix H¥4(L) contains 

a proposed model form with accessible 

language on fully amortizing payments, 

interest-only payments, and negatively 

amortizing minimum payments. First, 

the model form states that a fully 

amortizing payment will cover all the 

interest owed in a particular payment 

plus some principal and decrease the 

loan balance and that if the consumer 

regularly makes the fully amortizing 

payment the consumer will pay off the 

loan on schedule. Second, the model 

form states that an interest-only 

payment will cover all the interest owed 

in a particular payment but none of the 

principal, that the consumer’s balance 

will remain the same, and that if the 

consumer regularly makes interest-only 

payments the consumer will have to 

make larger payments as early as a 

specified date. Third, the model form 

states that a minimum payment will 

cover only part of the interest owed in 

a particular payment and result in a 

specified amount of unpaid interest 

being added to the loan balance and that 

if the consumer makes a minimum 

payment the consumer in effect will be 

borrowing more money and will lose 

home equity. Further, the model form 

states that if a consumer regularly makes 

minimum payments the consumer will 

have to make significantly larger 

payments as early as a specified date. 

Proposed comment 20(d)(1)(ii)–1 

states that the disclosures required by 

§ 226.20(d) must be consistent with the 

terms of the legal obligation. For 

example, the proposed comment 

clarifies that disclosures may not state 

that making fully amortizing payments 

on an interest-only loan will reduce a 

consumer’s loan balance if the creditor 

will not apply payments that exceed the 

interest-only payment to principal. 

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46See, e.g., Consumer Credit Industry 

Association, Fact Book of Credit-Related Insurance 

at 1 (2007) (finding that the 2007 volume of 

creditor-placed property insurance premiums was 

over twice the 2002 amount). 

47See State of Wisconsin, Office of the 

Commissioner of Insurance, ‘‘Force-Placed’’ 

Insurance Surprises Those Who Let Policies Lapse 

(May 30, 2002) available at http://oci.wi.gov/ 

pressrel/0502home.htm (‘‘Many people don’t 

realize that if they let that [homeowner’s] insurance 

lapse, banks and other lenders can legally re-insure 

their home loan by buying insurance to replace it 

and making the homebuyer pay for it.’’). 

48See, e.g., United States of America v. Fairbanks 

Capital Corp., Civ. Action No. 03–12219–DPW, 

Complaint at ¶ 17 (D. Mass. Nov. 12, 2003) (finding 

that Fairbanks improperly obtained property 

insurance when it knew or should have known that 

borrowers already had insurance); Ocwen Federal 

Bank FSB, OTS Docket No. 04592, Supervisory 

Agreement, OTS Docket No. 04592 (Apr. 19, 2004) 

(requiring the bank to take reasonable actions to 

determine whether appropriate hazard insurance is 

already in place before it obtained creditor-placed 

property insurance). 

49See, e.g., Webb, et al. v. Chase Manhattan 

Mortgage Corp., No. 2:05–CV–0548, 2008 U.S. Dist. 

LEXIS 42559, at *15 (S.D. Ohio May 28, 2008) 

(finding that the creditor-placed property insurance 

premium was four times higher than the plaintiff’s 

original premium and did not cover personal 

property or provide coverage for personal liability 

or medical payments to others). 

50Mich. Comp. Laws § 500.1625 (2009). 

51N.M. Admin. Code § 13.18.3.17 (2009). 

52Fannie Mae Single-Family Servicing Guide, 

Part II, Ch. 6 Lender-Placed Property Insurance 

(2005). 

53Freddie Mac Single-Family Seller/Servicer 

Guide, Vol. 2, § 58.9 Special Insurance 

Requirements and Changes in Insurance 

Requirements (2007). 

20(d)(1)(iii) Unpaid Interest 

Proposed § 226.20(d)(1)(iii) requires 

creditors to disclose the amount that 

will be added to the loan balance due 

to unpaid interest, if the consumer 

elects to make a payment that results in 

negative amortization. 

20(d)(2) Format of Disclosures 

Proposed § 226.20(d)(2)(i) requires 

that periodic statements for loans with 

a negative amortization feature contain 

payment disclosures with content 

substantially similar to the content of 

Form H–4(L) in Appendix H. Further, 

the proposed provision requires 

creditors to make payment disclosures 

in a payment summary table with 

headings, content, and format 

substantially similar to Form H–4(L). 

Proposed § 226.20(d)(2)(ii) requires that 

disclosures be placed in a prominent 

location (that is, located on the first 

page and on the front side of the 

disclosure statement, as clarified by 

proposed comment 37(d)(1)–1), with 

one exception. Under proposed 

§ 226.20(d)(2)(ii), if the payment 

disclosures required by § 226.20(d) are 

made together with the ARM adjustment 

disclosures required by § 226.20(c), the 

payment disclosures must be located 

directly below the ARM adjustment 

disclosures. 

Proposed § 226.20(d)(2)(iii) requires 

that the table required by 

§ 226.20(d)(2)(i) contain only the 

information required by § 226.20(d)(1). 

Other information may be presented 

with the table under the proposed rule, 

provided that such information appears 

outside of the required table. 

Alternatives not proposed. The Board 

is proposing to apply the requirement to 

provide periodic statements that contain 

a payment summary table, for payment 

option ARMs with a negative 

amortization feature that are secured by 

real property or a dwelling. The Board 

considered requiring periodic 

statements for all loans secured by real 

property or a dwelling. The Board is not 

proposing such a requirement, however. 

It is not clear that a monthly statement 

on a fixed-rate mortgage or an ARM 

without payment options would provide 

sufficient benefits to consumers to offset 

the costs of providing statements. For 

these loans, the consumer cannot 

exercise any choice in payments. 

Moreover, creditors must give borrowers 

advance notice each time the required 

payment for a variable-rate transaction 

adjusts, under § 226.20(c), as discussed 

above. Servicers send borrowers with 

escrow accounts annual statements 

under RESPA. Some servicers send 

additional escrow notices more 

frequently, for example quarterly. Those 

statements assist consumers in 

monitoring account changes related to 

changes in taxes or property insurance 

costs. 

20(e) Creditor-Placed Property 

Insurance 

Creditor-placed property insurance 

requirements. The security instrument 

or promissory note typically contains a 

requirement that the consumer maintain 

insurance on the property securing the 

loan, such as the consumer’s dwelling 

or automobile. If the consumer fails to 

maintain the insurance or the insurance 

is cancelled, the credit agreement 

typically authorizes the creditor to 

obtain such insurance at the consumer’s 

expense. The premium becomes 

additional debt of the consumer. This 

practice is known as ‘‘creditor-placed 

property insurance.’’ 

Industry reports indicate that the 

volume of creditor-placed property 

insurance premiums has increased 

significantly in the past few years.46

Consumers struggling financially may 

fail to pay required property insurance 

premiums unaware that the creditor has 

the right to obtain such insurance on 

their behalf and add the premiums to 

the outstanding loan balance.47 In some 

instances, creditors have improperly 

obtained property insurance when they 

arguably knew or should have known 

that the consumer already had 

insurance.48 Generally, creditor-placed 

insurance is more costly and provides 

less coverage than insurance that a 

consumer purchases through an 

insurance agent.49

Currently, there is no provision in 

Regulation Z or federal law that requires 

the creditor to provide notice of the cost 

to the consumer before charging the 

consumer for creditor-placed property 

insurance. It appears that only a few 

states require creditors to provide 

notice, and these requirements differ. 

Under Michigan law, for example, a 

creditor may not impose charges on a 

debtor for creditor-placed property 

insurance unless the creditor provides 

two notices and allows the borrower a 

total of 30 days to provide evidence of 

insurance.50 New Mexico law, on the 

other hand, simply requires the insurer 

to provide notice to the debtor within 15 

days after the placement or renewal of 

creditor-placed property insurance.51

The majority of states have no notice 

requirement. The servicing guidelines of 

Fannie Mae and Freddie Mac also vary 

greatly. Fannie Mae’s guidelines state 

that the servicer ‘‘should’’ provide the 

borrower with at least one written 

notice and a total of at least 60 days to 

provide evidence of insurance before 

charging for creditor-placed property 

insurance.52 Freddie Mac’s guidelines 

do not require the servicer to provide 

notice to the borrower.53

In order to ensure that consumers are 

informed of the cost of creditor-placed 

property insurance, the Board proposes 

to use its authority under TILA Section 

105(a), 15 U.S.C. 1604(a), to add 

§ 226.20(e) to require the creditor to 

provide notice of the cost and coverage 

of creditor-placed property insurance 

before charging the consumer for such 

insurance. In addition, proposed 

§ 226.20(e)(4) would require the creditor 

to provide the consumer with evidence 

of creditor-placed property insurance 

within 15 days of imposing a charge for 

such insurance. Proposed § 226.20(e)(1) 

would define ‘‘creditor-placed property 

insurance’’ as ‘‘property insurance 

coverage obtained by the creditor when 

the property insurance required by the 

credit agreement has lapsed.’’ Section 

226.20(e) would apply to secured 

closed-end loans, including mortgage 

and automobile loans. The Board 

solicits comment as to whether this rule 

should also apply to HELOCs. 

Proposed § 226.20(e)(2) contains three 

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54See Ark. Code Ann. § 23–101–113 (2008); 

Mich. Comp. Laws § 500.1625 (2009); Miss. Code 

Ann. § 83–54–25 (2008); Tenn. Code Ann. § 56–49– 

113 (2009). 

55Fannie Mae Single-Family Servicing Guide, 

Part II, Ch. 6 Lender-Placed Property Insurance 

(2005). 

56U.S. Census Bureau, Language Use and 

English-Speaking Ability: 2000 at 2 (Oct. 2003), 

available at http://www.census.gov/prod/2003pubs/ 

c2kbr-29.pdf. 

57See, e.g., In the Matter of First Mariner Bank, 

Baltimore, Maryland, FDIC–07–285b, FDIC–08– 

placed property insurance. First, 

proposed § 226.20(e)(2)(i) would require 

the creditor to make a reasonable 

determination that the required property 

insurance had lapsed. Second, proposed 

§ 226.20(e)(2)(ii) would require the 

creditor to mail or deliver to the 

consumer a written notice containing 

the information required by the 

proposed rule at least 45 days before a 

charge is imposed on the consumer for 

the creditor-placed property insurance. 

Finally, proposed § 226.20(e)(2)(iii) 

would permit the creditor to charge the 

consumer if, during the 45-day notice 

period, the consumer did not provide 

the creditor with evidence of adequate 

property insurance. 

Notice period timing and charges. 

Under the proposed rule, the creditor 

would have to mail or deliver to the 

consumer the required written notice at 

least 45 days before charging the 

consumer for the cost of creditor-placed 

property insurance. This 45-day notice 

period is consistent with the 45-day 

notice period required by the Flood 

Disaster Protection Act of 1973 Section 

102(e), 42 U.S.C. 4012a(e), and 

represents the midpoint between State 

law 30-day notice periods 54 and the 60- 

day Fannie Mae Servicing Guide 

recommendation.55 The Board notes 

that the provision in the Fannie Mae 

Servicing Guide is stated as a 

recommendation, but not a requirement. 

The Board believes that a 45-day notice 

period would allow the consumer 

reasonable time to shop for and provide 

evidence of insurance. The Board 

recognizes that it may take several days 

for the consumer to receive a notice sent 

by mail, but the consumer would still 

have at least one calendar month in 

which to shop for and purchase 

property insurance. Comment is 

solicited, however, on whether a 

different time period would better serve 

the needs of consumers and creditors. 

Proposed comment 20(e)–1 would 

make clear that if the creditor complies 

with § 226.20(e), the creditor could 

charge the consumer for creditor-placed 

insurance as of the 46th day after 

sending the notice to the consumer. For 

example, a creditor that mails the 

required notice on January 2, 2011, may 

begin to charge the consumer for the 

cost of the creditor-placed property 

insurance on February 18, 2011. 

Proposed comment 20(e)–1 would also 

clarify that the creditor may charge the 

consumer for the cost of any required 

property insurance obtained during the 

45-day notice period if such charge is 

not prohibited by applicable State or 

other law. 

Content and format of notice. 

Proposed § 226.20(e)(3) would require 

the creditor to provide the written 

notice clearly and conspicuously. 

Proposed § 226.20(e)(3)(i) would require 

that the notice contain the creditor’s 

name and contact information, the loan 

number, and the address or description 

of the property securing the credit 

transaction. The Board solicits comment 

as to whether the creditor should be 

required to establish a local or toll-free 

telephone number for the consumer to 

contact the creditor. 

Under proposed § 226.20(e)(ii)–(viii), 

the notice would also need to contain 

the following statements: (1) That the 

consumer is obligated to maintain 

insurance on the property securing the 

credit transaction; (2) that the required 

property insurance has lapsed; (3) that 

the creditor is authorized to obtain the 

property insurance on the consumer’s 

behalf; (4) the date the creditor can 

charge the consumer for the cost of the 

creditor-placed property insurance; (5) 

how the consumer may provide 

evidence of property insurance; (6) the 

cost of the creditor-placed property 

insurance stated as an annual premium, 

and that this premium is likely 

significantly higher than a premium for 

property insurance purchased by the 

consumer; and (7) that the creditorplaced insurance may not provide as 

much coverage as homeowner’s 

insurance. The Board solicits comment 

on whether the notice should also 

contain statements, if applicable, that 

the creditor will receive compensation 

for obtaining creditor-placed property 

insurance and that the creditor will 

establish an escrow account to pay for 

the creditor-placed insurance premium. 

Although such statements would be 

informative, the Board is concerned that 

providing these additional disclosures 

could result in information overload for 

the consumer. A Model Clause is 

proposed at Appendix H–18. 

The Board proposes to use its 

authority under TILA Section 105(a), 15 

U.S.C. 1604(a), to add § 226.20(e) to 

require the creditor to provide notice 

before charging the consumer for the 

cost of creditor-placed property 

insurance. TILA Section 105(a), 15 

U.S.C. 1604(a), authorizes the Board to 

prescribe regulations to carry out the 

purposes of the act. TILA’s purpose 

includes promoting ‘‘the informed use 

of credit,’’ which ‘‘results from an 

awareness of the cost thereof by 

consumers.’’ TILA Section 102(a), 15 

U.S.C. 1601(a). Currently, few 

consumers are aware of the cost or 

coverage of creditor-placed property 

insurance, or that the premiums become 

additional debt of the consumer. The 

Board believes that this proposed rule 

would inform consumers of the cost and 

coverage of the creditor-placed property 

insurance and avoid the uninformed use 

of credit. In addition, this proposed rule 

would not prohibit the creditor from 

charging for creditor-placed property 

insurance, but would simply delay the 

charge until the consumer has been 

provided sufficient notice of the cost 

and sufficient time to shop for his or her 

own homeowner’s insurance. 

Section 226.25 Record Retention 

25(a) General Rule 

Section 226.25(a) provides that 

creditors must retain records to 

evidence compliance with Regulation Z 

for two years. As discussed in detail 

below, the Board is proposing to add a 

new comment to § 226.25(a) to provide 

guidance on record retention 

requirements relating to proposed 

§ 226.36(d)(1), which would prohibit 

any person from paying compensation 

to a loan originator based on any of the 

terms or conditions of the transaction. 

Proposed comment 25(a)–5 would 

provide that, to evidence compliance 

with proposed § 226.36(d)(1), a creditor 

must retain for each covered transaction 

a record of the agreement between it and 

the loan originator that governs the 

originator’s compensation and a record 

of the amount of compensation actually 

paid to the originator in connection 

with the transaction. 

Section 226.27 Language of 

Disclosures 

Currently, § 226.27, permits TILA 

disclosures in a language other than 

English as long as the disclosures are 

provided in English upon the 

consumer’s request. Many consumers do 

not speak English or speak English as a 

second language. According to the 2000 

Census, at least 18% of the population 

(47 million people) speak a language 

other than English at home.56 To protect 

non-native English speakers from fraud 

and discrimination in credit 

transactions, recent enforcement actions 

have required that creditors or mortgage 

brokers provide translations of 

presentations, disclosures, or 

documents.57 Moreover, several states 

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358k, Consent Agreement at 5 (April 22, 2009) 

(alleging that the bank discriminated against 

Hispanics, African-Americans, and women by 

charging them higher prices for residential mortgage 

loans and requiring the bank to provide financial 

literacy courses in English and Spanish); Fed. Trade 

Comm’n v. MortgagesParaHispanos.com and Daniel 

Moises Goldberg, Civ. Action No. 4:06cv19, Final 

Judgment and Order at 5 (E.D. Tex. Sept. 27, 2006) 

(alleging that the mortgage broker misrepresented 

the mortgage terms to Spanish-speaking consumers 

and requiring the broker to provide a disclosure and 

consumer education brochure in Spanish to any 

consumer if they have reason to believe that the 

consumer’s primary language is Spanish); In re 

Ameriquest Mortgage Co., et al., Settlement 

Agreement at 17–18 (Jan. 23, 2006) (requiring 

documents and disclosures to be translated to 

Spanish or to any language in which Ameriquest 

advertises). 

58Ariz. Rev. Stat. § 6–631 (requiring a consumer 

loan lender to provide a notice in English and 

Spanish that the consumer may request the TILA 

disclosure in Spanish); Cal. Civ. Code § 1632 

(requiring any person engaged in a trade or business 

who negotiates certain transactions primarily in 

Spanish, Chinese, Tagalog, Vietnamese, or Korean 

to deliver a translation of the contract in the 

language in which the contract was negotiated); DC 

Code Ann. § 26–1113 (requiring a post-application 

mortgage disclosure to be provided in the language 

of the mortgage lender’s presentation to the 

borrower); 815 Ill. Comp. Stat. Ann. 122/2–20 

(requiring payday lenders to provide consumers 

with a written disclosure in English and in the 

language in which the loan was negotiated); Tex. 

Fin. Code Ann. § 341.502 (requiring that the TILA 

disclosure be provided in Spanish if the terms for 

the consumer loan, retail installment transaction, or 

home equity loan were negotiated in Spanish). 

59News Release, Fannie Mae and Freddie Mac 

Offer Mortgage Documents in Spanish to Aid 

Lenders and Industry Partners with Helping More 

Hispanics Become Homeowners; Collaborative 

Effort Aimed at Helping Close the Hispanic and 

Overall Minority Homeownership Gaps (Sept. 25, 

2006), available at http://www.fanniemae.com/ 

newsreleases/2006/ 

3803.jhtml?p=Media&s=News+Releases. 

60Credit CARD Act of 2009, Public Law 111–24, 

§ 513, 123 Stat. 1734, 1765 (2009). 

have enacted laws to require credit 

disclosures or documents in Spanish or 

other foreign languages.58 In 2006, 

Fannie Mae and Freddie Mac 

announced the availability of nonexecutable Spanish translations of the 

Fannie Mae/Freddie Mac Uniform 

Instrument to help the residential 

mortgage industry better serve Spanishspeaking consumers.59 Finally, Congress 

recently asked the General Accounting 

Office to conduct a study examining the 

relationship between fluency in English 

and financial literacy, and the extent, if 

any, to which individuals whose native 

language is not English are impeded in 

the conduct of their financial affairs.60

Consumer advocates are concerned 

that consumers who do not speak 

English or speak English as a second 

language may be more susceptible to 

abusive credit practices or offered less 

favorable credit terms or products 

because they are not provided with 

disclosures they can understand. 

Industry representatives, on the other 

hand, raise concerns about the cost and 

burden of translating documents into 

multiple foreign languages and the 

potential liability for inaccurate 

translations. Both consumer advocates 

and industry representatives question 

whether consumers who speak minority 

languages will still have access to credit 

if creditors have to bear the cost and 

liability for translating documents into 

little-known languages. Creditors may 

be reluctant to engage in outreach to 

consumers who speak those languages. 

The Board solicits comment on 

whether it should use its rulemaking 

authority to require creditors to provide 

translations of credit disclosures. 

Comment is requested on whether the 

failure to provide credit disclosure 

translations is unfair or deceptive, or 

impedes the informed use of credit. 

Comment is also requested on potential 

litigation issues, such as whether a 

translation would be admissible into 

evidence or whether an inaccurate 

translation would toll TILA’s statute of 

limitations or extend the right of 

rescission. Finally, comment is 

requested on the effectiveness of State 

laws that require translations of 

disclosures or documents and whether 

the Board should adopt similar 

regulations. 

The Board requests comment on the 

following translation issues: 

• What is the scope of the problem? 

That is, approximately how many 

consumers do not understand TILA 

disclosures because of language 

barriers? 

• Should creditors be required to 

provide consumers with translations of 

required TILA disclosures? If such 

translations were required, what should 

be the trigger for such disclosures (e.g., 

the language of the negotiation, the 

language of the creditor’s presentation, 

the language of the creditor’s 

advertisement, a consumer request)? 

• Should there be an exception for 

consumers who are accompanied by an 

interpreter? 

• Would a translation requirement 

negatively affect consumers and the 

type and terms of credit offered because 

creditors would be reluctant to risk 

liability for engaging in transactions in 

a language other than English? 

Finally, the Board solicits comment 

on the following coverage issues: 

• Should a translation requirement 

apply only to mortgages loans, or also to 

other types of credit products, such as 

auto loans or credit cards? 

• Should a translation requirement 

apply only to the TILA disclosures 

provided before or at consummation, or 

to any credit disclosures or documents 

provided before, at, or subsequent to 

consummation? 

• Should a translation requirement 

apply to Web sites that provide early 

TILA disclosures? 

• Should a translation requirement 

apply only to one or a few languages, or 

should it apply to any foreign language? 

Section 226.32 Requirements for 

Certain Closed-End Mortgages 

32(b) Definitions 

32(b)(1) 

Section 226.32(b)(1) defines the 

‘‘point and fees’’ used to determine 

whether a loan is a HOEPA loan. That 

definition consists of four elements: (i) 

All items required to be disclosed under 

§ 226.4(a) and 226.4(b), except interest 

or the time-price differential; (ii) All 

compensation paid to mortgage brokers; 

(iii) All items listed in § 226.4(c)(7) 

(other than amounts held for future 

payment of taxes) unless the charge is 

reasonable, the creditor receives no 

direct or indirect compensation in 

connection with the charge, and the 

charge is not paid to an affiliate of the 

creditor; and (iv) Premiums or other 

charges for credit life, accident, health, 

or loss-of-income insurance, or debtcancellation coverage (whether or not 

the debt-cancellation coverage is 

insurance under applicable law) that 

provides for cancellation of all or part 

of the consumer’s liability in the event 

of the loss of life, health, or income or 

in the case of accident, written in 

connection with the credit transaction. 

In light of the changes to the finance 

charge under proposed § 226.4, 

discussed above, the Board is proposing 

technical amendments to this provision. 

The reference to ‘‘items required to be 

disclosed under § 226.4(a) and 226.4(b), 

except interest or the time-price 

differential’’ in § 226.32(b)(1)(i) 

implements TILA Section 103(aa)(4)(A). 

That provision includes in points and 

fees ‘‘all items included in the finance 

charge, except interest or the time-price 

differential.’’ 15 U.S.C. 1602(aa)(4)(A). 

Thus, ‘‘items required to be disclosed 

under § 226.4(a) and 226.4(b)’’ is 

intended to capture the finance charge. 

Section 226.32(b)(1)(ii) and (iii) parallel 

the additional elements in TILA Section 

103(aa)(4)(B) and (C). See 15 U.S.C. 

1602(aa)(4)(B) and (C). Finally, TILA 

Section 103(aa)(4)(D) provides for the 

inclusion of such other charges as the 

Board determines to be appropriate. 15 

U.S.C. 1602(aa)(4)(D). Pursuant to that 

authority, in § 226.32(b)(1)(iv), the 

Board included credit insurance 

premiums and debt cancellation 

coverage fees. Thus, the statutory 

definition reflects Congress’s intent to 

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43278 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

include in points and fees mortgage 

broker compensation, certain real-estate 

related fees, and the insurance charges 

added by the Board, even if those items 

would be excluded from the finance 

charge under other applicable rules. 

Under TILA Section 103(aa)(1), 

HOEPA applies to certain transactions 

that are secured by a consumer’s 

principal dwelling. 15 U.S.C. 

1602(aa)(1). Proposed § 226.4(g), and 

therefore the more inclusive definition 

of finance charge it would create, would 

apply to any transaction secured by real 

property or a dwelling. Consequently, 

all loans that are potentially subject to 

HOEPA would be subject to the 

proposed ‘‘but for’’ finance charge 

definition. Under that definition, the 

items included under the points and 

fees definition in addition to the finance 

charge (other than interest or the timeprice differential) would never be 

excluded from the finance charge for 

transactions secured by real property or 

a dwelling. 

The Board believes that proposed 

§ 226.4 would render § 226.32(b)(1)(ii) 

through (iv) unnecessary because all 

items included in points and fees under 

those provisions already would be 

included as part of the finance charge. 

To eliminate unnecessary complexity, 

the Board proposes to streamline 

§ 226.32(b)(1) by deleting those 

additional elements. The Board also 

proposes to revise § 226.32(b)(1) to 

provide that points and fees means all 

items included in the finance charge 

pursuant to § 226.4, except interest or 

the time-price differential, instead of 

§ 226.32(b)(1)(i)’s reference to ‘‘items 

required to be disclosed under § 226.4(a) 

and 226.4(b).’’ This change would 

reflect the language of TILA more 

closely and is not meant to effect any 

substantive change to HOEPA’s 

coverage. 

32(c) Disclosures 

32(c)(1) Notices 

For HOEPA loans, TILA Sections 

129(a)(1)(A) and (B), 15 U.S.C. 

1639(a)(1)(A) and (B), and § 226.32(c)(1), 

require the creditor to provide the 

following disclosures in conspicuous 

type size: ‘‘You are not required to 

complete this agreement merely because 

you have received these disclosures or 

have signed a loan application. If you 

obtain this loan, the lender will have a 

mortgage on your home. You could lose 

your home, and any money you have 

put into it, if you do not meet your 

obligations under the loan.’’ The first 

sentence is a ‘‘no obligation’’ statement 

to inform the consumer that the space 

for the consumer’s signature that may be 

on the credit application does not 

obligate the consumer to accept the 

terms of the loan. The next two 

sentences are ‘‘security interest’’ 

disclosures to inform the consumer of 

the potential consequences when the 

creditor takes a security interest in the 

consumer’s home. Comment 32(c)(1)–1 

states that these disclosures need not be 

in a particular format or part of the note 

or mortgage document. A Model Clause 

is currently provided at Appendix H– 

16. 

As discussed more fully in 

§ 226.38(f)(1), the MDIA amended TILA 

Section 128(b)(2), 15 U.S.C. 1638(b)(2), 

to require the creditor to provide the 

following ‘‘no obligation’’ statement on 

the TILA disclosure: ‘‘You are not 

required to complete this agreement 

merely because you have received these 

disclosures or signed a loan 

application.’’ Based on consumer 

testing, the Board proposes to use its 

adjustments and exception authority 

under TILA Section 105(a), 15 U.S.C. 

1604(a), to modify the specific wording 

on the disclosure. Proposed 

§ 226.38(f)(1) would require the creditor 

to provide a statement that the 

consumer has no obligation to accept 

the loan, and, if the creditor provides 

space for a consumer’s signature, a 

statement that a signature by the 

consumer only confirms receipt of the 

disclosure statement. During consumer 

testing, participants’ comprehension 

improved when they reviewed the 

plain-language version of the clause. 

Similarly, based on consumer testing, 

the Board proposes to use its 

adjustments and exception authority 

under TILA Section 105(a), 15 U.S.C. 

1604(a), to require the creditor under 

proposed § 226.32(c)(1) to provide the 

following ‘‘no obligation’’ statement in 

connection with a HOEPA loan: ‘‘You 

have no obligation to accept this loan. 

Your signature below only confirms that 

you have received this form.’’ TILA 

Section 105(a), 15 U.S.C. 1604(a), states 

that the Board ‘‘may provide for such 

adjustments * * * as in the judgment of 

the Board are necessary or proper to 

effectuate the purposes of [TILA]’’. One 

of the purposes of TILA is to promote 

the informed use of credit. TILA Section 

102(a), 15 U.S.C. 1601(a). Consumer 

testing showed that the ‘‘no obligation’’ 

language improved participants’ 

understanding of the key point that 

signing or accepting a disclosure did not 

obligate the consumer to accept the 

terms of the loan. 

In addition, the Board proposes to use 

its adjustments and exception authority 

under TILA Section 105(a), 15 U.S.C. 

1604(a), to require the creditor under 

proposed § 226.32(c)(1) to provide the 

following ‘‘security interest’’ statement 

in connection with a HOEPA loan: ‘‘If 

you are unable to make the payments on 

this loan, you could lose your home.’’ 

As discussed more fully in 

§ 226.38(f)(2), consumer testing showed 

that participant comprehension of this 

disclosure improved when the plainlanguage version of the ‘‘security 

interest’’ disclosure was used. The 

Board believes that the plain-language 

versions of the ‘‘no obligation’’ and 

‘‘security interest’’ disclosures will 

better inform consumers who are 

considering obtaining HOEPA loans. 

The proposal would delete comment 

32(c)(1)–1 and require these statements 

to be in bold text and a minimum 10- 

point font, consistent with proposed 

§§ 226.37 and 226.38. A revised Model 

Clause is proposed at Appendix H–16. 

32(c)(5) Amount Borrowed 

For HOEPA mortgage refinancing 

loans, § 226.32(c)(5) requires the 

creditor to disclose the amount 

borrowed, and states that ‘‘where the 

amount borrowed includes premiums or 

other charges for optional credit 

insurance or debt-cancellation coverage, 

that fact shall be stated, grouped 

together with the disclosure of the 

amount borrowed.’’ In the December 

2008 Open-End Final Rule, the existing 

rules for credit insurance and debt 

cancellation coverage were applied to 

debt suspension coverage for purposes 

of excluding a charge for debt 

suspension coverage from the finance 

charge. See 74 FR 5244, 5255; Jan. 29, 

2009. In the final rule, the Board stated 

that ‘‘[d]ebt cancellation coverage and 

debt suspension coverage are 

fundamentally similar to the extent they 

offer a consumer the ability to pay in 

advance for the right to reduce the 

consumer’s obligations under the plan 

on the occurrence of specified events 

that could impair the consumer’s ability 

to satisfy those obligations.’’ 74 FR 

5266. The Board also noted that the two 

products are different because debt 

cancellation coverage cancels the debt 

while debt suspension merely suspends 

payment of the debt. Id. Despite this 

difference, the Board adopted a final 

rule treating the two products the same 

for purposes of the finance charge, but 

adding a special disclosure warning 

consumers of the risks of debt 

suspension coverage. Id. Consistent 

with this approach, the Board proposes 

to treat debt suspension coverage in the 

same manner as debt cancellation 

coverage for purposes of the disclosing 

the amount borrowed for a HOEPA 

mortgage refinancing loan. The Board 

proposes to revise § 226.32(c)(5) to 

clarify that where the amount borrowed 

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includes charges for debt suspension 

coverage, that fact should be stated, 

grouped together with the disclosure of 

the amount borrowed. Proposed 

comment 32(c)(5)–1 would also be 

revised to include a reference to debt 

suspension coverage. Comment is 

solicited on this approach. 

Section 226.35 Prohibited Acts or 

Practices in Connection With HigherPriced Mortgage Loans 

35(a) Higher-Priced Mortgage Loans 

35(a)(2) 

In its final rule implementing new 

requirements for higher-priced mortgage 

loans, 73 FR 44522; July 30, 2008, the 

Board adopted the ‘‘average prime offer 

rate’’ as the benchmark for coverage of 

new § 226.35. In so doing, the Board 

adopted commentary under new 

§ 226.35(a)(2) regarding the calculation 

of the average prime offer rate and 

related guidance. Comment 35(a)(2)–4 

indicated that the Board publishes 

average prime offer rates and the 

methodology for their calculation on the 

Internet. The Board is proposing to 

amend comment 35(a)(2)–4 to specify 

where on the Internet the table and 

methodology may be found (http:// 

www.ffiec.gov/hmda). 

The Board also is proposing new 

comment 35(a)(2)–5 to provide 

additional guidance on determination of 

applicable average prime offer rates for 

purposes of § 226.35. The comment 

would clarify that the average prime 

offer rate is defined identically under 

§ 226.35 and under Regulation C 

(HMDA), 12 CFR 203.4(a)(12)(ii). Thus, 

for purposes of both coverage of 

§ 226.35 and coverage of the rate spread 

reporting requirement under Regulation 

C, 12 CFR 203.4(a)(12)(i), the applicable 

average prime offer rate is identical. The 

comment would clarify further that 

guidance on the applicable average 

prime offer rate is provided in the staff 

commentary under Regulation C, the 

Board’s A Guide to HMDA Reporting: 

Getting it Right!, and the relevant 

‘‘Frequently Asked Questions’’ on 

HMDA compliance posted on the 

FFIEC’s Web site referenced above. 

Section 226.36 Prohibited Acts or 

Practices in Connection With Credit 

Secured by Real Property or a 

Consumer’s Dwelling 

The Board proposes to amend 

§ 226.36 to extend the scope of the 

section’s coverage to all closed-end 

transactions secured by real property or 

a dwelling. Currently, this section 

applies to closed-end credit transactions 

secured by a consumer’s principal 

dwelling. As revised, § 226.36 would 

apply to closed-end transactions 

secured by any dwelling, not just a 

consumer’s principal dwelling. This 

approach would be consistent with 

recent amendments to the TILA effected 

by the MDIA. 

36(a) Loan Originator and Mortgage 

Broker Defined 

As discussed below in more detail, 

the Board proposes to prohibit certain 

payments to loan originators that are 

based on a transaction’s terms and 

conditions, and also proposes to 

prohibit loan originators from ‘‘steering’’ 

consumers to transactions that are not in 

their interest in order to increase the 

originator’s compensation. Accordingly, 

the Board proposes to amend the 

regulation to provide a definition of 

‘‘loan originator’’ in § 226.36(a)(1), 

which would include persons who are 

covered by the current definition of 

mortgage broker but also would include 

employees of the creditor, who are not 

considered ‘‘mortgage brokers.’’ Existing 

§ 226.36(a) defines the term ‘‘mortgage 

broker’’ because mortgage brokers are 

subject to the prohibition on coercion of 

appraisers in § 226.36(b). A revised 

definition of mortgage broker would be 

designated as § 226.36(a)(2). The 

provision of existing § 226.36(a) stating 

that a creditor making a ‘‘table funded’’ 

transaction is considered a mortgage 

broker would be revised for clarity; no 

substantive change is intended other 

than the expansion of the definition 

from mortgage broker to loan originator. 

Thus, under proposed § 226.36(a)(1), a 

creditor that does not provide the funds 

for the transaction at consummation out 

of its own resources, out of deposits 

held by it, or by drawing on a bona fide 

warehouse line of credit would be 

considered a loan originator for 

purposes of § 226.36. 

36(b) and (c) Misrepresentation of Value 

of Consumer’s Dwelling; Servicing 

Practices 

The Board proposes to amend 

§ 226.36(b) and (c) to reflect the 

expanded scope of coverage of § 226.36, 

as noted above. Existing § 226.36(b) 

prohibits creditors and mortgage brokers 

and their affiliates from coercing, 

influencing, or otherwise encouraging 

appraisers to misstate or misrepresent 

the value of the consumer’s principal 

dwelling in connection with a closedend mortgage transaction. Section 

226.36(c) currently prohibits certain 

practices of servicers of closed-end 

consumer credit transactions secured by 

a consumer’s principal dwelling. Under 

this proposal, the rules relating to 

appraiser coercion and loan servicing 

would apply to all closed-end 

transactions secured by real property or 

a dwelling, for the reasons discussed 

above. 

36(d) Prohibited Payments to Loan 

Originators 

The Board is proposing to use its 

authority in HOEPA to prohibit unfair 

or deceptive acts or practices in 

mortgage lending to restrict certain 

practices related to the payment of loan 

originators. See TILA Section 

129(l)(2)(A), 15 U.S.C. 1639(l)(2)(A). For 

this purpose, a ‘‘loan originator’’ 

includes both mortgage brokers and 

employees of creditors who perform 

loan origination functions. 

Specifically, to address the potential 

unfairness that can arise with certain 

loan originator compensation practices, 

the proposed rule would prohibit a 

creditor or other party from paying 

compensation to a loan originator based 

on the credit transaction’s terms or 

conditions. This prohibition would not 

apply to payments that consumers make 

directly to a loan originator. However, if 

a consumer directly pays the loan 

originator, the proposed rule would 

prohibit the originator from also 

receiving compensation from any other 

party in connection with that 

transaction. 

The Board is soliciting comment on 

an alternative that would allow loan 

originators to receive payments that are 

based on the principal loan amount, 

which is a common practice today. The 

Board is also soliciting comment on 

whether it should adopt a rule that 

seeks to prohibit loan originators from 

directing or ‘‘steering’’ consumers to 

loans based on the fact that the 

originator will receive additional 

compensation, unless that loan is in the 

consumer’s interest. The Board is 

expressly soliciting comment on 

whether the rule would be effective in 

achieving the stated purpose. Comment 

is also solicited on the feasibility and 

practicality of such a rule, its 

enforceability, and any unintended 

adverse effects the rule might have. 

These proposals and alternatives are 

discussed more fully below. 

Background 

In the summer of 2006, the Board held 

public hearings on home equity lending 

in four cities. During the hearings, 

consumer advocates urged the Board to 

ban ‘‘yield spread premiums,’’ payments 

that mortgage brokers receive from the 

creditor at closing for delivering a loan 

with an interest rate that is higher than 

the creditor’s ‘‘buy rate.’’ The consumer 

advocates asserted that yield spread 

premiums provide brokers an incentive 

to increase consumers’ interest rates 

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43280 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

61See Kellie K. Kim-Sung & Sharon Hermanson, 

Experiences of Older Refinance Mortgage Loan 

Borrowers: Broker- and Lender-Originated Loans, 

Data Digest No. 83 (AARP Public Policy Inst., 

Washington, DC, Jan. 2003, at 3, available at http:// 

assets.aarp.org/rgcenter/post-import/ 

dd83_loans.pdf. 

unnecessarily. They argued that a 

prohibition would align reality with 

consumers’ perception that brokers 

serve consumers’ best interests. 

In light of the information received at 

the 2006 hearings and the rise in 

defaults that began soon after, the Board 

held an additional hearing in June of 

2007 to explore how it could use its 

authority under HOEPA to prevent 

abusive lending practices in the 

subprime mortgage market while still 

preserving responsible lending. 

Although the Board did not expressly 

solicit comment on mortgage broker 

compensation in its notice of the June 

2007 hearing, a number of commenters 

and some hearing panelists raised the 

topic. Consumer and creditor 

representatives alike raised concerns 

about the fairness and transparency of 

creditors’ payment of yield spread 

premiums to brokers. Several 

commenters and panelists stated that 

consumers are not aware of the 

payments creditors make to brokers, or 

that such payments increase consumers’ 

interest rates. They also stated that 

consumers may mistakenly believe that 

a broker seeks to obtain the best interest 

rate available. Consumer groups have 

expressed particular concern about 

increased payments to brokers for 

delivering loans both with higher 

interest rates and prepayment penalties. 

Consumer groups suggested a variety of 

solutions, such as prohibiting creditors 

paying brokers yield spread premiums, 

imposing on brokers that accept yield 

spread premiums a fiduciary duty to 

consumers, imposing on creditors that 

pay yield spread premiums liability for 

broker misconduct, or including yield 

spread premiums in the points and fees 

test for loans subject to HOEPA. Several 

creditors and creditor trade associations 

advocated requiring brokers to disclose 

whether the broker represents the 

consumer’s interests, and how and by 

whom the broker is to be compensated. 

Some of these commenters 

recommended that brokers be required 

to disclose their total compensation to 

the consumer and that creditors be 

prohibited from paying brokers more 

than the disclosed amount. 

To address these concerns, the 

Board’s January 2008 proposed rule 

would have prohibited a creditor from 

paying a mortgage broker any 

compensation greater than the amount 

the consumer had previously agreed in 

writing that the broker would receive. 

73 FR 1672, 1698–1700; Jan. 9, 2008 

(HOEPA proposal). In support of the 

rule, the Board explained its concerns 

about yield spread premiums, which are 

summarized below. 

A yield spread premium is the present 

dollar value of the difference between 

the lowest interest rate the wholesale 

lender would have accepted on a 

particular transaction and the interest 

rate the broker actually obtained for the 

lender. This dollar amount is usually 

paid to the mortgage broker, though it 

may also be applied to reduce the 

consumer’s upfront closing costs. The 

creditor’s payment to the broker based 

on the interest rate is an alternative to 

the consumer paying the broker directly 

from the consumer’s preexisting 

resources or from loan proceeds. 

Preexisting resources or loan proceeds 

may not be sufficient to cover the 

broker’s total fee, or may appear to the 

consumer to be a more costly way to 

finance those costs if the consumer 

expects to prepay the loan in a relatively 

short period. Thus, consumers 

potentially benefit from having an 

option to pay brokers for their services 

indirectly by accepting a higher interest 

rate. 

The Board shares concerns, however, 

that creditors’ payments to mortgage 

brokers are not transparent to 

consumers and are potentially unfair to 

them. Creditor payments to brokers 

based on the interest rate give brokers 

an incentive to provide consumers loans 

with higher interest rates. Some brokers 

may refrain from acting on this 

incentive out of legal, business, or 

ethical considerations. Moreover, 

competition in the mortgage loan market 

may often limit brokers’ ability to act on 

the incentive. The market often leaves 

brokers room to act on the incentive 

should they choose, however, especially 

as to consumers who are less 

sophisticated and less likely to shop 

among either loans or brokers. 

Large numbers of consumers are 

simply not aware the incentive exists. 

Many consumers do not know that 

creditors pay brokers based on the 

interest rate, and the current legally 

required disclosures seem to have only 

limited effect. Some consumers may not 

even know that creditors pay brokers: A 

common broker practice of charging a 

small part of its compensation directly 

to the consumer, to be paid from the 

consumer’s existing resources or loan 

proceeds, may lead consumers to 

believe, incorrectly, that this amount is 

all the consumer will pay or that the 

broker will receive. Consumers who do 

understand that the creditor pays the 

broker based on the interest rate may 

not fully understand the implications of 

the practice. They may not appreciate 

the full extent of the incentive the 

practice gives the broker to increase the 

rate because they do not know the dollar 

amount of the creditor’s payment. 

Moreover, consumers often wrongly 

believe that brokers have agreed, or are 

required, to obtain the best interest rate 

available. Several commenters in 

connection with the 2006 hearings 

suggested that mortgage broker 

marketing cultivates an image of the 

broker as a ‘‘trusted advisor’’ to the 

consumer. Consumers who have this 

perception may rely heavily on a 

broker’s advice, and there is some 

evidence that such reliance is common. 

In a 2003 survey of older borrowers who 

had obtained prime or subprime 

refinancings, majorities of respondents 

with refinance loans obtained through 

both brokers and creditors’ employees 

reported that they had relied ‘‘a lot’’ on 

their loan originators to find the best 

mortgage for them.61 The Board’s recent 

consumer testing also suggests that 

many consumers shop little for 

mortgages and often rely on one broker 

or lender because of their trust in the 

relationship. 

If consumers believe that brokers 

protect consumers’ interests by 

shopping for the lowest rates available, 

then consumers will be less likely to 

take steps to protect their interests when 

dealing with brokers. For example, they 

may be less likely to shop rates across 

retail and wholesale channels 

simultaneously to assure themselves the 

broker is providing a competitive rate. 

They may also be less likely to shop and 

negotiate brokers’ services, obligations, 

or compensation upfront, or at all. For 

example, they may be less likely to seek 

out brokers who will promise in writing 

to obtain the lowest rate available. 

In response to these concerns, the 

2008 HOEPA proposal would have 

prohibited a creditor from paying a 

broker more than the consumer agreed 

in writing to pay. Under the proposal, 

the consumer and mortgage broker 

would have had to enter into a written 

agreement before the broker accepted 

the consumer’s loan application and 

before the consumer paid any fee in 

connection with the transaction (other 

than a fee for obtaining a credit report). 

The agreement also would have 

disclosed (i) that the consumer 

ultimately would bear the cost of the 

entire compensation even if the creditor 

paid part of it directly; and (ii) that a 

creditor’s payment to a broker could 

influence the broker to offer the 

consumer loan terms or products that 

would not be in the consumer’s interest 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43281 

62For more details on the consumer testing, see 

the report of the Board’s contractor, Macro 

International, Inc., Consumer Testing of Mortgage 

Broker Disclosures (July 10, 2008), available at 

http://www.federalreserve.gov/newsevents/press/ 

bcreg/20080714regzconstest.pdf. 

or the most favorable the consumer 

could obtain. 

Based on the Board’s analysis of 

comments received on the HOEPA 

proposal, the results of consumer 

testing, and other information, the 

Board withdrew the proposed 

provisions relating to broker 

compensation. 73 FR 44522, 44563–65; 

July 30, 2008. The Board’s withdrawal 

of those provisions was based on its 

concern that the proposed agreement 

and disclosures could confuse 

consumers and undermine their 

decision-making rather than improve it. 

The risks of consumer confusion arose 

from two sources. First, an institution 

can act as either creditor or broker 

depending on the transaction. At the 

time the agreement and disclosures 

would have been required, such an 

institution could be uncertain as to 

which role it ultimately would play. 

This could render the proposed 

disclosures inaccurate and misleading 

in some, and possibly many, cases. 

Second, the Board was concerned by the 

reactions of consumers who participated 

in one-on-one interviews about the 

proposed agreement and disclosures as 

part of the Board’s consumer testing. 

These consumers often concluded, not 

necessarily correctly, that brokers are 

more expensive than creditors. Many 

also believed that brokers would serve 

their best interests notwithstanding the 

conflict resulting from the relationship 

between interest rates and brokers’ 

compensation.62 The proposed 

disclosures presented a significant risk 

of misleading consumers regarding both 

the relative costs of brokers and lenders 

and the role of brokers in their 

transactions. 

In withdrawing the broker 

compensation provisions of the HOEPA 

proposal, the Board stated it would 

continue to explore options to address 

potential unfairness associated with 

loan originator compensation 

arrangements, such as yield spread 

premiums. The Board indicated it 

would consider whether disclosures or 

other approaches could effectively 

remedy this potential unfairness 

without imposing unintended 

consequences. 

Potential for Unfairness in Loan 

Originator Compensation Practices 

As noted above, the Board is now 

proposing rules to prohibit certain 

practices relating to payments made to 

compensate mortgage brokers and other 

loan originators. These rules would be 

adopted pursuant to the Board’s 

authority under HOEPA, as contained in 

TILA Section 129(l), which authorizes 

the Board to prohibit acts or practice in 

connection with mortgage loans that the 

Board finds to be unfair or deceptive. As 

discussed in part IV above, in 

considering whether a practice is unfair 

or deceptive under TILA Section 129(l), 

the Board has generally relied on the 

standards that have been adopted for 

purposes of Section 5(a) of the FTC Act, 

15 U.S.C. 45(a), which also prohibits 

unfair and deceptive acts and practices. 

For purposes of the FTC Act, an act 

or practice is considered unfair when it 

causes or is likely to cause substantial 

injury to consumers that is not 

reasonably avoidable by consumers 

themselves and not outweighed by 

countervailing benefits to consumers or 

to competition. As explained below, the 

practice of basing a loan originator’s 

compensation on the credit transaction’s 

terms or conditions appears to meet 

these standards and constitute an unfair 

practice. Furthermore, based on its 

experience with consumer testing, 

particularly in connection with the 

HOEPA proposal, the Board believes 

that disclosure alone would be 

insufficient for most consumers to avoid 

the harm caused by this practice. Thus, 

the Board is proposing a rule that would 

remedy the practice through substantive 

regulations that prohibit particular 

practices. 

Specifically, under proposed 

§ 226.36(d)(1), compensation payments 

made to a mortgage broker or any other 

loan originator based on a mortgage 

transaction’s terms or conditions would 

be prohibited. Unlike the 2008 HOEPA 

proposal, the rule would also apply to 

creditors’ employees who originate 

loans. As noted above, such payments 

when made to a mortgage broker are 

commonly referred to as yield spread 

premiums. There are analogous 

payments made by creditors to their 

employees who originate loans at a 

higher interest rate than the minimum 

rate required by the creditor. This 

arrangement is frequently referred to as 

an ‘‘overage.’’ For convenience, the 

discussion below uses the term ‘‘yield 

spread premium’’ also to refer to these 

types of payments, which would be 

covered by the proposed rule as well. 

Substantial injury. When loan 

originators receive compensation based 

on a transaction’s terms and conditions, 

they have an incentive to provide 

consumers loans with higher interest 

rates or other less favorable terms. Yield 

spread premiums, therefore, present a 

significant risk of economic injury to 

consumers. Currently, such injury is 

common because consumers typically 

are not aware of the practice or do not 

understand its implications and cannot 

effectively negotiate its use. 

Creditors’ payments to mortgage 

brokers or their own employees that 

originate loans (‘‘loan officers’’) 

generally are not transparent to 

consumers. Brokers may impose a direct 

fee on the consumer which may lead 

consumers to believe that this is the sole 

source of the broker’s compensation. 

While consumers expect the creditor to 

compensate its own loan officers, they 

do not necessarily understand that the 

loan originator may have the ability to 

increase the creditor’s interest rate or 

include certain loan terms for the 

originator’s own gain. 

To guard effectively against this 

practice, a consumer would have to 

know the lowest interest rate the 

creditor would have accepted to 

ascertain that the offered interest rate 

represents a rate increase by the loan 

originator. Most consumers will not 

know the lowest rate the creditor would 

be willing to accept. The consumer also 

would need to understand the dollar 

amount of the yield spread premium 

that is generated by the rate increase to 

determine what portion, if any, is being 

applied to reduce the consumer’s 

upfront loan charges. Although HUD 

recently adopted disclosures in 

Regulation X, implementing RESPA, 

that could enhance some consumers’ 

understanding of mortgage broker 

compensation, the details of the 

compensation arrangements are 

complex and the disclosures are limited. 

A creditor may show the yield spread 

premium as a credit to the borrower that 

is applied to cover upfront costs, but is 

also permitted to add the amount of the 

yield spread to the total origination 

charges being disclosed. This would not 

necessarily inform the consumer that 

the rate has been increased by the 

originator and that a lower rate with a 

smaller origination charge was also 

available. In addition, the Regulation X 

disclosure concerning yield spread 

premiums would not apply to overages 

occurring when the loan originator is 

employed by the creditor. Thus, the 

Regulation X disclosure, while perhaps 

an improvement over previous rules, is 

not likely by itself to prevent consumers 

from incurring substantial injury from 

the practice. 

Because consumers generally do not 

understand the yield spread premium 

mechanism, they are unable to engage in 

effective negotiation. Instead they are 

more likely to rely on the loan 

originator’s advice and frequently obtain 

a higher rate or other unfavorable terms 

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43282 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

63Creditors may be willing to offer a loan with 

a lower interest rate in return for including a 

prepayment penalty. A loan originator that offers a 

loan with a prepayment penalty might not offer the 

lower rate, resulting in a premium interest rate and 

the payment of a yield spread premium. 

solely because of greater originator 

compensation. These consumers suffer 

substantial injury by incurring greater 

costs for mortgage credit than they 

would otherwise be required to pay. 

Injury not reasonably avoidable. Yield 

spread premiums create a conflict of 

interest between the loan originator and 

consumer. As noted above, many 

consumers are not aware of creditor 

payments to loan originators, especially 

in the case of mortgage brokers, because 

these arrangements lack transparency. 

Although consumers may reasonably 

expect creditors to compensate their 

own employees, consumers do not 

know how the loan officer’s 

compensation is structured or that the 

loan officer can increase the creditor’s 

interest rate or offer certain loan terms 

to increase their own compensation. 

Without this understanding, consumers 

cannot reasonably be expected to 

appreciate or avoid the risk of financial 

harm these arrangements represent. 

Yield spread premiums are complex 

and may be counter-intuitive even to 

well-informed consumers. Based on the 

Board’s experience with consumer 

testing, the Board believes that 

disclosures are insufficient to overcome 

the gap in consumer comprehension 

regarding this critical aspect of the 

transaction. Currently, the required 

disclosures of originator compensation 

under federal and State laws seem to 

have little, if any, effect on originators’ 

incentive to provide consumers with 

increased interest rates or other 

unfavorable loan terms, such as a 

prepayment penalty, that can increase 

the originator’s compensation.63 The 

Board’s consumer testing, discussed 

above, supported the finding that 

disclosures about yield spread 

premiums are ineffective; consumers in 

these tests did not understand yield 

spread premiums and did not grasp how 

they create an incentive for loan 

originators to increase consumers’ costs. 

Consumers’ lack of comprehension of 

yield spread premiums is compounded 

where the originator also imposes a 

direct charge on the consumer. A 

mortgage broker might charge the 

consumer a direct fee, for example $500, 

for arranging the consumer’s mortgage 

loan. This charge encourages consumers 

to infer that the broker accepts the 

consumer-paid fee to represent the 

consumer’s financial interests. 

Consumers may believe that the fee they 

pay is the originator’s sole 

compensation. This may lead reasonable 

consumers to believe, erroneously, that 

loan originators are working on their 

behalf and are under a legal or ethical 

obligation to help consumers obtain the 

most favorable loan terms and 

conditions. There is evidence that 

consumers often regard loan originators 

as ‘‘trusted advisors’’ or ‘‘hired experts’’ 

and consequently rely on originators’ 

advice. Consumers who regard loan 

originators in this manner are far less 

likely to shop or negotiate to assure 

themselves that they are being offered 

competitive mortgage terms. Even for 

consumers who shop, the lack of 

transparency in originator compensation 

arrangements makes it unlikely 

consumers will avoid yield spread 

premiums that unnecessarily increase 

the cost of their loan. 

Consumers generally lack expertise in 

complex mortgage transactions because 

they engage in such mortgage 

transactions infrequently. Their reliance 

on the loan originator is reasonable in 

light of the originator’s greater 

experience and professional training in 

the area, the belief that originators are 

working on their behalf, and the 

apparent ineffectiveness of disclosures 

to dispel that belief. 

Injury not outweighed by benefits to 

consumers or to competition. Yield 

spread premiums can represent a 

potential consumer benefit in cases 

where the amount is applied to reduce 

consumers’ upfront closing costs, 

including originator compensation. A 

creditor’s increase in the interest rate (or 

the addition of other loan terms) may be 

used to generate additional income that 

the creditor uses to compensate the 

originator, in lieu of adding origination 

points or fees that the consumer would 

be required to pay directly from the 

consumer’s preexisting funds or the 

loan proceeds. This can benefit a 

consumer who lacks the resources to 

pay closing costs in cash, or who might 

have insufficient equity in the property 

to increase the loan amount to cover 

these costs. Further, some consumers 

prefer to fund closing costs, including 

origination fees, through a higher rate if 

the consumer expects to own the 

property or have the loan for a relatively 

short period, for example, less than five 

years. For those consumers who 

understand this trade-off there could be 

potential benefits. In such cases, 

however, the yield spread premium 

does not increase the amount of 

compensation paid by the creditor to the 

originator, who would receive the same 

amount whether the loan has a higher 

rate or a lower rate accompanied by 

higher upfront fees. 

Nevertheless, without a clear 

understanding of yield spread 

premiums or effective disclosure, the 

majority of consumers are not equipped 

to police the market to ensure that yield 

spread premiums are in fact applied to 

reduce their closing costs, especially in 

the case of loan originator 

compensation. This would be 

particularly difficult because consumers 

are not likely to have any basis for 

determining a ‘‘typical’’ or ‘‘reasonable’’ 

amount for originator compensation. 

Accordingly, the Board is proposing a 

rule that prohibits any person from 

basing a loan originator’s compensation 

on the loan’s rate or terms but still 

affords creditors the flexibility to 

structure loan pricing to preserve the 

potential consumer benefit of 

compensating an originator through the 

interest rate. 

The Board’s Proposal 

Under § 226.36(d)(1), the Board 

proposes to prohibit any person from 

compensating a loan originator, directly 

or indirectly, based on the terms or 

conditions of a loan transaction secured 

by real property or a dwelling. This 

prohibition would apply to any person, 

rather than only a creditor, to prevent 

evasion by structuring loan originator 

payments through non-creditors. For 

example, secondary market investors 

that purchase closed loans from 

creditors would not be permitted to pay 

compensation to loan originators that is 

based on the terms or conditions of their 

transactions. 

Under the proposal, compensation 

that is based on the loan amount would 

be considered a payment that is based 

on a term or condition of the loan. The 

prohibition would not apply to 

consumers’ direct payments to loan 

originators. Under § 226.36(d)(2), 

however, if the consumer compensates 

the loan originator directly, the 

originator would be prohibited from 

receiving compensation from the 

creditor or any other person. 

Because the loan originator could not 

receive compensation based on the 

interest rate or other terms, the 

originator would have no incentive to 

alter the terms made available by the 

creditor to deliver a more expensive 

loan. For example, a company acting as 

a mortgage broker could not provide 

greater compensation to its employee 

acting as the loan originator for a 

transaction with a 7 percent interest rate 

than for a transaction with a 6 percent 

interest rate. A creditor would be under 

the same restriction in compensating its 

loan officer. For this purpose, the term 

‘‘compensation’’ would not be limited to 

commissions, but would include 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43283 

64For example, the Federal Trade Commission’s 

settlement with Gateway Funding, Inc. in December 

2008 illustrates a case where a creditor’s loan 

officers created ‘‘overages,’’ although the primary 

legal theory concerned disparate treatment by race 

in the imposition of overages. The FTC’s complaint 

and the court’s final judgment and order can be 

found on the FTC’s web-site at http://www.ftc.gov/ 

os/caselist/0623063/index.shtm. The FTC has since 

filed a complaint alleging similar patterns of 

overages in violation of fair lending laws, against 

Golden Empire Mortgage, Inc. The May 2009 

complaint can be found at http://www.ftc.gov/os/ 

caselist/0623061/090511gemcmpt.pdf. A similar 

pattern of overages was alleged in legal actions 

brought by the Department of Justice (DOJ), which 

resulted in settlement agreements with Huntington 

Mortgage Company (1995) and Fleet Mortgage Corp. 

(1996). 

salaries or any financial incentive that is 

tied to the transaction’s terms or 

conditions, including annual or periodic 

bonuses or awards of merchandise or 

other prizes. See proposed comment 

36(d)(1)–1. 

Proposed comment 36(d)(1)–2 

provides examples of compensation that 

is based on the transaction’s terms or 

conditions, such as payments that are 

based on the interest rate, annual 

percentage rate, or the existence of a 

prepayment penalty. Examples of loan 

originator compensation that is not 

based on the transaction’s terms or 

conditions are listed in proposed 

comment 36(d)(1)–3. These include 

compensation based on the originator’s 

loan volume, the performance of loans 

delivered by the originator, or hourly 

wages. 

The Board recognizes that loans 

originators may need to expend more 

time and resources in originating loans 

for consumers with limited or 

blemished credit histories. Because such 

loans are likely to carry higher rates, 

originators currently rely on higher 

yield spread premiums to compensate 

them for the additional time and efforts. 

Paying an originator based on the time 

expended would be permissible under 

the proposed rule. 

Although the proposed rule would 

not prohibit a creditor from basing 

compensation on the originator’s loan 

volume, such arrangements may raise 

concerns about whether it creates 

incentives for originators to deliver 

loans without proper regard for the 

credit risks involved. The Board expects 

creditors to exercise due diligence to 

monitor and manage such risks. 

Financial institution regulators 

generally will examine creditors they 

supervise to ensure they have systems 

in place to exercise such due diligence. 

The proposed rule also would not 

prohibit compensation that differs by 

geographical area, but any such 

arrangements must comply with other 

applicable laws such as the Equal Credit 

Opportunity Act (15 U.S.C. 1691–1691f) 

and Fair Housing Act (42 U.S.C. 3601– 

3619). See proposed comment 36(d)(1)– 

4. Creditors that use geography as a 

criterion for setting originator 

compensation would need to be able to 

demonstrate that this reflects legitimate 

differences in the costs of origination 

and in the levels of competition for 

originators’ services. 

Under the proposed rule, creditors 

also may compensate their own loan 

officers differently than mortgage 

brokers. For instance, in light of the fact 

that mortgage brokers relieve creditors 

of certain overhead costs of loan 

originations, a creditor might pay 

brokers more than its own loan officers. 

Likewise, a creditor might pay one loan 

originator of either type more than it 

pays another, as long as each originator 

receives compensation that is not based 

on the terms of the transactions they 

deliver to the creditor. 

Scope of coverage. The Board believes 

that the proposed rule should apply to 

creditors’ employees who originate 

loans in addition to mortgage brokers. A 

creditor’s loan officers frequently have 

the same discretion over loan pricing 

that mortgage brokers have to modify a 

loan’s terms to increase their 

compensation, and there is evidence 

suggesting that loan officers engage in 

such practices.64 Accordingly, the 

coverage of § 226.36(d)(1) is broader 

than the 2008 HOEPA proposal, which 

covered only mortgage brokers. Some 

commenters on the HOEPA proposal 

expressed concern that it would create 

an ‘‘unlevel playing field’’ by creating 

an unfair advantage for creditors that 

would not have to comply with the 

same requirements as brokers. 

The proposed rule would apply to 

covered transactions whether or not 

they are higher-priced mortgage loans. A 

loan originator’s financial incentive to 

deliver less favorable loan terms to a 

consumer could result in consumer 

injury whether or not the loan has a rate 

above the coverage threshold in 

§ 226.35. The risks of harm could be 

reduced in the lower-priced segment of 

the market, however, where consumers 

historically have more choices. 

Comment is solicited on the relative 

costs and benefits of applying the rule 

to all segments of the market, and 

whether the costs would outweigh the 

benefits for loans below the higherpriced mortgage loan threshold. 

Creditors’ pricing flexibility. The 

proposed rule would not affect 

creditors’ flexibility in setting rates or 

other loan terms. The rule does not limit 

the creditor’s ability to adjust the loan 

terms it offers to consumers as a means 

of financing costs the consumer would 

otherwise be obligated to pay directly 

(in cash or out of the loan proceeds), 

including the originator’s compensation, 

provided this does not affect the amount 

the originator receives for the 

transaction. Thus, a creditor could 

recoup costs by adding to the loan 

pricing terms an origination point 

(calculated as one percentage point of 

the loan amount) even though the 

creditor could not pay the originator’s 

compensation on that basis. Similarly, a 

creditor could add a constant premium 

of, for instance, 1⁄4 of one percent to the 

interest rates on all transactions for 

which the creditor will pay 

compensation to the loan originator, as 

a means of recouping the cost of the 

originator’s compensation. The creditor 

would not recoup the same dollar 

amount in each transaction, however, 

because the present value of the 

premium in dollars would vary with the 

loan amount. Consequently, even 

though loan pricing could be set in this 

manner, this method could not be used 

to set the loan originator’s 

compensation. See proposed comment 

36(d)(1)–5. 

Effect of modification of loan terms. 

The proposed rule is designed to 

prevent consumers from being harmed 

by loan originators making unfavorable 

modifications to loan terms, such as 

increasing the interest rate, to increase 

the originator’s compensation. 

Currently, loan originators might also 

exercise discretion to make 

modifications in the consumer’s favor. 

For example, to retain the consumer’s 

business, today a loan originator might 

agree with the consumer to reduce the 

amount the consumer must pay in 

origination points on the loan, which 

would be funded by a reduction in the 

amount the originator receives from the 

creditor as compensation for delivering 

the loan. Under the proposed rule, 

however, a creditor would not be 

permitted to reduce the amount it pays 

to the loan originator based on such a 

change in loan terms. As a result, the 

reduction in origination points would 

be a cost borne by the creditor. 

Thus, when the creditor offers to 

extend a loan with specified terms and 

conditions (such as the rate and points), 

the amount of the originator’s 

compensation for that transaction is not 

subject to change, through either an 

increase or a decrease, even if different 

loan terms are negotiated. If this were 

not the case, a creditor generally could 

agree to compensate originators at a 

high level and then subsequently lower 

the compensation only in selective 

cases, such as when the consumer 

obtains a competing offer with a lower 

interest rate. This would have the same 

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43284 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

effect as increasing the originator’s 

compensation for higher rate loans. 

Proposed comment 36(d)(1)–6 would 

address this issue. 

Periodic changes in loan originator 

compensation. Under proposed 

§ 226.36(d)(1) a creditor would not be 

prevented from periodically revising the 

compensation it agrees to pay a loan 

originator. However, a creditor may not 

revise a loan originator’s compensation 

arrangement in connection with each 

transaction. This guidance is reflected 

in proposed comment 36(d)(1)–7. The 

revised compensation arrangement must 

result in payments to the loan originator 

that are not based on the terms or 

conditions of a credit transaction. A 

creditor might periodically review 

factors such as loan performance, 

transaction volume, as well as current 

market conditions for originator 

compensation, and prospectively revise 

the compensation it agrees to pay to a 

loan originator. For example, assume 

that during the first six months of the 

year, a creditor pays $3,000 to a 

particular loan originator for each loan 

delivered, regardless of the loan terms. 

After considering the volume of 

business produced by that originator, 

the creditor could decide that as of July 

1, it will pay $3,250 for each loan 

delivered by that originator, regardless 

of the loan terms. The change in 

compensation would not be a violation 

even if the loans made by the creditor 

after July 1 generally carry higher 

interest rates than loans made before 

that date. 

Alternative to permit compensation 

based on loan amount. The Board is 

also publishing for comment a proposed 

alternative that would allow loan 

originator compensation to be based on 

the loan amount, which would not be 

considered a transaction term or 

condition for purposes of the 

prohibition in § 226.36(d)(1). Currently, 

the compensation received by many 

mortgage originators is structured as a 

percentage of the loan amount. Other 

participants in the mortgage market, 

such as creditors, mortgage insurers, 

and other service providers, also receive 

compensation based on the loan 

amount. The Board is therefore seeking 

comment on whether prohibiting 

originator compensation on this basis 

might be unduly restrictive and 

unnecessary to achieve the purposes of 

the proposed rule. 

On the other hand, prohibiting 

compensation based on the loan amount 

would eliminate an incentive for the 

originator to steer consumers to a larger 

loan amount. Such steering maximizes 

the originator’s compensation but also 

increases the transaction’s loan-to-value 

ratio and decreases the consumer’s 

equity in the property. If the loan-tovalue ratio increases sufficiently, the 

consumer may incur additional costs in 

the form of a higher interest rate or 

additional points and fees, including the 

cost of mortgage insurance premiums. 

Because the consumer’s monthly 

payment would also be larger, the 

originator might direct the consumer to 

riskier loan products that have 

discounted initial rates but are subject 

to significant payment increases after 

the introductory period expires. 

Because of the foregoing concerns, the 

Board is publishing two alternative 

versions of proposed § 226.36(d)(1). The 

first alternative would consider the loan 

amount as a term or condition of the 

loan, thereby prohibiting the payment of 

originator compensation as a percentage 

of the loan amount. The second 

alternative provides that the loan 

amount is not a term or condition of the 

loan, and would permit such payments. 

The second alternative would be 

accompanied by proposed comment 

36(d)(1)–10 to provide further guidance. 

Under proposed comment 36(d)(1)–10, a 

loan originator could be paid a fixed 

percentage of the loan amount even 

though the dollar amount paid by a 

particular creditor would vary from 

transaction to transaction and would 

increase as the loan amount increases. 

Comment 36(d)(1)–10 also permits 

compensation paid as a fixed percentage 

of the loan amount to be subject to a 

specified minimum or maximum dollar 

amount. For example, a loan originator’s 

compensation could be set at one 

percent of the principal loan amount but 

not less than $1,000 or greater than 

$5,000. 

The Board seeks comment on the two 

alternatives. Further, if the final rule 

permits compensation based on the loan 

amount, should creditors be permitted 

to apply different percentages to loans 

of different amounts? Should creditors 

be allowed to pay a larger percentage for 

smaller loan amounts, which could be 

an incentive to originate loans in lowerpriced neighborhoods that ensures that 

the originator receives an amount that is 

comparable to loans originated in highpriced neighborhoods? If so, should 

creditors also be permitted to pay 

originators a higher percentage for larger 

loan amounts? 

Prohibition of compensation from 

both the consumer and another source. 

Proposed § 226.36(d)(2) would provide 

that, if a loan originator is compensated 

directly by the consumer for a 

transaction secured by real property or 

a dwelling, no other person may pay 

any compensation to the originator for 

that transaction. Direct compensation 

paid by a consumer to a loan originator 

would not be limited to ‘‘origination 

fees,’’ ‘‘broker fees,’’ or similarly labeled 

charges. Rather, compensation for this 

purpose includes any payment by the 

consumer that is retained by the loan 

originator. Thus, a creditor that is a loan 

originator by virtue of making a table 

funded transaction, as discussed above, 

would be subject to this prohibition if 

it imposes and retains any direct charge 

on the consumer for the transaction. 

Consumers reasonably may believe 

that when they pay a loan originator 

directly, that amount is the only 

compensation the originator will 

receive. As discussed above, consumers 

generally are not aware of creditor 

payments to originators. If the consumer 

were aware of such payments, the 

consumer might reasonably expect that 

making a direct payment to an 

originator would reduce or eliminate the 

need for the creditor to fund the 

originator’s compensation through the 

consumer’s interest rate. Because the 

consumer is unaware of yield spread 

premiums, however, the consumer 

cannot effectively negotiate the 

originator’s compensation. In fact, if 

consumers pay loan originators directly 

and creditors also pay originators 

through higher rates, consumers may be 

injured by unwittingly paying 

originators more in total compensation 

(directly and through the rate) than 

consumers believe they agreed to pay. 

The Board believes that simply 

disclosing the yield spread premium 

would not address this injury to 

consumers. Consumer testing in 

connection with the Board’s 2008 

HOEPA Final Rule shows that, even 

with a disclosure, consumers do not 

understand how a creditor payment to 

a loan originator can result in a higher 

interest rate for the consumer. A 

disclosure therefore cannot inform 

consumers that they effectively are 

paying the loan originator more than 

they believe they agreed to pay. Without 

that knowledge, consumers cannot take 

steps to protect their own interests, such 

as by negotiating for a smaller direct 

payment, a lower rate, or both. 

The Board also believes that this 

prohibition would increase 

transparency for consumers by requiring 

that all originator compensation come 

from the creditor or from the consumer, 

but not both. This additional 

consequence of proposed § 226.36(d)(2) 

would reduce the total number of loan 

pricing variables with which the 

consumer must contend. There is 

evidence that such simplification is 

consistent with TILA’s purpose of 

promoting the informed use of 

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65See, e.g., Woodward, Susan E., A Study of 

Closing Costs for FHA Mortgages at 70–73 (Urban 

Institute and U.S. Department of Housing and 

Urban Development 2008), available at http:// 

www.urban.org/UploadedPDF/ 

411682_fha_mortgages.pdf. 

consumer credit.65 See TILA Section 

102(a), 15 U.S.C. 1601(a). 

Proposed § 226.36(d)(2) would 

prohibit only payments to an originator 

that are made in connection with the 

particular credit transaction, such as a 

commission for delivering the loan. The 

rule is not intended to prohibit payment 

of a salary to a loan originator who also 

receives direct compensation from a 

consumer in connection with that 

consumer’s transaction. This guidance 

is contained in proposed comment 

36(d)(2)–1. 

Record retention requirements. 

Creditors are required by § 226.25(a) to 

retain evidence of compliance with 

Regulation Z for two years. Proposed 

staff comment 25(a)–5 would be added 

to clarify that, to demonstrate 

compliance with § 226.36(d)(1), a 

creditor must retain at least two types of 

records. 

First, a creditor must have a record of 

the compensation agreement with the 

loan originator that was in effect on the 

date the transaction’s rate was set. The 

Board believes this date is most likely 

when a loan originator’s compensation 

was determined for a given transaction. 

The Board seeks comment, however, on 

whether some other time would be more 

appropriate, in light of the purposes of 

the proposed rule. Proposed comment 

25(a)–5 would clarify that the rules in 

§ 226.35(a) would govern in determining 

when a transaction’s rate is set. 

Second, proposed comment 25(a)–5 

would state that a creditor must retain 

a record of the actual amount of 

compensation it paid to a loan 

originator in connection with each 

covered transaction. The proposed 

comment would clarify that, in the case 

of mortgage brokers, the HUD–1 

settlement statement required under 

RESPA would be an example of such a 

record because it itemizes the 

compensation received by a mortgage 

broker. The Board solicits comment on 

whether any comparable record exists 

for loan officer compensation that 

should be referenced in proposed 

comment 25(a)–5. To facilitate 

compliance, a cross reference to the 

record retention requirement would be 

included in proposed comment 

36(d)(1)–9. 

The Board solicits comment on 

whether there are other records that 

should be subject to the retention 

requirements. The Board also seeks 

comment on whether the existing twoyear record retention period is adequate 

for purposes of the rules governing loan 

originator compensation. 

The current record retention 

requirements in § 226.25 apply only to 

creditors. Although loan originator 

compensation has historically been paid 

by creditors, the prohibitions in 

§ 226.36(d) apply more broadly to any 

person to prevent evasion by 

restructuring of payments through noncreditors. Accordingly, the Board 

expects that payments to loan 

originators will continue to be made 

largely by creditors. The Board seeks 

comment on whether there is a need to 

adopt requirements for retaining records 

concerning originator compensation that 

would apply to persons other than 

creditors, including the relative costs 

and benefits of that approach. 

36(e) Prohibition on Steering 

Optional Proposal on Steering by Loan 

Originators 

The Board is also soliciting comment 

on whether it should adopt a rule that 

seeks to prohibit loan originators from 

directing or ‘‘steering’’ consumers to 

loans based on the fact that the 

originator will receive additional 

compensation, when that loan may not 

be in the consumer’s best interest. 

Under proposed § 226.36(d)(1), a loan 

originator would receive the same 

compensation from a particular creditor 

regardless of the transaction’s rate or 

terms. That provision, however, would 

not prohibit a loan originator from 

directing a consumer to transactions 

from a single creditor that offers greater 

compensation to the originator, while 

ignoring possible transactions having 

lower interest rates that are available 

from other creditors. 

Attempting to address this issue 

presents difficulties. Determining 

whether a loan originator was warranted 

in directing a consumer to a loan that 

resulted in greater compensation for the 

originator also involves a determination 

of whether that loan was in the 

consumer’s best interest compared to 

other available loan products. There is, 

however, no uniform method for making 

that evaluation. Consumers and loan 

originators may choose from among 

possible loan offers for a variety of 

reasons. The annual percentage rate 

(APR) is a tool that facilitates 

comparison shopping among different 

loans, but it is imperfect for reasons that 

are well documented, including the fact 

that the APR is calculated by amortizing 

origination fees over the full loan term 

rather than the expected life of the loan. 

See the 1998 Joint Report to the 

Congress by the Board and HUD, cited 

above. In considering interest rates, 

consumers may view the economic 

trade-off between rates and points 

differently depending on their 

individual financial circumstances or 

the amount of time they expect to hold 

the loan. Moreover, consumers evaluate 

other factors in deciding whether a loan 

is in their best interest even if it is not 

represented as the lowest cost option 

among the possible loan offers available 

through the originator. Thus, some 

consumers may reasonably determine 

that the financial risk created by a loan’s 

prepayment penalty is acceptable in 

light of the loan’s lower interest rate, 

while other consumers may prefer to 

accept a higher rate to avoid the risk. 

Consumers and loan originators also 

may consider factors other than loan 

cost, such as the creditor’s rate lock-in 

policies, or the creditor’s reputation for 

delivering loans within the promised 

time-frame, especially for homepurchase loans. 

The Board believes, however, that 

there is benefit in attempting to craft a 

rule that prohibits and deters the most 

egregious practices, even if such a rule 

cannot ensure that consumers always 

obtain the lowest cost loan. Under the 

proposal, a loan originator would have 

a duty not to steer a consumer to higher 

cost loans that pay more to the 

originator when the loan is not in the 

consumer’s interest. Originators would 

violate the rule, for example, if they 

directed the consumer to a fixed-rate 

loan option from a creditor that 

maximizes the originator’s 

compensation without providing the 

consumer with an opportunity to choose 

from other available loans that have 

lower fixed interest rates with the 

equivalent amount in origination and 

discount points. 

The Board is publishing a proposal, 

designated as proposed § 226.36(e)(1), to 

reflect this optional approach. 

Specifically, the rule would prohibit 

loan originators from directing or 

‘‘steering’’ a consumer to consummate a 

transaction secured by real property or 

a dwelling that is not in the consumer’s 

interest, based on the fact that the 

originator will receive greater 

compensation from the creditor in that 

transaction than in other transactions 

the originator offered or could have 

offered to the consumer. The proposed 

rule seeks to preserve consumer choice 

by ensuring that consumers have 

appropriate loan options that reflect 

considerations other than the maximum 

amount of compensation that will be 

paid to the originator. Proposed 

comments 36(e)(1)–1 through –3 would 

provide additional guidance on the rule. 

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43286 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

Proposed § 226.36(e) would not 

require a loan originator to direct a 

consumer to the transaction that will 

result in the least amount of 

compensation being paid to the 

originator by the creditor. However, if 

the loan originator reviews possible loan 

offers available from a significant 

number of the creditors with which the 

originator regularly does business and 

the originator directs the consumer to 

the transaction that will result in the 

least amount of creditor-paid 

compensation, the requirements of 

§ 226.36(e) would be deemed to be 

satisfied. See proposed comment 

36(e)(1)–2(ii). 

Loan originators employed by the 

creditor in a transaction would be 

prohibited under § 226.36(d)(1) from 

receiving compensation based on the 

terms or conditions of the loan. Thus, 

when originating loans for the 

employer, the originator could not steer 

the consumer to a particular loan to 

increase compensation. Accordingly, in 

those cases, their compliance with 

§ 226.36(d)(1) would be deemed to 

satisfy the requirements of proposed 

§ 226.36(e). See proposed comment 

36(e)(1)–2(ii). A creditor’s employee, 

however, occasionally might act as a 

broker in forwarding a consumer’s 

application to a creditor other than the 

originator’s employer, such as when the 

employer does not offer any loan 

products for which the consumer would 

qualify. If the originator is compensated 

for arranging the loan with the other 

creditor, the originator would not be an 

employee of the creditor in that 

transaction and would be subject to 

proposed § 226.36(e). 

The Board is also publishing 

provisions that would facilitate 

compliance with the prohibition in 

proposed § 226.36(e)(1). Under 

proposed § 226.36(e)(2) and (3), a safe 

harbor would be created, and there 

would be no violation if the loan was 

chosen by the consumer from at least 

three loan options for each type of 

transaction (fixed-rate or adjustable-rate 

loan) in which the consumer expressed 

an interest, provided the following 

conditions are met. The loan originator 

must obtain loan options from a 

significant number of creditors with 

which the originator regularly does 

business. For each type of transaction in 

which the consumer expressed an 

interest, the originator must present and 

permit the consumer to choose from at 

least three loans that include: the loan 

with the lowest interest rate, the loan 

with the second lowest interest rate, and 

the loan with the lowest total dollar 

amount for origination points or fees 

and discount points. The loan originator 

must have a good faith belief that these 

are loans for which the consumer likely 

qualifies. If the originator presents more 

than three loans to the consumer, the 

originator must highlight the three loans 

that satisfy the lowest rate and points 

criteria in the rule. Proposed comments 

36(e)(2)–1 and 36(e)(3)–1 though –4 

would provide guidance on the 

application of the rule. 

Comment is expressly solicited on 

whether the proposed rule in § 226.36(e) 

and the accompanying commentary 

would be effective in achieving the 

stated purpose. Comment is also 

solicited on the feasibility and 

practicality of such a rule, its 

enforceability, and any unintended 

adverse effects the rule might have. 

36(f) 

The Board proposes to redesignate 

existing § 226.36(d) as § 226.36(f). 

Existing § 226.36(d) provides that 

§ 226.36 does not apply to home-equity 

lines of credit (HELOCs). The 

redesignation would accommodate 

proposed new § 226.36(d) and (e), 

discussed above. 

The Board proposed as part of the 

2008 HOEPA proposal to exclude 

HELOCs from the coverage of § 226.36 

because of two considerations, which 

suggested that the protections may be 

unnecessary for such transactions. First, 

the Board understood that most 

originators of HELOCs hold them in 

portfolio rather than sell them, which 

aligns these originators’ interests in loan 

performance more closely with their 

borrowers’ interests. Second, the Board 

understood that HELOCs are 

concentrated in the banking and thrift 

industries, where the federal banking 

agencies can use their supervisory 

authority to protect consumers. The 

Board sought comment on whether 

these considerations were valid or 

whether any or all of the protections in 

§ 226.36 should apply to HELOCs. 

Although mortgage lenders and other 

industry representatives commented in 

support of the proposed exclusion and 

consumer advocates commented in 

opposition, neither group provided the 

Board with substantial evidence as to 

whether the kinds of problems § 226.36 

addresses exist in the HELOC market. 

In the July 2008 HOEPA Final Rule, 

the Board limited the scope of § 226.36 

to closed-end mortgages. In the absence 

of clear evidence of abuse, the Board 

continued to believe the protections 

may be unnecessary for the reasons 

discussed above. Nevertheless, the 

Board remains aware of concerns that 

creditors may structure transactions as 

HELOCs solely to evade the protections 

of § 226.36. The Board also is aware that 

many of the same opportunities and 

incentives that underlie the abuses 

addressed by § 226.36 for closed-end 

mortgages may well exist for HELOCs. 

Reasons therefore exist for positing that 

such unfair practices either may or may 

not occur with HELOCs, but the Board 

lacks concrete evidence as to which is 

the case. 

The Board requests comment on 

whether any or all of the protections in 

§ 226.36 should apply to HELOCs. 

Specifically, what evidence exists that 

shows whether loan originators unfairly 

manipulate HELOC terms and 

conditions to receive greater 

compensation, injuring consumers as a 

result? What evidence is there as to 

whether appraisals obtained for 

HELOCs have been influenced toward 

misstating property values? To what 

extent do creditors contract out HELOC 

servicing to third parties, thus 

undermining the Board’s premise 

regarding aligned interests between 

servicers and consumers? Whether third 

parties or the original creditors 

primarily service HELOCs, what 

evidence shows whether they engage in 

the abusive servicing practices 

addressed by § 226.36(c)? 

Section 226.37 Special Disclosure 

Requirements for Closed-End Mortgages 

Section 226.17(a), which implements 

Sections 122(a) and 128(b)(1) of TILA, 

addresses format and other disclosure 

standards for all closed-end credit. 15 

U.S.C. 1632(a), 1638(b)(1). For closedend credit, creditors must provide 

disclosures in writing in a form that the 

consumer may keep, grouped together 

and segregated from other information. 

In addition, the loan’s ‘‘finance charge’’ 

and ‘‘annual percentage rate,’’ using 

those terms, must be more conspicuous 

than other required disclosures. 

The Board proposes special rules in 

new § 226.37 to govern the format of 

required disclosures under TILA for 

transactions secured by real property or 

a dwelling. These new rules would be 

in addition to the rules in § 226.17. The 

proposed format rules are intended to 

(1) improve consumers’ ability to 

identify disclosed loan terms more 

readily; (2) emphasize information that 

is most important to the consumer in 

the decision-making process; and (3) 

simplify the organization and structure 

of required disclosures to reduce 

complexity and ‘‘information overload.’’ 

Proposed § 226.37 would establish 

special format rules for disclosures 

required by proposed §§ 226.38 and 

226.20(d), and existing §§ 226.19(b) and 

226.20(c). 

The Board is proposing § 226.37 and 

associated commentary to address the 

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66See also Improving Consumer Mortgage 

Disclosures (finding that incorporating white space, 

using clear headings, and using certain formatting 

and organization create a ‘‘less intimidating 

appearance than many consumer financial 

disclosures, making it more likely that consumers 

will both want to read the form and be able to use 

it productively in their decisions.’’). 

67See the 1998 Joint Report, App.A–6. 

68See also Improving Consumer Mortgage 

Disclosure at 69 (consumer testing results showed 

that current mortgage disclosure forms failed to 

convey key cost disclosures, but that prototype 

disclosures, which removed less useful information, 

significantly improved consumers’ recognition of 

key mortgage costs). 

duty to provide ‘‘clear and 

conspicuous’’ disclosures that are 

grouped together and segregated from 

other information, and to require that 

certain information be highlighted in 

table form or in a graph. Proposed 

§ 226.37 would also require creditors to 

use consistent terminology for all 

disclosures. The Board is proposing to 

revise the requirement that certain terms 

be used or disclosed more 

conspicuously, for transactions secured 

by real property or a dwelling. The 

general disclosure standards under 

§ 226.17(a)(1) and associated 

commentary continue to apply 

transactions secured by real property or 

a dwelling but, under the proposal 

creditors would also be required to meet 

the higher standards under proposed 

§ 226.37. 

37(a) Form of Disclosures 

37(a)(1) Clear and Conspicuous 

Section 122(a) of TILA and 

§ 226.17(a)(1) require that all closed-end 

credit disclosures be made clearly and 

conspicuously. 15 U.S.C. 1632(a). 

Currently, under comment 17(a)(1)–1, 

the Board interprets the clear and 

conspicuous standard to mean that 

disclosures must be in a ‘‘reasonably 

understandable’’ form. This standard 

does not require any mathematical 

progression or format, or that 

disclosures be provided in a particular 

type size, although disclosures must be 

legible whether typewritten, 

handwritten, or printed by computer. 

Comment 17(a)(1)–3 provides that the 

standard does not require disclosures to 

be located in a particular place. 

Consumer testing conducted by the 

Board showed that information 

presented without any highlighting or 

other emphasis, and the use of small 

print led many participants to miss or 

disregard key information about the 

loan transaction. As discussed more 

fully under the following sections, 

consumer testing indicates that when 

certain information is presented and 

highlighted in a specific way consumers 

are able to identify and use key terms 

more easily: proposed § 226.38 for 

disclosures required on transactions 

secured by real property or a dwelling, 

§ 226.19(b) for ARM loan program 

disclosures, § 226.20(c) for ARM 

adjustment notices, and § 226.20(d) for 

periodic statements on loans that are 

negatively amortizing.66 For example, 

consumer testing of the current TILA 

model form indicated that participants 

viewed both the interest rate and 

monthly payment as important. 

Although participants generally 

understood that the interest rate on their 

loan could change, several arrived at 

this conclusion because of the payment 

schedule disclosure, which showed 

different monthly payment amounts, not 

because they understood the loan had a 

variable rate feature that would affect 

their monthly payments. In addition to 

testing the current TILA model form, the 

Board also tested variations of that form, 

including a form it developed in 1998 

with HUD (‘‘Joint Form’’) that was 

submitted to Congress in the 1998 Joint 

Report.67 Participants who reviewed the 

Joint Form also generally understood 

the loan had an adjustable rate, but less 

than half understood the rate was fixed 

only for the first three years and could 

vary only after that time period. 

However, when the Board consumer 

tested information about interest rates 

and monthly payments in a tabular 

form, participants could identify more 

readily that the loan had an adjustable 

rate feature, and comprehension of 

when interest rates would adjust and 

the impact that rate adjustments had on 

their monthly payments improved. 

For these reasons, the Board proposes 

to require that creditors make 

disclosures for transactions secured by 

real property or a dwelling clearly and 

conspicuously, by highlighting certain 

information in accordance with the 

requirements in proposed §§ 226.38, 

226.19(b), § 226.20(c), and § 226.20(d). 

Proposed comment 37(a)(1)–1 would 

clarify that to meet the clear and 

conspicuous standard, disclosures must 

be in a reasonably understandable form 

and readily noticeable to the consumer. 

Proposed comment 37(a)(1)–2 provides 

that to meet the readily noticeable 

standard, the disclosures under 

proposed §§ 226.38, 226.19(b), 

226.20(c), and 226.20(d) generally must 

be provided in a minimum 10-point 

font. The approach of requiring a 

minimum of 10-point font for certain 

disclosures is consistent with the 

approach taken by the Board in revising 

disclosures required under TILA for 

certain open-end credit. 74 FR 5244; 

Jan. 29, 2009. 

New comment 37(a)(1)–3 would 

clarify that disclosures under proposed 

§§ 226.38 and 226.19(b) must be 

provided on a document separate from 

other information, although these 

disclosures, as well as disclosures under 

proposed §§ 226.20(c) and 226.20(d), 

may be made on more than one page, on 

the front or back side of a page, and 

continued from one page to the next. 

Consumer testing suggests that 

consumers may not read information 

carefully if it is excessive in length, and 

if unable to identify relevant 

information quickly are likely to become 

frustrated and not read the disclosures. 

The Board believes that allowing 

creditors to combine disclosures with 

other information may increase the 

likelihood that consumers will not read 

the disclosures. 

37(a)(2) Grouped Together and 

Segregated 

Section 128(b)(1) of TILA and 

§ 226.17(a)(1) currently require that, 

except for certain information, the 

disclosures required for closed-end 

credit must be grouped together, 

segregated from everything else, and not 

contain any information not directly 

related to the required disclosures. 15 

U.S.C. 1638(b)(1). Comment 17(a)(1)–2 

states that creditors can satisfy the 

grouped together and segregation 

requirement in a variety of ways, 

including combining segregated 

disclosures with other information as 

long as they are set off by a certain 

format type. Comment 17(a)(1)–2 further 

provides that the segregation 

requirement does not apply to 

disclosures for variable rate transactions 

required under current §§ 226.19(b) and 

226.20(c). Comment 17(a)(1)–7 clarifies 

that balloon-payment financing with 

leasing characteristics is subject to the 

grouped together and segregation 

requirement. 

Consumer testing conducted by the 

Board indicated that participants 

generally are overwhelmed by the 

amount of information presented for 

loan transactions, and as a result, do not 

read their mortgage disclosures 

carefully. Consumer testing showed that 

emphasizing terms and costs consumers 

find important, and separating out less 

useful information, is critical to 

improving consumers’ ability to identify 

and use key information in their 

decision-making process.68 Consumer 

testing also demonstrated that grouping 

related concepts and figures together, 

and presenting them in a particular 

format or structure can improve 

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consumers’ ability to identify, 

comprehend, or use disclosed terms. 

For these reasons, the Board proposes 

to require that certain disclosures be 

grouped together and segregated in the 

manner discussed below, pursuant to its 

authority under TILA Section 105(a). 15 

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

authorizes the Board to make exceptions 

and adjustments to TILA to effectuate 

the statute’s purposes, which include 

facilitating consumers’ ability to 

compare credit terms and helping 

consumers avoid the uninformed use of 

credit. 15 U.S.C. 1601(a), 1604(a). 

Grouping and segregating information 

which is most useful and relevant to the 

loan transaction would facilitate 

consumers’ ability to evaluate a loan 

offer. 

Segregation of disclosures. Proposed 

§ 226.37(a)(2) would implement TILA 

Section 128(b)(1) of TILA, in part, for 

transactions secured by real property or 

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

1638(b)(1). Proposed § 226.37(a)(2) 

would require that disclosures for such 

transactions be grouped together in 

accordance with the requirements under 

proposed § 226.38(a) through (j), 

segregated from other information, and 

not contain any information not directly 

related to the segregated disclosures. 

Based on consumer testing, the Board 

also is proposing to require that ARM 

loan program disclosures under 

proposed § 226.19(b), ARM adjustment 

notices under proposed § 226.20(c), and 

periodic notices for payment option 

loans that are negatively amortizing 

under proposed § 226.20(d), be subject 

to a grouped-together and segregation 

requirement. Thus, the reference to 

§§ 226.19(b) and 226.20(c) would be 

deleted from comment 17(a)(1)–2. 

Proposed comment 37(a)(2)–1 would 

clarify that to be segregated, disclosures 

must be set off from other information. 

Based on consumer testing, the Board is 

concerned that allowing creditors to 

combine disclosures with other 

information, in any format, will 

diminish the clarity of key disclosures, 

potentially cause ‘‘information 

overload,’’ and increase the likelihood 

that consumers may not read the 

disclosures. Proposed comment 

37(a)(2)–1 also would provide guidance 

on how creditors can group together and 

segregate the disclosures in accordance 

with proposed § 226.38(a)–(j), such as 

by using bold print dividing lines. 

Content of segregated disclosures; 

directly related information. Footnotes 

37 and 38 currently provide exceptions 

to the grouped-together and segregation 

requirement under § 226.17(a)(1). 

Footnote 37 allows creditors to include 

information not directly related to the 

required disclosures, such as the 

consumer’s name, address, and account 

number. Footnote 38, which 

implements TILA Section 128(b)(1), 15 

U.S.C. 1638(b)(1), allows creditors to 

exclude certain required disclosures 

from the grouped-together and 

segregation requirement, such as the 

creditor’s identity under § 226.18(a), the 

variable-rate example under 

§ 226.18(f)(1)(iv), insurance or debt 

cancellation disclosures under 

§ 226.18(n), or certain security-interest 

charges under § 226.18(o). Comment 

17(a)(1)–4 clarifies that creditors have 

flexibility in grouping the disclosures 

listed in footnotes 37 and 38 either 

together with or separately from 

segregated disclosures, and comment 

17(a)(1)–5 addresses what is considered 

directly related to the segregated 

disclosures. 

Proposed § 226.37(a)(2)(i) and (ii) 

would provide exceptions to the 

grouped-together and segregation 

requirement, and implement TILA 

Section 128(b)(1) for transactions 

secured by real property or a dwelling. 

15 U.S.C. 1638(b)(1). Proposed 

§ 226.37(a)(2)(i) replicates the content in 

current footnote 37 and would allow the 

following disclosures to be made 

together with the segregated disclosures: 

the date of the transaction, and the 

consumer’s name, address and account 

number. Proposed § 226.37(a)(2)(ii) 

generally replicates the substance in 

current footnote 38, except that the 

Board proposes to remove the reference 

to the variable-rate example under 

§ 226.18(f)(iv), which would be 

eliminated for mortgage loans as 

discussed under proposed § 226.19(b). 

Under proposed § 226.37(a)(2)(ii), 

creditors also would have flexibility to 

make the tax deductibility disclosure, as 

discussed under proposed § 226.38(f)(4), 

together with or separately from other 

required disclosures. 

Proposed comment 37(a)(2)–2 clarifies 

that creditors may add or delete the 

disclosures listed in proposed 

§ 226.37(a)(2)(i) and (ii) in any 

combination together with or separate 

from the segregated disclosures. 

Proposed comment 37(a)(2)–3 provides 

guidance on the type of information that 

would be considered directly related 

and that may be included with the 

segregated disclosures for transactions 

secured by real property or a dwelling. 

Information described in comments 

17(a)(1)–5(i) through (xv) are not 

included in proposed comment 

37(a)(2)–3 because they are not 

applicable to transactions secured by 

real property or a dwelling, or are 

unnecessary as a result of other 

proposed disclosures: grace periods for 

late fees; unsecured interest; demand 

features; instructions on multi-purpose 

forms; minimum finance charge 

statement; negative amortization; dueon-sale clauses; prepayment of interest 

statement; the hypothetical example 

disclosure required by current 

§ 226.18(f)(1)(iv); the variable rate 

transaction disclosure required by 

current § 226.18(f)(1); assumption; and 

the late-payment fee disclosure for 

single-payment loans. 

The Board also proposes to require 

that the disclosure of the creditor’s 

identity be grouped together and 

segregated from other information, for 

all closed-end credit. The Board 

proposes to make this change pursuant 

to its authority under TILA Section 

105(a). 15 U.S.C. 1604(a). Section 105(a) 

authorizes the Board to make exceptions 

and adjustments to TILA to effectuate 

the statute’s purposes, which include 

facilitating consumers’ ability to 

compare credit terms, and avoiding the 

uninformed use of credit. 15 U.S.C. 

1601(a). The Board believes that the 

creditor’s identity should be included 

with the grouped-together and 

segregated disclosures so that 

consumers can more easily identify the 

appropriate entity. Thus, current 

footnote 38 would be revised, and 

proposed § 226.37(a)(2) would 

implement this aspect of the proposal 

for transactions secured by real property 

or a dwelling. 

In technical revisions, the Board 

proposes to move the substance of 

footnotes 37 and 38 to the regulatory 

text of § 226.17(a)(1). Current comment 

17(a)(1)–7 would be revised to address 

disclosures for transactions secured by 

real property or a dwelling that have 

balloon payment financing with leasing 

characteristics; a cross-reference to 

comment 17(a)(1)–7 is proposed in new 

comment 37(a)(2)–4. 

The Board seeks comment on whether 

it should continue to permit creditors to 

make the insurance or debt cancellation 

disclosures under proposed § 226.4(d) 

together with or separately from other 

required disclosures. Consumer testing 

showed that many participants found 

these disclosures too long and complex, 

and as a result they do not read or only 

skim the disclosures. The Board is 

concerned that adding the insurance 

information to the information about 

loan terms required by proposed 

§ 226.38 will result in ‘‘information 

overload.’’ 

Multi-purpose forms. Comment 

17(a)(1)–6 currently permits creditors to 

design multi-purpose forms for TILArequired closed-end credit disclosures 

as long as the clear and conspicuous 

requirement is met. The Board proposes 

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69See also Improving Consumer Mortgage 

Disclosures at 37–38, 59–60 (finding that 

streamlining disclosures improved consumer ability 

to identify and understand key terms of the loan 

transaction disclosed). 

to require that disclosures for 

transactions secured by real property or 

a dwelling be made only as applicable, 

as discussed more fully under proposed 

§ 226.38. As noted, consumer testing 

indicates that consumers may not read 

information if it is excessive in length, 

and if unable to identify relevant 

information quickly are likely to become 

frustrated and not read the disclosures. 

The Board believes that allowing 

creditors to combine disclosures with 

other information that is not applicable 

to the transaction may contribute to 

‘‘information overload,’’ and increase 

the likelihood that consumers will not 

read the disclosures. 

For these reasons, under the proposal 

creditors would not be permitted to use 

forms for more than one type of 

mortgage transaction (i.e., multi-purpose 

forms). The Board believes technology 

and form design software will allow 

creditors to prepare transaction-specific, 

customized disclosure forms at minimal 

cost. The Board seeks comment, 

however, on whether creditors already 

provide consumers with customized 

disclosures forms for mortgage loans in 

the regular course of business, or the 

extent to which creditors rely on multipurpose forms. The Board seeks 

comment on potential operational 

changes, difficulties, or costs that would 

be incurred to implement the 

requirement to have transaction-specific 

disclosures for transactions secured by 

real property or a dwelling. 

37(b) Separate Disclosures 

Existing § 226.17(a)(1) requires certain 

disclosures to be provided separately 

from the segregated information, such as 

the itemization of amount financed 

required by § 226.18(c)(1) and TILA 

Section 128(a)(2)(A). 15 U.S.C. 

1638(a)(2)(A). The Board is proposing to 

expand the list of disclosures that must 

be provided separately from the 

segregated information, based on 

consumer testing. 

Consumer testing showed that certain 

disclosures, such as disclosures about 

assumption or property insurance, were 

confusing to participants, or were 

generally not as useful in the 

participants’ decision-making process as 

other information. For example, with 

respect to assumption, few participants 

understood the current assumption 

policy model clause in Model Clause H– 

6 in Appendix H to Regulation Z; almost 

no one stated that the assumption was 

important information when applying 

for and obtaining a loan. With respect to 

property insurance, most participants 

understood that the borrower can obtain 

property insurance from anyone that is 

acceptable to the lender, but 

participants stated they were already 

aware of this fact and therefore this 

information was not useful. Regarding 

rebates, consumers understood that 

early payoff of the loan could result in 

a refund of interest and fees, and 

generally expressed interest in knowing 

this information. However, most also 

indicated that information about rebates 

would not have an impact on whether 

they accepted a loan and therefore, it 

was not as important or useful to the 

decision-making process as other 

information, such as interest rate or 

closing costs. 

With respect to the contract reference, 

almost all participants understood 

already that they could read their 

contract to learn what could happen if 

they stopped making payments, 

defaulted, paid off or refinanced their 

loan early. In addition, other proposed 

disclosures, such as the prepayment 

penalty under proposed § 226.38(a)(5) or 

demand feature under proposed 

§ 226.38(d)(2)(iv), would make the 

contract reference disclosure less 

important because such information 

would already be disclosed directly on 

the disclosure statement itself. 

Moreover, because creditors must 

provide disclosures within three 

business days after application for 

transactions secured by real property or 

a consumer’s dwelling, consumers will 

not have a contract to reference at this 

point in time. 

For these reasons, the Board proposes 

to require that certain information be 

disclosed separately from the grouped 

together and segregation information, to 

improve consumers’ ability to focus on 

the terms that are most important for 

shopping and decision-making.69 New 

§ 226.37(b) would require that creditors 

provide the following disclosures 

separately from other information for 

transactions secured by real-property or 

a dwelling: Itemization of amount 

financed under proposed § 226.38(j)(1); 

rebates under proposed § 226.38(j)(2); 

late payment under proposed 

§ 226.38(j)(3); property insurance under 

proposed § 226.38(j)(4); contract 

reference under proposed § 226.38(j)(5); 

and assumption under proposed 

§ 226.38(j)(6). 

The Board proposes this approach 

pursuant to its authority under TILA 

Section 105(a). 15 U.S.C. 1604(a). 

Section 105(a) authorizes the Board to 

make exceptions and adjustments to 

TILA for any class of transactions to 

effectuate the statute’s purposes, which 

include facilitating consumers’ ability to 

compare credit terms and helping 

consumers avoid the uninformed use of 

credit. 15 U.S.C. 1601(a), 1604(a). In this 

case, the Board believes an exception 

from TILA’s grouped together and 

segregation requirement is necessary to 

effectuate the Act’s purposes for 

transactions secured by real property or 

a dwelling. As noted above, many 

consumers may not read information if 

it is excessive in length, and if unable 

to identify relevant information quickly 

are likely to become frustrated and not 

read the disclosures. The Board is 

concerned that allowing creditors to 

combine the information in proposed 

§ 226.38(j) with other required 

information could contribute to 

‘‘information overload,’’ distract from 

other important disclosures, such as the 

APR or monthly payments, and may 

increase the likelihood that consumers 

will not read the disclosures. Thus, the 

Board believes that requiring these 

disclosures to be separate from the other 

required disclosures will serve TILA’s 

purpose to avoid the uninformed use of 

credit. 15 U.S.C. 1601(a). 

37(c) Terminology 

37(c)(1) Consistent Terminology 

Currently, there is no requirement 

that TILA disclosures for closed-end 

credit use consistent terminology. 

Consumer testing showed that some 

participants were confused when 

different terms are used for the same 

information. For example, when the 

terms loan amount, principal, and loan 

balance were used, some participants 

attributed different meaning to each 

term used. Based on these findings, the 

Board proposes § 226.37(c)(1) to require 

the use of consistent terminology for the 

disclosures under proposed §§ 226.38, 

226.19(b), 226.20(c) and 226.20(d). The 

Board believes that using consistent 

terminology will enhance a consumers’ 

ability to identify, review, and 

comprehend disclosed terms across all 

disclosures and therefore, avoid the 

uninformed use of credit. Proposed 

comment 37(c)(1)–1 clarifies that terms 

do not need to be identical, unless 

otherwise specified, but must be close 

enough in meaning to enable the 

consumer to relate the disclosures to 

one another. Proposed comment 

37(c)(1)–2 provides guidance on 

combining terms for transactions 

secured by real property or a dwelling 

when more than one numerical 

disclosure would be the same, and 

provides an example relating to the total 

payments and amount financed 

disclosures required under proposed 

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43290 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

§§ 226.38(e)(5)(i) and 226.38(e)(5)(iii), 

respectively. 

37(c)(2) Terms Required To Be More 

Conspicuous 

Currently TILA Section 122(a) and 

§ 226.17(a)(2) require creditors to 

disclose the terms ‘‘finance charge’’ and 

‘‘annual percentage rate,’’ together with 

a corresponding dollar amount and 

percentage rate, more conspicuously 

than any other disclosure, except the 

creditor’s identity under § 226.18(a). 15 

U.S.C. 1632(a). Under TILA Section 

103(u), the finance charge and the 

annual percentage rate are material 

disclosures; failure to disclose either 

term extends the right of rescission 

under TILA Section 125, and can result 

in actual and statutory damages under 

TILA Section 130(a). 15 U.S.C. 1602(u); 

15 U.S.C. 1635, 1640(a). 

Finance charge: interest and 

settlement charges. Section 226.18(d), 

which implements TILA Sections 

128(a)(3) and (a)(8), requires creditors to 

disclose the ‘‘finance charge,’’ using that 

term, and a brief description such as 

‘‘the dollar amount the credit will cost 

you’’ for closed-end credit. 15 U.S.C. 

1638(a)(3), (a)(8). Consumer testing 

showed that participants could not 

correctly explain what the finance 

charge represented. Many consumers 

recognized that the finance charge 

included all of the interest they would 

pay over the loan’s term, but did not 

know that it also included fees. Most 

participants did not find the finance 

charge to be useful in evaluating a loan 

offer. However, some participants 

expressed a general interest in knowing 

the information. 

Based on these results, the Board 

tested a form with the finance charge 

disclosed as ‘‘interest and settlement 

charges,’’ to more closely represent the 

components of the finance charge. 

Participants generally understood the 

term, but still stated that they did not 

find the term very useful, particularly 

when compared to other information 

such as the interest rate or monthly 

payments. Consumer testing suggests 

that highlighting terms that are not 

useful in the decision-making process 

may generally diminish consumers’ 

ability to understand other key terms. 

For these reasons, and as discussed 

more fully in the discussion of proposed 

§ 226.38(e)(5)(ii), the Board proposes to 

exercise its authority under TILA 

Section 105(a) to make certain 

exceptions to the disclosure of the 

finance charge under TILA Section 

128(a)(3) and TILA Section 122(a). 15 

U.S.C. 1604(a); 1632(a); 1638(a)(3). First, 

creditors would be required to disclose 

the finance charge as ‘‘interest and 

settlement charges,’’ not as the ‘‘finance 

charge’’ as required by TILA Section 

128(a)(3). 15 U.S.C. 1638(a)(3). Second, 

the disclosure of interest and settlement 

charges would not have to be more 

conspicuous than other terms, as 

required by TILA Section 122(a). 15 

U.S.C. 1632(a). 

The exception to TILA’s requirements 

that the finance charge be disclosed as 

the ‘‘finance charge’’ and that it be more 

conspicuous than other information is 

proposed pursuant to TILA Section 

105(a). 15 U.S.C. 1604(a). The Board has 

authority under TILA Section 105(a) to 

adopt ‘‘such adjustments and exceptions 

for any class of transactions as in the 

judgment of the Board are necessary or 

proper to effectuate the purposes of this 

title, to prevent circumvention or 

evasion thereof, or to facilitate 

compliance therewith.’’ 15 U.S.C. 

1601(a), 1604(a). The class of 

transactions that would be affected is 

closed-end transactions secured by real 

property or a dwelling. The Board 

believes an exception from TILA’s 

requirements is necessary and proper to 

effectuate TILA’s purposes to assure 

meaningful disclosure and informed 

credit use. Consumer testing showed 

that disclosing the finance charge as 

‘‘interest and settlement charges’’ 

improved participants’ understanding of 

the information, even though the figure 

may not include all interest and 

settlement charges applicable to the 

transaction. (See discussion under 

proposed § 226.4 regarding content and 

calculation of the interest and 

settlement charges.) Moreover, 

consumer testing showed that 

participants did not find the interest 

and settlement charges as useful, when 

choosing or evaluating a loan product, 

as other information, such as whether 

the loan has an adjustable rate or the 

monthly payment amount. 

In addition, and for the reasons 

discussed more fully under proposed 

§ 226.38(e)(5)(ii) regarding interest and 

settlement charges, the proposal would 

group the interest and settlement 

charges disclosure with other 

disclosures relating to the total cost of 

the loan offered, such as the total of 

payments and the amount financed. 

Consumer testing conducted by the 

Board, as well as basic document design 

principles, shows that grouping related 

concepts and figures makes it easier for 

consumers to identify, comprehend, or 

use disclosed terms. 

Annual percentage rate. TILA Section 

122(a) and § 226.17(a)(1) require that the 

term ‘‘annual percentage rate,’’ when 

disclosed with the corresponding 

percentage rate, be disclosed more 

conspicuously than any other required 

disclosure. 15 U.S.C. 1632(a). The Board 

is proposing to revise the description of 

the APR and require that creditors 

provide context for the APR by 

disclosing it on a scaled graph with 

explanatory text, as discussed more 

fully under proposed §§ 226.38(b). In 

addition, the Board is proposing 

§ 226.37(c)(2) to implement TILA 

Section 122(a) for transactions secured 

by real property or a dwelling. 15 U.S.C. 

1632(a). Section 226.37(c)(2) would 

require that creditors disclose the APR 

in a 16-point font, in a prominent 

location, and in close proximity to the 

scaled graph and explanations proposed 

under § 226.38(b)(2) through (4). 

As discussed under proposed 

§ 226.38(b), the APR is one of the most 

important terms disclosed about the 

loan; it is the only single, unified 

number available to help consumers 

understand the overall cost of a loan. To 

this end, the Board believes it is 

essential that consumers be able to 

identify the APR easily. Consumer 

testing and basic document design 

principles show that participants 

generally pay greater attention to 

figures, such as numbers, percentages 

and dollar signs, than to terminology 

that may accompany, describe or label 

any disclosed figure. However, the TILA 

disclosure contains many numerical 

figures that consumers must identify 

and review. Given that the Board is 

proposing to require a minimum 10- 

point font for disclosure of other terms 

on the TILA (see discussion under 

proposed comment 37(a)(1)–2), and 

based on document design principles, 

the Board consumer tested disclosing 

the APR figure in a larger font and in 

bold text to make it more readily 

noticeable as compared to other 

disclosed terms. When tested in this 

manner, participants were able to easily 

identify the APR. Based on consumer 

testing, the Board believes that a 16- 

point font requirement for the APR is 

sufficient to highlight the APR. The 

Board also notes that the approach of 

requiring at least a 16-point font for the 

APR disclosure is consistent with the 

approach taken by the Board in revising 

the purchase APR disclosure required 

under TILA for open-end credit. 74 FR 

5244; Jan. 29, 2009. 

Proposed comment 37(c)–3(i) through 

(iii) would provide further guidance on 

the more conspicuous requirement and 

would clarify that the APR must be 

more conspicuous only in relation to 

other required disclosures under 

proposed § 226.38, and only as required 

under proposed § 226.37(c)(2) and 

§ 226.38(b). Proposed comment 37(c)–4 

would provide guidance on how 

creditors can comply with the more 

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conspicuous requirement for 

transactions secured by real property or 

a dwelling. 

The Board seeks comment on whether 

the APR should be made more or less 

prominent using a larger or smaller fontsize, and whether different graphs or 

visuals could be used to provide better 

context for the APR. The Board also 

seeks comment on the relative 

advantages and disadvantages of a 

graphic-based versus text-based 

approach to disclosing the APR, and the 

potential operational changes, 

difficulties, or costs that would be 

incurred to implement the graphicbased APR disclosure requirement for 

transactions secured by real property or 

a dwelling. 

37(d) Specific Formats 

Currently, § 226.17(a)(1) does not 

impose special format design or location 

requirements on disclosures for closedend credit. However, as discussed more 

fully under proposed § 226.38, 

consumer testing showed that the 

current TILA form did not present key 

loan information in a manner that was 

noticeable and easy for consumers to 

understand. For example, the payment 

schedule required under current 

§ 226.18(g) did not effectively 

demonstrate to participants the 

relationship between monthly payments 

and an adjustable interest rate feature. 

Consumer testing also showed that the 

current TILA form highlighted terms 

that confused many participants. For 

example, most participants incorrectly 

assumed the amount financed was the 

same as the loan amount, a term not 

required on the current TILA form. In 

other instances, the current TILA form 

emphasized information that 

participants generally understood, but 

did not find useful or important, such 

as the total of payments. Many 

participants also noted that the current 

TILA form failed to include information 

they would find useful when shopping 

or evaluating a loan offer, such as the 

contract interest rate and settlement 

charges. 

As discussed under proposed 

§ 226.19, consumer testing of the current 

ARM loan program disclosure and the 

CHARM booklet also revealed 

ineffective presentation of information 

relating to adjustable rate loan 

programs. Many participants found the 

narrative format and terminology used 

in the current ARM loan program 

disclosure complicated, dense, and 

difficult to read and understand. With 

respect to the CHARM booklet, many 

participants generally indicated that the 

information it contained was 

informative and educational, but they 

would be unlikely to read it because it 

was too long. 

In addition, as noted previously, 

consumer testing suggests that 

consumers may not read information 

carefully if it is excessive in length, and 

if unable to identify relevant 

information quickly are likely to become 

frustrated and not read the disclosures. 

As discussed more fully under proposed 

§ 226.37(a) through (c), this suggests 

highlighting and structuring disclosures 

in a particular manner to improve 

clarity, identification and 

comprehension of disclosed terms. 

To address the problems with the 

current TILA form and ARM loan 

program disclosures, the Board used 

various formats to present key loan 

information, such as tabular forms and 

question and answer format. Consumer 

testing suggests that using tabular forms 

improved participants’ ability to readily 

identify and understand key 

information, as discussed under 

proposed §§ 226.19(b) and 226.38(c). 

For example, current ARM loan program 

disclosures provide information in 

narrative form, which participants 

found difficult to read and understand. 

However, consumer testing showed that 

when information about interest rate, 

monthly payment and loan features was 

presented in tabular format, participants 

found the information easier to locate 

and their comprehension of the 

disclosed terms improved. The benefits 

of disclosing important information in a 

tabular format are consistent with the 

results of consumer testing conducted 

by the Board in revising credit card 

disclosures. 74 FR 5244; Jan. 29, 2009. 

Consumer testing also showed that 

using question and answer format 

improved participants’ ability to 

recognize and understand potentially 

risky or costly features of a loan, as 

discussed under proposed §§ 226.19 and 

226.38(d). Consumer testing and basic 

document design principles suggest that 

keeping language and design elements 

consistent between forms improves 

consumers’ ability to identify and track 

changes in the information being 

disclosed. As a result, the Board also 

integrated the question and answer 

format used on the revised TILA model 

form into ARM loan program 

disclosures required under proposed 

§ 226.19(b). 

To present key loan terms more 

effectively, the Board also used specific 

location and structure requirements. 

Consumer testing suggests that the 

location and order in which information 

is presented impacts consumers’ ability 

to find and comprehend the information 

disclosed. For example, as discussed 

under proposed § 226.38(a), disclosing 

key information, such as the loan term, 

amount, type, and settlement charges, 

before other required disclosures and in 

a tabular format improved participants’ 

ability to quickly and accurately 

identify key loan terms. In another 

example, participants’ ability to identify 

the frequency of rate adjustments after 

an introductory period expired also 

improved when this information was 

included both in the loan summary 

section at the top of the revised TILA 

model form, and then again below in the 

interest rate and payment summary 

section. 

Based on consumer testing results, 

basic document design principles, and 

for the reasons discussed more fully 

under each of the following subsections, 

the Board is proposing to establish 

special format rules for: disclosures 

under proposed § 226.38 for 

transactions secured by real property or 

a dwelling; ARM loan program 

disclosures under proposed § 226.19(b) 

for adjustable rate transactions; ARM 

adjustment notices under proposed 

§ 226.20(c); and periodic statements 

required for payment option loans that 

are negatively amortizing under 

proposed § 226.20(d). The special rules 

regarding format, structure and location 

of disclosures are noted in proposed 

§ 226.37(d)(1) through (10). Proposed 

comments 37(d)–1 and –2 would 

provide guidance to creditors on how to 

comply with the special format rules 

noted in proposed § 226.37(d)(1) 

through (10) regarding prominence and 

close proximity of disclosed terms. 

37(e) Electronic Disclosures 

Currently, under § 226.17(a)(1) 

creditors are permitted to provide in 

electronic form any TILA disclosure for 

closed-end credit that is required to be 

provided or made available to 

consumers in writing if the consumer 

affirmatively consents to receipt of 

electronic disclosures in a prescribed 

manner. Electronic Signatures in Global 

and National Commerce Act (the E-Sign 

Act), 15 U.S.C. 7001 et seq. The Board 

proposes § 226.37(e) to allow creditors 

to provide required disclosures for 

transactions covered by proposed 

§ 226.38 in electronic form in 

accordance with the requirements under 

§ 226.17(a)(1). 

Section 226.38 Content of Disclosures 

for Credit Secured by Real Property or 

a Dwelling 

38(a) Loan Summary 

To shop for and understand the cost 

of credit, consumers must be able to 

identify and understand the key credit 

terms offered to them. As discussed 

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43292 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

below, the Board’s consumer testing 

suggested that loan amount, loan term 

and loan type are key terms that 

consumers are familiar with and expect 

to see on closed-end mortgage 

disclosures, together with settlement 

charges and whether a prepayment 

penalty would apply to their loan. 

The Board’s Proposal 

The Board proposes to require 

creditors to provide the following key 

loan features in a loan summary section: 

loan amount, loan term, loan type, the 

total settlement charges, whether a 

prepayment penalty applies and, the 

maximum amount of the penalty. The 

purpose of the proposed disclosures is 

to improve their effectiveness and 

consumer comprehension. A concise 

loan summary would help consumers 

compare loan offers; a summary may 

also help consumers determine whether 

they can afford the loan they are offered, 

and whether the disclosure presents the 

same loan terms they discussed with 

their mortgage broker or lender. 

The Board conducted consumer 

testing of loan summary disclosures. 

Participants were able to identify the 

exact loan amount, what type of a loan 

they were being offered, how long they 

would have to pay off their loan, how 

much they would have to pay in 

settlement charges, and whether a 

prepayment penalty would apply. A 

discussion of the items that would be 

included in the loan summary follows. 

38(a)(1) Loan Amount 

Currently creditors are not required to 

disclose the loan amount for closed-end 

mortgages, except for loans subject to 

HOEPA. Under § 226.32(c)(5), creditors 

are required to disclose the total amount 

borrowed. The Board is proposing to 

require a similar disclosure of the loan 

amount for all transactions secured by a 

real property or a dwelling. Proposed 

§ 226.38(a)(1) would require creditors to 

disclose ‘‘loan amount,’’ which would 

be defined as the principal amount the 

consumer will borrow reflected in the 

note or loan contract. The loan amount 

is a core loan term that the consumer 

should be able to verify readily on the 

disclosure. Disclosing the loan amount 

may also alert the consumer to fees that 

are financed in addition to the principal 

balance. 

38(a)(2) Loan Term 

Currently, Regulation Z requires 

creditors to disclose the number of 

payments but not the term of the loan. 

The Board believes that the loan term is 

an important fact about the loan that 

consumers should know when 

evaluating a loan offer. Consumer 

testing of current model forms 

conducted by the Board indicated that 

some consumers are not able to readily 

identify the loan term from the number 

of payments disclosed in the current 

disclosures. Although some participants 

could determine the loan term by 

dividing by 12 the number of months 

shown in the payment schedule 

disclosed under § 226.18(g), other 

participants could not readily figure the 

term of the loan offered, particularly for 

loans that have multiple payment levels, 

such as discounted adjustable-rate 

mortgages. For these reasons, the Board 

is proposing to require disclosure of the 

loan term in the summary section for 

loans covered by § 226.38, and to define 

‘‘loan term’’ for these purposes as the 

time to repay the obligation in full. For 

instance, instead of disclosing the 

number of months for each payment 

amount for variable interest rate loans 

and requiring the consumer to add up 

those months to determine the loan 

term, the proposed disclosure would 

state ‘‘Loan term: 30 years.’’ Likewise, 

for a 10-year loan with a balloon 

payment due in year 10 and an 

amortization schedule of 30 years, the 

proposed disclosure would state ‘‘Loan 

term: 10 years.’’ 

38(a)(3) Loan Type and Features 

Regulation Z does not require the 

creditor to disclose the type of the loan, 

except in the case of loans with variable 

interest rates. Current § 226.18(f) 

requires a disclosure of a variable rate 

if the annual percentage rate may 

increase after consummation. The 

Board’s consumer testing indicates that 

the current variable rate disclosures may 

not clearly convey whether the loan has 

a fixed or a variable interest rate. The 

Board believes that a specific disclosure 

of a loan type offered will assist 

consumers in better understanding 

whether a loan features a rate that may 

increase after consummation, so that the 

consumer may evaluate whether they 

want a loan in which the rate and 

payments can increase. 

The Board is proposing to require a 

disclosure of the loan type in the loan 

summary section for loans covered by 

§ 226.38. Proposed § 226.38(a)(3)(i) 

would require that a loan be classified 

as one of three types: an ‘‘adjustable-rate 

mortgage (ARM),’’ a ‘‘step-rate 

mortgage,’’ or a ‘‘fixed-rate mortgage’’ 

using those terms. The categories 

proposed in § 226.38(a)(3)(i) apply only 

to disclosures requires for closed-end 

transaction secured by real property or 

a dwelling, and are different from the 

categories in § 226.18(f) and 

commentary to § 226.17(c)(1). Proposed 

§ 226.38(a)(3)(ii) would require an 

additional disclosure if the loan has one 

or more of the following three features: 

‘‘negative amortization,’’ ‘‘interest-only 

payments,’’ or ‘‘step-payments,’’ using 

those terms. The related commentary 

would provide examples for each loan 

type and feature. 

38(a)(3)(i) Loan Type 

As discussed above, consumer testing 

indicated that the current variable rate 

disclosure is not sufficiently clear for 

many consumers. When presented with 

a current closed-end model form for an 

adjustable-rate mortgage, over half of the 

participants understood that the interest 

rate would change. However, several 

participants inferred this from the 

different monthly payments in the 

payment schedule, not because the 

check box on the form indicated that the 

loan had a ‘‘variable rate.’’ A few 

participants indicated that they did not 

know whether the rate would change. 

Some participants commented that 

although the current model form used 

the term ‘‘variable rate,’’ they were more 

familiar with the term ‘‘adjustable rate.’’ 

As a result, the Board tested revised 

disclosures using the term ‘‘adjustable 

rate mortgage’’ in the loan summary 

section. All participants who were 

shown a revised disclosure for a 

variable rate transaction using the term 

‘‘adjustable-rate mortgage’’ understood 

that the interest rate and payments 

could change during the loan’s term. 

Proposed § 226.38(a)(3)(i) would 

define an adjustable-rate mortgage as a 

transaction in which the annual 

percentage rate may increase after 

consummation; a step-rate mortgage as a 

transaction in which the interest rate 

will change after consummation as 

specified in the legal obligation between 

the parties; and a fixed-rate mortgage as 

a transaction that is neither an 

adjustable-rate mortgage nor a step-rate 

mortgage. Proposed comment 

38(a)(3)(i)(A)–2 would offer examples of 

adjustable-rate mortgages and clarify 

that some variable-rate transactions 

described in comment 17(c)(1)(iii)–4, 

such as certain renewable balloonpayment, preferred-rate and price-leveladjusted loans, would be considered 

fixed-rate mortgages for the purposes of 

the ‘‘loan type’’ disclosure in the loan 

summary required by § 226.38(a). This 

follows the current approach in 

comment 17(c)(1)–11 which provide 

that disclosures for certain variable-rate 

transactions should be based on the 

interest rate that applies at 

consummation. 

Proposed § 226.38(a)(3)(i)(B) would 

require the creditor to disclose a loan as 

a ‘‘step-rate mortgage’’ if the interest rate 

will change after consummation, 

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provided all such interest rates are 

specified in the legal obligation between 

the parties. Under existing guidance, 

such a loan would not be considered a 

variable rate loan. The Board believes 

that for the purposes of the loan 

summary, which is to alert the 

consumer to the possibility that their 

interest rate and payment could increase 

after consummation, step-rate loans 

should not be identified as fixed or 

variable rate loans, even though they 

share certain features with both loan 

types. Proposed comment 38(a)(3)(i)(B)– 

2 would clarify that certain preferredrate loans would not be considered steprate mortgages for the purposes of the 

‘‘loan type’’ disclosures. Proposed 

comment 38(a)(3)(i)(C)–1 would offer 

examples of fixed-rate mortgages and 

explain which variable-rate transactions 

described in comment 17(c)(1)(iii)–4 

would be considered fixed-rate 

mortgages for the purposes of the ‘‘loan 

type’’ disclosure. 

38(a)(3)(ii) Loan Features 

The general classification of loans as 

fixed rate, adjustable rate and step rate 

would enable consumers to understand 

what loan type they are being offered 

and to shop for loan products according 

to consumers’ needs and preferences. 

However, these broad categories of loan 

types are not sufficient to warn 

consumers about the potential risks that 

a specific loan may carry. As discussed 

previously, nontraditional mortgage 

products with negatively amortizing or 

interest-only payments grew in 

popularity in recent years, subjecting 

consumers to the risk of payment shock. 

Disclosures should clearly alert 

consumers to these features before the 

consumer becomes obligated on the 

loan. To alert consumers to potentially 

risky loan features, the Board is 

proposing to require an additional 

disclosure for each loan type in the loan 

summary if the loan has step-payments, 

payment option or negative 

amortization features, or interest-only 

payments. 

Proposed § 226.38(a)(3)(ii) would 

require creditors to disclose whether a 

loan would have one or more of the 

following features: Step-payments if the 

legal obligation permits the periodic 

monthly payment to increase by a set 

amount for a specified amount of time; 

a payment option feature if the legal 

obligation permits the consumer to 

make payments that result in negative 

amortization and other types of 

payments; a negative amortization 

feature if the legal obligation requires 

the consumer to make payments that 

result in negative amortization—that is, 

the legal obligation does not permit the 

consumer to make payments that would 

cover all interest accrued or all interest 

accrued and principal; or an interestonly feature if the legal obligation 

permits or requires the consumer to 

make one or more regular periodic 

payments of interest accrued and no 

principal, and the legal obligation does 

not require or permit any payments that 

would result in negative amortization. 

Proposed comment 38(a)(3)(ii)(A)–1 

would offer an example of a steppayment feature. For example, if the 

consumer is offered a fixed-rate 

mortgage with 24 monthly payments at 

$1,000 that will later increase to $1,200 

and remain at that level for a specified 

period of time, and the loan amortizes 

fully over the loan term, the creditor 

would disclose ‘‘Fixed-Rate Mortgage, 

step-payments’’ for the loan type in the 

loan summary. Proposed comment 

38(a)(3)(ii)(B) and (C)–1 would clarify 

that a creditor should disclose the loan 

feature as either ‘‘payment option’’ or 

‘‘negative amortization’’ but not both, 

whereas a loan may have both a ‘‘steppayment’’ feature and either a ‘‘payment 

option’’ or a ‘‘negative amortization’’ 

feature. Moreover, for a loan to have a 

‘‘payment option’’ feature, all periodic 

payment choices must be specified in 

the legal obligation and must include a 

choice to make payments that may 

result in negative amortization. 

Proposed comment 38(a)(3)(ii)(D)–1 

would provide that a creditor should 

not disclose both an ‘‘interest-only’’ 

feature and a ‘‘payment option’’ feature 

or ‘‘negative amortization’’ feature in a 

single transaction, whereas a loan may 

have both an ‘‘interest-only’’ feature and 

a ‘‘step-payment’’ feature. 

38(a)(4) Total Settlement Charges 

Currently, TILA and Regulation Z 

disclose settlement charges through the 

finance charge. TILA Section 128(a)(3) 

and § 226.18(d) require the creditor to 

disclose the finance charge. 15 U.S.C. 

1638(a)(3). TILA Section 106(a) defines 

the ‘‘finance charge’’ as the ‘‘sum of all 

charges, payable directly or indirectly 

by the person to whom the credit is 

extended, and imposed directly or 

indirectly by the credit or as an incident 

to the extension of credit.’’ 15 U.S.C. 

1605(a). Section 226.4(a) further defines 

the ‘‘finance charge’’ as ‘‘the cost of 

consumer credit as a dollar amount.’’ 

The finance charge includes any interest 

due under the loan terms as well as 

other charges incurred in connection 

with the credit transaction. See 

§ 226.4(a) and (b). 

Consumer testing indicated that 

participants did not understand the 

term ‘‘finance charge.’’ Most 

participants believed the term referred 

only to the total amount of interest they 

would pay if they kept the loan to 

maturity, but did not always realize that 

it also includes the fees and costs 

incurred as part of the credit 

transaction. Most participants did not 

find the finance charge useful in 

evaluating a loan offer. 

The disclosure of settlement charges 

is governed by RESPA, 12 U.S.C. 2601– 

2617, and implemented by HUD under 

Regulation X, 24 CFR part 3500. Under 

RESPA and Regulation X, creditors must 

provide a GFE of settlement costs within 

three business days of application for a 

mortgage, which is the same time 

creditors must provide the early TILA 

disclosure. RESPA and Regulation X 

also require a statement of the final 

settlement costs at loan closing (‘‘HUD– 

1 or HUD–1A settlement statement’’). 

Under the new final rule for Regulation 

X, effective January 1, 2010, the GFE is 

subject to certain accuracy 

requirements, absent changed 

circumstances. RESPA and Regulation X 

do not, however, provide any remedies 

for a violation of the accuracy 

requirements. 

Consumer testing consistently 

demonstrated that participants wanted 

to see settlement charges on the revised 

TILA disclosure. Participants stated that 

including such a disclosure would help 

them confirm information that the loan 

originator told them about the cost of 

the loan during the mortgage 

application process. During consumer 

testing, participants indicated that they 

were often surprised at the closing table 

by substantial increases in the 

settlement charges. Despite these 

changes, consumers reported that they 

proceeded with closing because they 

lacked alternatives (especially in the 

case of a home purchase loan), or were 

told that they could easily refinance 

with better terms in the near future. 

Participants indicated that they would 

like an estimate of their settlement 

charges as early as possible in the loan 

process, and that it would be helpful to 

have the settlement charges displayed in 

the context of the other loan terms, 

rather than on a separate GFE or HUD– 

1 or HUD–1A settlement statement. 

For these reasons, the Board proposes 

§ 226.38(a)(4) to require creditors to 

disclose the ‘‘total settlement charges,’’ 

using that term, as those charges are 

disclosed under Regulation X, 12 CFR 

part 3500. The proposed rule would 

further require, as applicable, a 

statement of the amount of the charges 

already included in the loan amount. 

Finally, the proposed rule would 

require disclosure of a statement, as 

applicable, that the total amount does 

not include a down payment, along with 

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70 Improving Consumer Mortgage Disclosures at 

78. 

71 Id. 

a reference to the GFE or HUD–1 for 

more details. 

Proposed comment 38(a)(4)–1 would 

clarify that on the early TILA disclosure 

required by § 226.19(a)(1)(i), the creditor 

must disclose the amount of the ‘‘Total 

Estimated Settlement Charges’’ as 

disclosed on the GFE under Regulation 

X, 12 CFR part 3500, Appendix C. For 

the final TILA disclosure required by 

proposed § 226.19(a)(2)(ii), the creditor 

would be required to disclose the sum 

of the final settlement charges. The 

creditor would be permitted to use the 

sum of the ‘‘Charges That Cannot 

Increase,’’ ‘‘Charges That In Total 

Cannot Increase By More Than 10%,’’ 

and ‘‘Charges That Can Change’’ as 

would be disclosed in the column 

entitled ‘‘HUD–1’’ on page three of the 

HUD–1 or on page two of the HUD–1A 

settlement statement under Regulation 

X, 12 CFR part 3500, Appendix A. 

Alternatively, the creditor would be 

permitted to provide the consumer with 

the final HUD–1 or HUD–1A settlement 

statement. For transactions in which a 

GFE, HUD–1 or HUD–1A are not 

required, the proposed comment would 

clarify that the creditor may look to 

such documents for guidance on how to 

comply with the requirements of this 

section. 

The Board recognizes that creditors 

are not currently required to provide the 

final settlement charges before 

consummation. Regulation X, 24 CFR 

3500.10(b), permits the settlement agent 

to provide the completed HUD–1 or 

HUD–1A at settlement. However, 

proposed § 226.19(a)(2)(ii) would 

require the creditor to provide the TILA 

disclosure required by proposed 

§ 226.38, including the total settlement 

charges disclosed under proposed 

§ 226.38(a)(4), so that the consumer 

receives it at least three business days 

before consummation. In addition, 

under proposed § 226.19(a)(2)(iii)– 

Alternative 1, if anything changes 

during the three-business-day waiting 

period, including total settlement 

charges, the creditor would be required 

to supply another final TILA disclosure 

and three-business-day waiting period 

before consummation could occur. 

Consumers could waive the three-day 

waiting periods for bona fide personal 

financial emergencies. 

The Board recognizes that proposed 

§§ 226.19(a)(2)(ii), 226.19(a)(2)(iii)– 

Alternative 1, and 226.38(a)(4) would 

require the creditor to disclose final 

settlement charge information several 

days in advance of consummation. 

These requirements would impose a 

cost on creditors, which may be passed 

on to consumers. Operational 

procedures and systems would need to 

be changed significantly to determine 

several days before closing the precise 

total amount of settlement charges that 

the consumer would pay at settlement. 

The Board believes, however, that the 

cost would be outweighed by the benefit 

to consumers of knowing their final 

total settlement charges three business 

days before consummation. This 

proposal would enable consumers to 

review and verify cost information in 

advance of consummation, and contact 

the creditor with questions or take other 

action, as appropriate. 

38(a)(5) Prepayment Penalty 

Current Disclosure Requirements 

Under TILA Section 128(a)(11) and 

existing § 226.18(k)(1), if an obligation 

includes a finance charge computed by 

applying a rate to the unpaid principal 

balance (a ‘‘simple-interest obligation’’), 

creditors must disclose whether or not 

a penalty may be imposed if the 

consumer prepays the obligation in full. 

Comment 18(k)(1)–1 states that the term 

‘‘penalty’’ refers only to charges that are 

assessed because of the prepayment in 

full of a simple-interest obligation, in 

addition to other amounts. 

The existing model form in Appendix 

H–2 contains checkboxes for creditors to 

indicate whether a consumer ‘‘may’’ or 

‘‘will not’’ have to pay a penalty if the 

consumer prepays the obligation in full. 

The Board adopted these checkbox 

options in 1980, in response to concerns 

that a statement that a prepayment 

penalty ‘‘will be imposed’’ would be 

misleading. The Board noted that many 

credit contracts allow a penalty to be 

imposed only if the loan is paid off 

within a certain time period after 

consummation or under other specific 

circumstances. See 45 FR 80648, 80682; 

Dec. 5, 1980. 

Discussion 

Consumer testing of the current 

disclosure showed that participants had 

difficulty identifying whether a loan 

would have a prepayment penalty and 

in what circumstances it would apply. 

For example, in the Board’s consumer 

testing, participants did not understand 

that refinancing a loan or paying off the 

loan with proceeds from the sale of the 

home securing the loan could trigger a 

prepayment penalty. Similarly, 

consumer testing conducted by FTC 

staff found that two-thirds of 

participants who looked at a sample of 

the existing TILA disclosure showing a 

loan with a two-year prepayment 

penalty did not understand that a 

prepayment penalty would be charged if 

the consumer refinanced the loan two 

years after origination.70 Some 

participants thought that a prepayment 

penalty could be charged only if they 

paid off their entire loan from their own 

funds, such as with money obtained 

through a sudden financial windfall.71

The Board developed and tested a 

revised prepayment penalty disclosure. 

Participants in the Board’s consumer 

testing generally understood that if they 

prepaid the loan within the time 

specified in the disclosure, a penalty 

could be imposed. Participants also 

understood that the penalty could be 

imposed if they refinanced or sold the 

home during the time the penalty was 

in effect. 

The Board’s Proposal 

Under proposed § 226.38(a)(5), if the 

legal obligation permits a creditor to 

impose a prepayment penalty the 

creditor must disclose in the ‘‘Loan 

Summary’’ section the period during 

which the penalty provision applies, the 

maximum possible penalty, and the 

circumstances in which the creditor 

may impose the penalty. If the legal 

obligation does not allow the creditor to 

impose a prepayment penalty, the 

creditor would make no disclosure 

regarding prepayment penalties in the 

‘‘Loan Summary’’ section. (However, 

proposed § 226.38(d)(1)(iii) requires the 

creditor to disclose whether or not the 

legal obligation permits the creditor to 

charge a prepayment penalty in the 

‘‘Key Questions about Risk’’ section.) 

Maximum penalty amount. The Board 

is proposing to require creditors to 

disclose the maximum penalty possible 

under the legal obligation. Prepayment 

penalties may be substantial. The 

existence of a prepayment penalty may 

make it difficult to refinance a loan or 

sell a home. This may be particularly 

difficult for consumers who have 

adjustable rate loans or other loans that 

pose the risk of payment shock, as these 

consumers may believe that they can 

refinance or sell the home to avoid the 

increased payments. Thus, it is 

important for consumers to know the 

maximum penalty amount before they 

are obligated on a loan. 

Under proposed § 226.38(a)(5) and 

(d)(1)(iii), creditors could not disclose 

the method or formula they use to 

determine the penalty with the 

disclosures required by § 226.38. 

Although some consumers might benefit 

from knowing how a prepayment 

penalty will be determined, the Board is 

concerned that consumers may be 

overloaded with information if the 

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calculation method is included with the 

segregated information. Many 

consumers would not read the 

prepayment penalty disclosure at all if 

it contains mathematical procedures 

and terms. Creditors may, of course, 

disclose how a prepayment penalty will 

be determined, as long as the disclosure 

is not disclosed together with the 

segregated disclosures. 

Creditors also could not disclose a 

range of possible prepayment penalties 

or give examples of penalty amounts 

assuming the consumer prepaid at a 

hypothetical point in time under 

proposed § 226.38(a)(5) or (d)(1)(iii). 

The Board believes that it is important 

that prepayment penalty disclosures 

simply and clearly convey to consumers 

the potential magnitude of the 

prepayment penalty. Disclosures based 

on assumptions or averages could 

undermine the impact of the maximum 

penalty disclosure. 

Additional penalty disclosures. 

Consumer testing indicated that some 

consumers do not understand that 

paying off the loan with the proceeds of 

a refinance loan or a home sale can 

trigger a prepayment penalty provision, 

as discussed above. Therefore, the 

proposed rule would require creditors to 

disclose the conditions upon which and 

the period during which they may 

impose a prepayment penalty. 

It is important for a consumer to know 

what actions will trigger a prepayment 

penalty provision before obtaining a 

loan with such a provision. Consumers 

likely will not receive the loan 

agreement containing the prepayment 

penalty provision until consummation 

and may have little opportunity to 

review the agreement before becoming 

obligated. Moreover, a prepayment 

penalty is but one of many loan terms 

for consumers to consider at closing. 

The Board believes that including key 

information about a prepayment penalty 

provision in transaction-specific 

disclosures would help consumers 

avoid the uninformed use of credit. 

Coverage. Comment 226.18(k)(1)–1 

clarifies that § 226.18(k)(1) applies to 

transactions in which interest 

calculations take into account all 

scheduled reductions in principal, 

whether interest calculations are made 

daily or at some other interval. Proposed 

comment 38(a)(5)–1 is consistent with 

comment 18(k)(1)–1. Proposed § 38(j)(2) 

reflects existing § 226.18(k)(2) on rebate 

disclosures, as discussed below. 

Existing comment 18(k)–2 discusses 

cases where a single transaction 

involves both a rebate and a penalty. 

Proposed comment 38(a)(5)–8 reflects 

this existing commentary. 

Definition of prepayment penalty. 

Comment 18(k)(1)–1 states that under 

§ 226.18(k)(1) the term ‘‘penalty’’ refers 

only to those charges that are assessed 

because of the prepayment in full of a 

simple-interest obligation, in addition to 

other amounts. Comment 18(k)(1)–1 

clarifies that interest charges for any 

period after prepayment in full is made 

and minimum finance charges are 

examples of prepayment penalties. The 

Board is proposing to revise comment 

18(k)(1)–1 for clarity by substituting 

‘‘charges determined by treating the 

loan balance as outstanding for a period 

after prepayment in full and applying 

the interest rate to such ‘balance’ ’’ for 

‘‘interest charges for any period after 

prepayment,’’ as discussed above. 

Proposed comments 38(a)(5)–2(i) and 

(ii) are consistent with comment 

18(k)(1)–1, as it is proposed to be 

amended. 

Proposed comment 38(a)(5)–2(iii) 

states that origination or other charges 

that a creditor waives on the condition 

that the consumer does not prepay the 

loan are prepayment penalties, for 

transactions secured by real property or 

a dwelling. Fees imposed for a 

preparing a payoff statement and 

performing other services when a 

consumer prepays the obligation would 

not be considered a prepayment penalty 

under the proposed rule, however. Such 

fees are not strictly linked to a 

consumer’s prepaying the obligation, as 

they are charged at the end of a loan’s 

term as well. The Board solicits 

comment on this distinction. 

For purposes of some State laws, a 

minimum finance charge is not 

considered a prepayment penalty. For 

purposes of disclosure under TILA, a 

minimum finance charge is considered 

a prepayment penalty. Existing 

comment 18(k)(1)–1 and proposed 

comment 38(a)(5)–2 are designed to 

promote clear, consistent disclosure of 

charges creditors may impose when a 

consumer prepays the obligation in full. 

The proposed rule would not preempt 

State laws unless State law disclosure 

requirements are inconsistent with the 

rule, and then only to the extent of any 

inconsistency. 

Existing comment 17(a)(1)–5(vii) 

allows creditors to disclose that the 

borrower may pay a minimum finance 

charge as information directly related to 

the penalty disclosure. Further, if a 

State or federal law prohibits creditors 

from charging a prepayment penalty but 

permits the charging of interest for some 

period after the consumer prepays from 

that prohibition, existing comment 

17(a)(1)–5(xi) permits creditors to 

disclose that a consumer may have to 

pay interest for some period after 

prepayment as information directly 

related to the prepayment penalty 

disclosure. Comments 17(a)(1)–5(vii) 

and (xi), together with other 

commentary in comment 17(a)(1)–5, 

would not apply to transactions secured 

by real property or a dwelling, as 

discussed above. 

Existing comment 18(k)(1)–1 states 

that loan guarantee fees are examples of 

charges that are not penalties. The 

Board proposes to retain this example in 

comment 38(a)(5)–2. (In a separate 

rulemaking, the Board proposed to 

remove the example of interim interest 

on a student loan as an example of 

charges that are not penalties. See 74 FR 

12464, 12469; Mar. 29, 2009.) 

Disclosed as applicable; disclosure 

content. Proposed comment 38(a)(5)–4 

clarifies that if no prepayment penalty 

applies, creditors need not disclose that 

fact in the ‘‘Loan Summary’’ section of 

transaction-specific disclosures. 

Proposed § 226.38(d)(1)(iii) requires 

creditors to disclose whether or not the 

legal obligation permits the creditor to 

charge a prepayment penalty in the 

‘‘Key Questions about Risk’’ section, 

however. Proposed comment 38(a)(5)–5 

clarifies that creditors must disclose the 

maximum penalty as a numerical 

amount. This is consistent with the 

general rule of construction of the word 

‘‘amount’’ required by § 226.2(b)(5). 

Basis of disclosure. Proposed 

comment 38(a)(5)–6 explains how 

creditors determine the maximum 

penalty amount and contains examples 

that illustrate how those principles are 

applied. (Proposed comment 

38(d)(1)(iii) states that creditors may 

rely on proposed comment 38(a)(5)–6 in 

determining the maximum prepayment 

penalty to be disclosed as one of the 

‘‘Key Questions about Risk’’ 

disclosures.) Proposed comment 

38(a)(5)–6 states that in all cases, the 

creditor should assume that the 

consumer prepays at a time when the 

prepayment penalty may be charged. 

The comment also states that if more 

than one type of prepayment penalty 

applies (for example, if the loan 

includes a minimum finance charge and 

the creditor may collect interest after 

prepayment), the creditor should 

include the maximum amount of each 

type of prepayment penalty in 

determining the maximum penalty 

possible. 

Existing comment 18(k)(1)–1 clarifies 

that interest charges for any period after 

a consumer prepays in full and a 

minimum finance charge in a simple 

interest transaction are deemed to be 

prepayment penalties. Proposed 

comment 38(a)(5)–6(i) and (ii) clarifies 

that the amount of such charges must be 

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43296 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

72The Board issued § 226.35(a) in its 2008 

HOEPA Final Rule; compliance with § 226.35(a) is 

mandatory beginning on October 1, 2009. 

73The 1998 Joint Report at 8; see also Bd. Of 

Governors of Fed. Res. Sys., 1996 Report to 

Congress: Finance Charges for Consumer Credit 

under the Truth in Lending Act at (April 1996). 

74The 1998 Joint Report at 8. 

75 Id. 

76 Id. 

77See also Improving Consumer Mortgage 

Disclosures at 35 (finding that most respondents in 

consumer testing did not understand or were 

confused by the APR and generally mistook it for 

the contract interest rate). 

counted in determining the maximum 

penalty. 

Proposed comment 38(a)(5)–6(iii) 

provides examples of how creditors may 

calculate a maximum prepayment 

penalty where the creditor determines 

the penalty by applying a constant rate 

to the loan balance at the time of 

prepayment. In such cases, the 

prepayment penalty amount is largest 

when the balance is as high as possible. 

Proposed comment 38(a)(5)–6(iv) 

illustrates a method creditors could use 

to approximate the maximum penalty 

where the penalty amount depends on 

both the loan balance and the time at 

which the consumer prepays (for 

example, where a prepayment penalty 

on an adjustable-rate loan equals six 

months’ interest payments). If the 

penalty amount depends on both the 

loan balance and the time at which the 

consumer prepays, under the proposed 

rule creditors would disclose the greater 

of (1) the penalty charged when the 

balance is the highest possible and (2) 

the penalty charged when the penalty 

rate is the highest possible (two-stage 

penalty calculation). 

The two-stage penalty calculation 

produces an amount that approximates, 

but does not necessarily equal, the 

maximum prepayment penalty. The 

Board believes, however, that the 

amount determined using the two-stage 

penalty calculation ordinarily will be 

sufficiently close to the actual 

maximum prepayment penalty that it 

would be appropriate for creditors to 

use the method in complying with 

§ 226.38(a)(5) and (d)(1)(iii). The Board 

solicits comment on whether the Board 

should permit creditors to use the twostage penalty calculation where the 

penalty rate increases. Will this ‘‘twostage penalty calculation’’ method 

produce a prepayment penalty amount 

that sufficiently approximates the 

maximum prepayment penalty possible 

for a loan? Are there cases where there 

will be a significant disparity between 

the maximum penalty determined using 

the two-stage penalty calculation and 

the actual maximum penalty? 

Neither the simple penalty calculation 

nor the two-stage penalty calculation 

will enable the creditor to determine the 

maximum penalty where the penalty 

rate on a negatively amortizing loan 

declines. In such a case, the creditor 

must determine the maximum 

prepayment penalty by determining 

what the penalty would be at each point 

during the loan term while the penalty 

is in effect. 

Requiring all creditors to base 

maximum penalty disclosures on the 

foregoing rules ensures standardization 

of disclosures. Allowing creditors to 

select their own assumptions about 

when consumers are likely to prepay 

would result in inconsistencies among 

the disclosures given by different 

creditors. The Board considered other 

approaches, such as requiring creditors 

to disclose the maximum prepayment 

penalty based on a single hypothetical 

point in time (for example, one year 

after origination). However, this 

approach would understate the amount 

consumers who prepay earlier would 

have to pay. 

Timely payment assumed. Proposed 

comment 38(a)(5)–7 states that creditors 

may assume that the consumer makes 

payments on time and may disregard 

any possible inaccuracies resulting from 

consumers’ payment patterns. This is 

consistent with existing comment 

17(c)(2)(i)–3 and proposed clarifications 

in comment 17(c)(1)–1. Proposed 

comment 38(a)(5)–7 further clarifies that 

where the payment required by a legal 

obligation’s terms is not a fully 

amortizing payment, the creditor must 

base disclosures on the required 

periodic payment and may not assume 

that the consumer will make payments 

that exceed the required payment. 

38(b) Annual Percentage Rate 

The Board proposes to improve the 

APR’s utility to consumers by making it 

a more inclusive measure of the cost of 

credit, as discussed under § 226.4, and 

also by improving the manner in which 

the APR is disclosed on the TILA 

statement. Proposed § 226.38(b)(1) 

would require the APR to be disclosed, 

using the term ‘‘annual percentage rate’’ 

and with the description, ‘‘overall cost 

of this loan including interest and 

settlement charges.’’ Proposed 

§ 226.38(b)(2) would require creditors to 

show the APR plotted on a graph, 

relative to (1) the ‘‘average prime offer 

rate’’ (APOR) for borrowers with 

excellent credit for a comparable loan 

type, in the week in which the 

disclosure is provided, and (2) the 

higher-priced loan threshold under 

§ 226.35(a).72 Proposed § 226.38(b)(3) 

would require an explanation of the 

APOR and higher-priced threshold. 

Proposed § 226.38(b)(4) would require 

creditors to disclose the average perperiod savings from a 1 percentagepoint reduction in the disclosed APR. 

Certain loans, including construction 

loans, would be excluded from 

proposed § 226.38(b)(2) and (b)(3). 

Current Rules 

For closed-end credit, TILA Section 

128(a)(4) and (a)(8) require creditors to 

disclose the ‘‘annual percentage rate,’’ 

using that term, together with a brief 

description such as ‘‘the cost of your 

credit as a yearly rate.’’ 15 U.S.C. 

1638(a)(4), (a)(8). Section 226.18(e) 

implements these requirements. As 

discussed in proposed § 226.37, TILA 

Section 122 and § 226.17(a) require the 

APR, with the finance charge, to be 

more conspicuous than other 

disclosures except the disclosure of the 

creditor’s identity. Changes to the 

requirements of § 226.17(a) are 

discussed under § 226.37. 

Discussion 

The APR is the only single, unified 

number available to help consumers 

understand the overall cost of a loan.73

15 U.S.C. 1638(a)(4). Before enactment 

of TILA in 1968, creditors could 

advertise a 6 percent loan rate, but were 

allowed to calculate the interest charged 

to the consumer by using a simple 

interest, an add-on, or a discount rate 

method.74 Although the advertised loan 

rate would appear the same, the amount 

of interest consumers actually would 

pay over the loan term would differ 

greatly under each of these calculation 

methods.75 In addition, consumers were 

forced to evaluate different components 

of a loan’s costs, such as interest rate, 

points, and closing costs, when 

comparing competing loan offers. The 

APR standardizes the interest rate 

calculation and seeks to capture the 

overall cost of the credit offered so that 

consumers can compare competing loan 

more easily than if they had to evaluate 

the relationship and impact of different 

loan costs themselves.76

Participants in the Board’s consumer 

testing generally did not understand the 

APR and often mistook it for the loan’s 

interest rate.77 The Board tested 

alternative descriptive statements and 

formats for the APR, but consumers 

continued to be confused by the APR. 

For example, some participants thought 

the APR reflected future adjustments to 

the interest rate, or the maximum 

possible interest rate for a variable rate 

loan. A few participants recognized that 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43297 

78 Kozup, John, Elizabeth Howlett, and Michael 

Pagano. 2008. ‘‘The Effects of Summary Information 

on Consumer Perception of Mutual Fund 

Characteristics.’’ The Journal of Consumer Affairs, 

vol. 42. See also Testimony of John Kozup, 

Assistant Professor, Department of Marketing, and 

Director, Center for Marketing and Public Policy, 

Villanova University; http:// 

www.federalreserve.gov/events/publichearings/ 

hoepa/2006/20060711/transcript.pdf. 

79See, e.g., Hsee, Christopher K. and France 

Leclerc. 1988. ‘‘Will Products Look More Attractive 

When Presented Separately or Together?’’ Journal of 

Consumer Research, vol. 25. 

the APR differed from the interest rate, 

but were unable to articulate the reason. 

In addition, when presented with two 

hypothetical loan offers, participants 

did not use the APR to compare and 

choose between the offers. Instead, 

participants chose a loan based on one 

or more of the following pieces of 

information: the interest rate, monthly 

payment, and settlement costs. 

The Board’s Proposal 

The Board proposes to retain the APR 

disclosure, with several changes 

designed to improve the APR’s utility 

for consumers. These proposed changes 

would apply only to closed-end 

transactions secured by real property or 

a dwelling. First, the Board proposes to 

revise the description to use simpler 

terminology. Proposed § 226.38(b)(1) 

would require creditors to disclose the 

APR, expressed as a percentage, together 

with a statement that it represents the 

overall cost of the loan, including 

interest and settlement charges. As 

discussed under § 226.4, the Board also 

proposes to make the APR more 

inclusive of the cost of credit. Moreover, 

under § 226.38(c), the interest rate 

would be disclosed on the form, which 

would help some consumers understand 

that the APR does not represent the 

interest rate. 

Second, the proposed rule also would 

require creditors to disclose the APR 

using a graph that shows the consumer 

how the APR for the loan offered would 

compare to the average prime offer rate 

and the threshold for higher-priced 

loans under § 226.35(a). This disclosure 

would help consumers understand how 

the APR on the loan offered to them 

compares to APRs offered to borrowers 

with excellent credit for a similar loan 

type, and higher-priced loans which 

generally are made to borrowers who 

present higher risk. Such borrowers 

include those with blemished credit 

histories, or with high loan-to-value 

ratios. 

The Board’s consumer testing shows 

that consumers do not understand the 

APR’s utility. Testing the APR with 

different names and descriptions did 

not measurably increase consumers’ 

understanding of the APR. Although the 

APR was designed in part to facilitate 

comparison of competing loan products, 

testing suggests that most consumers do 

not compare competing loans by APR, 

probably because they receive only one 

TILA disclosure before they 

consummate a loan. If consumers 

comparison shop for a loan, they do so 

before they apply for a loan and likely 

shop based on oral quotes of interest 

rates and points. 

The Board’s testing suggests that with 

little understanding of the APR and no 

ready and appropriate basis for 

comparison, many consumers ignore the 

APR in favor of information they find 

more accessible, such as the loan’s 

monthly payment or settlement costs. 

Therefore, the Board is taking two steps 

to improve the disclosure of the APR. 

The first step is designed to draw 

consumers’ attention to the APR. To do 

so, the Board proposes to require 

disclosure of the consumer’s APR on a 

graph to highlight the APR and 

distinguish it from other numerical 

disclosures, including the interest rate. 

Consumers would be more likely to 

notice the APR plotted on the graph, in 

a prominent location on the disclosure 

statement. Principles of consumer 

design provide that a graphic device 

accommodates different learning styles. 

And, consumer research has shown that 

use of graphics or similar visual devices 

help consumers attend to or notice 

important information.78

The Board’s next proposed step is to 

present the APR in a context that is 

designed to facilitate understanding of 

the APR. The Board believes that 

consumers would be more likely to use 

the APR if it is shown to them in context 

of other rates, rather than in isolation as 

is presently often the case. Research on 

consumer behavior suggests that 

consumer choice is affected by whether 

a consumer is presented with a single 

option for a product or multiple options. 

Consumers making a choice in the 

presence of more than one option are 

more likely to make a selection based on 

the relative merits of the options 

presented, rather than on their own 

existing ‘‘references’’ for the value of the 

product.79 Here, the Board believes that 

presenting consumers with information 

about other rates, current as of the week 

of the consumer’s application, would 

help consumers make more informed 

decisions about the loan offered. 

Testing suggests that showing the 

consumer the APR in context of 

information about other APRs would 

result in consumer benefits. For 

example, the APR graph would cause 

consumers to ask the creditor questions 

about the rate offered to them and when 

applicable, why it differs from the 

average APR offered to borrowers with 

excellent credit histories. The proposed 

APR disclosure would enable 

consumers to determine whether they 

are being offered a loan that comports 

with their creditworthiness. A borrower 

who knows his or her credit history is 

excellent or very good would be 

informed that the loan offered is higherpriced. Participants in the Board’s 

testing stated that if they knew they had 

excellent credit, they would ask the 

lender why they were being offered a 

higher-priced loan and what they would 

need to do to get a better offer. The 

Board notes that some participants 

indicated that the disclosed APR, even 

if higher-priced, was lower than the 

interest rate on their current loan and 

thus was attractive to them. 

Nevertheless, while some consumers 

may not be prompted by the APR graph 

to seek information about improved 

loan terms, testing suggests others may 

do so and benefit as a result. 

The Board recognizes that not all 

consumers are aware of their credit 

history, and thus may not be able to 

assess whether the loan offered is 

consistent with their credit standing. 

The Board anticipates that the APR 

graph would cause some consumers to 

investigate their credit reports. If there 

are errors, these consumers could take 

steps to resolve the errors. If consumers 

in fact have impaired credit, some 

consumers might consider whether to 

delay seeking a loan until they could 

repair their credit standing. 

In some instances the APR graph may 

be potentially confusing. That is, a loan 

may be a higher-priced loan for reasons 

other than the borrower’s credit history. 

For example, a consumer might have 

little home equity, resulting in a high 

loan-to-value ratio and a higher APR. 

The Board believes that even in such 

cases, the APR graph nonetheless would 

be beneficial to consumers. It would 

prompt the consumer to ask questions, 

and creditors should be able to explain 

to consumers why the APR on a loan is 

higher-priced. In many cases the 

explanation may help the consumer 

determine whether they could take steps 

to get a lower APR. For example, if the 

creditor explains that the offered loan is 

a higher-priced loan because of a low 

down-payment, the borrower would be 

alerted that providing a larger down 

payment would result in a reduced APR 

and cost savings. 

The Board also notes that certain 

loans may be higher-priced loans simply 

because of the loan type. For example, 

loans that exceed the threshold amount 

for eligibility for purchase by Fannie 

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43298 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

Mae and Freddie Mac, known as 

‘‘nonconforming’’ or ‘‘jumbo loans,’’ 

may tend to be higher-priced loans 

because of the method for calculating 

the APOR. The APOR is the average 

APR for conforming loans offered to 

borrowers with excellent credit. In the 

case of such loans, creditors would have 

to explain to consumers why the loan’s 

APR is higher-priced. 

Third, the proposal would require the 

creditor to disclose the average perperiod savings from a 1 percentagepoint reduction in the disclosed APR. 

The Board believes that showing 

consumers the relationship between the 

APR and a concrete dollar figure would 

help make the possible benefits of 

obtaining better loan terms more 

concrete for consumers. Showing 

potential savings that could result from 

a lower APR would help encourage 

consumers to shop and negotiate for 

better loan terms, or as discussed, to 

increase their downpayment, resolve 

errors in their credit report, or seek to 

improve their credit standing. 

38(b)(2) 

Proposed § 226.38(b)(2) would require 

a graph indicating the consumer’s APR 

within a range of APRs beginning with 

the average prime offer rate (‘‘APOR’’), 

as defined in § 226.35(a)(2), including 

the higher-priced mortgage loan 

threshold, as defined in § 226.35(a)(1), 

and terminating four percentage points 

greater than the higher-priced mortgage 

loan threshold. Proposed § 226.38(b)(3) 

would require a statement of the APOR 

as defined in § 226.35(a)(2), and the 

higher-priced mortgage loan threshold, 

as defined in § 226.35(a)(1), current as of 

the week the disclosure is produced. 

The graphic would contain different 

shaded areas using different scales for 

the range between the APOR and the 

higher-priced mortgage loan threshold, 

and for the range above the higherpriced mortgage loan threshold. The 

graphic would also label the range 

above the higher-priced mortgage loan 

threshold as the ‘‘high-cost zone.’’ 

Creditors would use the Board’s table 

of average prime offer rates to find the 

APOR for the loan type that matches the 

loan being disclosed, for the week in 

which the creditor provides the 

disclosure. Creditors would follow the 

Board’s guidance in commentary to 

§ 226.35(a) in determining how to select 

the appropriate APOR. In the text 

explaining the APOR, creditors may 

include a statement clarifying that the 

APOR is for conforming loans only. 

The Board requests comment on any 

potential operational difficulty in 

producing the graph proposed in 

§ 226.38(b)(2) in an accurate and timely 

manner. Comment is also sought on 

whether a different graphical device 

would better draw consumers’ attention 

to the APR and illustrate the APR’s 

utility to consumers. 

38(b)(3) 

To help consumers navigate the 

information provided by the graph, 

proposed § 226.38(b)(3) would require 

an explanation of the average prime 

offer rate as defined in § 226.35(a)(2), 

and the higher-priced mortgage loan 

threshold, as defined in § 226.35(a)(1). 

Participants in the Board’s consumer 

testing found this statement helpful in 

understanding the information in the 

graph. 

38(b)(4) 

Proposed § 226.38(b)(4) would 

provide how creditors must calculate 

the average per-period savings that 

would result from a 1 percentage-point 

reduction in the APR. (This discussion 

refers to monthly savings because most 

mortgage loans require monthly 

payments.) Creditors would calculate 

the average per-month savings by 

reducing the interest rate (or rates in the 

case of an ARM, as discussed in 

comment 34(b)(4)–1) by 1 percentage 

point, computing a hypothetical total of 

payments reflecting the payment 

schedule at the lower rate or rates. The 

creditor would divide the difference 

between (1) the total of payments 

disclosed under proposed 

§ 226.38(e)(5)(i), and (2) the 

hypothetical total of payments by the 

number of payment periods required 

under the terms of the legal obligation. 

The creditor would report the results of 

this calculation as the average savings 

each month from a 1 percentage-point 

reduction in the APR. Proposed 

comment 38(b)(4)–1 would provide 

guidance on this method, and would 

include examples for fixed- and 

adjustable-rate mortgages. 

The Board notes that the proposed 

method does not result in an exact 1 

percentage-point reduction in APR, but 

is likely to be within a few basis points 

of a 1 percentage-point reduction. The 

results would be sufficiently accurate to 

show consumers that a lower APR will 

yield savings. Methods that might result 

in an actual 1 percentage-point 

reduction in the APR would likely be 

more complicated and would vary 

depending on the terms of the loan, 

such as whether the rate is variable and 

whether the payments amortize the 

loan. The Board believes that any 

additional consumer benefit from 

disclosing the precise 1 percentagepoint APR reduction would not be 

sufficient to offset the costs of a more 

complex calculation method. The Board 

seeks comment, however, on its 

proposed method and whether another 

method would achieve the objectives of 

the disclosure without imposing undue 

compliance burdens. 

38(b)(5) Exemptions 

Proposed section 226.38(b)(5) would 

exempt construction loans, bridge loans, 

and reverse mortgages from the 

requirement to show the APR plotted on 

a graph (§ 226.38(b)(2)) and the 

statement of the APOR and the higherpriced loan threshold (§ 226.38(b)(3)). 

The exempted transactions are also 

exempt from the definition of a higherpriced mortgage, under § 226.35(a)(3) in 

the Board’s 2008 HOEPA Final Rule. 

The Board does not publish an average 

prime offer rate for construction, bridge, 

or reverse mortgage loans. Thus, an 

exemption seems appropriate. The 

Board seeks comment, however, on 

whether these transactions should 

nevertheless be subject to § 226.38(b)(2) 

and (3). 

38(c) Interest Rate and Payment 

Summary 

Proposed § 226.38(c) provides 

requirements for disclosure of the 

contract interest rate and the periodic 

payment for transactions secured by real 

property or a dwelling. The information 

proposed to be required by this 

paragraph must be in the form of a table, 

as provided in § 226.38(c)(1), 

substantially similar to Model Forms H– 

19(A), H–19(B), or H–19(C) in Appendix 

H. Additional formatting requirements 

would be provided in § 226.37. The 

rules for disclosing the interest rate and 

periodic payments for an amortizing 

loan are provided in proposed 

§§ 226.38(c)(2)(i) and 226.38(c)(3). Rules 

for disclosing the interest rate and 

periodic payments for a loan with 

negative amortization are in proposed 

§§ 226.38(c)(2)(ii) and 226.38(c)(4). 

Special rules for disclosing balloon 

payments are found in proposed 

§ 226.38(c)(5). Additional explanations 

of introductory rates and negative 

amortization are contained in proposed 

§§ 226.38(c)(2)(iii) and 226.38(c)(6), 

respectively. Proposed § 226.38(c)(7) 

provides definitions for certain terms 

used in § 226.38(c). 

Existing Requirements for Periodic 

Payments 

TILA Section 128(a)(6) requires the 

creditor to disclose the number, amount, 

and due dates or period of payments 

scheduled to repay the total of 

payments, for closed-end credit. 15 

U.S.C. 1648(a)(6). Currently, § 226.18(g) 

implements TILA 128(a)(6). Under 

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80For a mortgage transaction with rates or fees 

that exceed certain thresholds, TILA Section 129 

requires special disclosures regarding payments 

three business days before consummation of the 

transaction. See § 226.32(c) (3), (4). The Board is not 

proposing revisions to these disclosures. 

81TILA Section 128(b)(2)(C) also provides that the 

Board’s testing should ensure that consumers can 

understand that there is no guarantee that they will 

be able to refinance. Proposed § 226.38(f)(3) 

implements this aspect of Section 128(b)(2)(C). 

§ 226.18(g), creditors must show the 

number, amounts, and timing of 

payments scheduled to repay the 

obligation, except as provided in 

§ 226.18(g)(2) for certain loans with 

varying payments.80 The creditor must 

provide these disclosures on the TILA 

statement within three business days of 

receiving the consumer’s written 

application, as provided in § 226.19(a). 

Comment 18(g)–1 provides that the 

payment schedule should include all 

components of the finance charge, not 

just interest. Thus, if mortgage 

insurance is required, the payment 

schedule must reflect the consumer’s 

mortgage insurance payments until the 

date on which the creditor must 

automatically terminate coverage under 

applicable law. See comment 18(g)–5. 

Commentary to § 226.17(c) provides that 

for an adjustable-rate loan, creditors 

should disclose the payments and other 

disclosures based only on the initial rate 

and should not assume that the rate will 

increase. However, the disclosures must 

reflect a discounted or premium initial 

interest rate for as long as it is charged. 

The commentary permits, but does not 

require, creditors to include in the 

payments amounts that are not finance 

charges or part of the amount financed. 

Thus, creditors may, but need not, 

include insurance premiums excluded 

from the finance charge under 

§ 226.4(d), and ‘‘real estate escrow 

amounts such as taxes added to the 

payment in mortgage transactions.’’ 

TILA Section 128(b)(2)(C), as recently 

added by the MDIA, requires additional 

disclosures for loans secured by a 

dwelling in which the interest rate or 

payments may vary. 15 U.S.C. 

1638(b)(2)(C). Specifically, creditors 

must provide ‘‘examples of adjustments 

to the regular required payment on the 

extension of credit based on the change 

in the interest rates specified by the 

contract for such extension of credit. 

Among the examples required * * * is 

an example that reflects the maximum 

payment amount of the regular required 

payments on the extension of credit, 

based on the maximum interest rate 

allowed under the contract. * * *’’ 

TILA Section 128(b)(2)(C), 15 U.S.C. 

1638(b)(2)(C). Creditors must provide 

these disclosures within three business 

days of receipt of the consumer’s 

written application, as provided in 

§ 226.19(a). TILA Section 128(b)(2)(C) 

provides that these examples must be in 

conspicuous type size and format and 

that the payment schedule be labeled 

‘‘Payment Schedule: Payments Will 

Vary Based on Interest Rate Changes.’’ 

Section 128(b)(2)(C) requires the Board 

to conduct consumer testing to 

determine the appropriate format for 

providing the disclosures to consumers 

so that the disclosures can be easily 

understood, including the fact that the 

initial regular payments are for a 

specific time period that will end on a 

certain date, that payments will adjust 

afterwards potentially to a higher 

amount, and that there is no guarantee 

that the borrower will be able to 

refinance to a lower amount. 15 U.S.C. 

1638(b)(2)(C). 

The Board’s Proposal 

The Board proposes to add new 

§ 226.38(c) to implement TILA Section 

128(a)(6) and Section 128(b)(2)(C) for all 

closed-end transactions secured by real 

property or a dwelling.81 (For all other 

closed-end credit transactions, 

§ 226.18(g) would continue to provide 

the rules for disclosing payments). 

Section 226.38(c) would require 

creditors to disclose the contract interest 

rate, regular periodic payment, and 

balloon payment if applicable. For 

adjustable-rate or step-rate amortizing 

loans, up to three interest rates and 

corresponding monthly payments 

would be required, including the 

maximum possible interest rate and 

payment. If payments are scheduled to 

increase independent of an interest-rate 

adjustment, the increased payment must 

be disclosed. Payments for amortizing 

loans must include an itemized estimate 

of the amount for taxes and insurance if 

the creditor will establish an escrow 

account. If a borrower may make one or 

more payments of interest only, all 

payments disclosed must be itemized to 

show the amount that will be applied to 

interest and the amount that will be 

applied to principal. Special rate and 

payment disclosures would be required 

for loans with negative amortization. 

Creditors must provide the information 

about interest rates and payments in the 

form of a table, and creditors would not 

be permitted to include other unrelated 

information in the table. 

Scope of proposed § 226.38(c). TILA 

Section 128(b)(2)(C) applies to all 

transactions secured by a dwelling. The 

Board proposes to expand the 

requirement in Section 128(b)(2)(C) to 

include loans secured by real property 

that do not include a dwelling. As 

discussed in § 226.19(a), unimproved 

real property is likely to be a significant 

asset for most consumers, and 

consumers should receive the 

disclosures required in Section 

128(b)(2)(C) before they become 

obligated on a loan secured by such an 

asset. The disclosures would alert 

consumers to the potential for interest 

rate and payment increases and help 

them to determine whether these risks 

are appropriate to their circumstances. 

The Board proposes this adjustment 

to TILA Section 128(b)(2)(C) pursuant to 

its authority under TILA Section 105(a). 

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

authorizes the Board to make exceptions 

and adjustments to TILA for any class 

of transactions to effectuate the statute’s 

purposes, which include facilitating 

consumers’ ability to compare credit 

terms and helping consumers avoid the 

uninformed use of credit. 15 U.S.C. 

1601(a), 1604(a). The class of 

transactions that would be affected is 

transactions secured by real property or 

a dwelling. As discussed, providing 

examples of increased interest rates and 

payments would help consumers 

understand the risks involved in certain 

loans. The Board also proposes to revise 

the label for the interest rate and 

payment information from the statutory 

language, ‘‘Payment Schedule: 

Payments Will Vary Based on Interest 

Rate Changes,’’ based on plain language 

principles, to make the disclosure more 

readily understandable. 

Disclosure of the interest rate. 

Currently, TILA does not require 

disclosure of the contract interest rate 

for closed-end credit. In the consumer 

testing conducted for the Board, when 

consumers were asked what factors they 

considered when looking for a mortgage, 

by far the most common answers were 

that they wanted to obtain the lowest 

interest rate possible and that they 

wanted the loan with the lowest 

possible monthly payment. However, as 

they described their thought process, 

most consumers were primarily focused 

on the initial rate and payment, rather 

than how those terms might vary over 

time. Testing conducted on the current 

transaction-specific TILA disclosures 

indicated that consumers would like to 

see the interest rate disclosed on the 

form. 

In addition, testing indicated that the 

current TILA payment schedule, which 

does not show the relationship between 

interest rate and payment, is ineffective 

at communicating to consumers what 

could happen to their payments over 

time on an ARM. Most participants said 

they liked the current presentation of 

the payments because it was specific 

and detailed. However, when shown a 

payment schedule for an ARM with an 

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introductory rate, many incorrectly 

assumed that payments shown were in 

fact their future payments, rather than 

payments based on the fully-indexed 

rate at consummation. 

Under the Board’s proposal, the 

interest rate and payment would be 

shown together in a table. The Board 

believes that highlighting the 

relationship between the interest rate 

and payment will enhance consumers’ 

understanding of loan terms. If the 

interest rate is adjustable, the table 

would indicate changes in the 

adjustable interest rate over time. In 

addition, payment changes that are not 

based on adjustments to the interest rate 

would also be indicated in the table. 

Highlighting potential changes to the 

interest rate and payment based on 

maximum interest rate increases, rather 

than showing a set payment schedule 

based on the assumption that the index 

used to calculate a adjustable interest 

rate will not change, will clarify to 

consumers not only that their interest 

rate and payments may change, but also 

how the interest rate and payment may 

change over time. Consumers would be 

better able to determine if a adjustable 

rate or payment loan will be affordable 

and appropriate for their individual 

circumstances. 

Definitions for § 226.38(c). Proposed 

§ 226.38(c) uses several terms that are 

defined in proposed § 226.38(c)(7). 

Under § 226.38(c)(7), the terms 

‘‘adjustable-rate mortgage,’’ ‘‘step-rate 

mortgage,’’ and ‘‘interest-only’’ would 

have the same meanings as in 

§ 226.38(a)(3). An ‘‘amortizing loan’’ 

would be defined as a loan in which the 

regular periodic payments cannot cause 

the principal balance to increase; the 

term ‘‘negative amortization’’ would 

mean a loan in which the regular 

periodic payments may cause the 

principal balance to increase. Finally, 

the tern ‘‘fully-indexed rate’’ would 

mean the interest rate calculated using 

the index value and margin. 

Proposed § 226.38(c)(2)(i) and (c)(3) 

would require disclosure of interest 

rates and payment amounts for 

amortizing loans. Proposed 

§ 226.38(c)(7) defines an amortizing loan 

as one in which the regular periodic 

payments cannot cause the principal 

balance to increase. Thus, loans with 

interest-only payments are amortizing 

loans. If an escrow account will be 

established for an amortizing loan, 

creditors would be required to itemize 

the payment to show amounts to be 

included for taxes and insurance. See 

proposed § 226.38(c)(3)(i)(C). Proposed 

§§ 226.38(c)(2)(ii) and 226.38(c)(4) 

would require a special table for 

disclosures of interest rates and 

payment amounts for negatively 

amortizing loans. For such loans in 

which the consumer may choose 

between several payment options, the 

table will show only two: the minimum 

required payment option, and the fully 

amortizing option. Creditors may, 

however, disclose other payment 

options to the consumer, outside the 

segregated information required by this 

section. 

38(c)(1) Format 

Proposed § 226.38(c)(1) would require 

the interest rate and payment 

information to be disclosed in the form 

of a table. This would ensure that 

payment examples required by the 

MDIA are in conspicuous format as 

required by TILA Section 128(b)(2)(C). 

The MDIA also requires conspicuous 

type size for the examples. Under the 

proposal, all disclosures must be in a 

minimum 10 point font, including the 

table required under § 226.38(c), to 

ensure that they are clear and 

conspicuous. See proposed § 226.37(a). 

The Board’s proposal would prescribe 

the number of interest rates and 

payments that could be shown in a 

table. The number of columns and rows 

for the table required by this part would 

vary depending on whether the loan is 

an amortizing loan and whether it has 

adjustable rates. However, tables 

disclosed under this section would have 

no more than 5 columns across, and 

creditors would not include information 

in the table that is not required under 

226.38(c), to avoid information 

overload. Model and Sample Forms 

would be provided in Appendix H. 

38(c)(2) Interest Rates 

38(c)(2)(i) Amortizing Loans 

Proposed § 226.38(c)(2)(i) would 

provide disclosure of interest rates for 

amortizing loans. For a fixed-rate 

mortgage with no scheduled payment 

increases or balloon payments, the 

creditor would disclose only one 

interest rate. Fixed-rate loans with 

payment increases would require the 

creditor to disclose the interest rate with 

each increase. For adjustable-rate 

mortgages and step-rate mortgages, more 

than one interest rate must be shown, as 

discussed below. 

Interest Rates for Fixed-Rate Mortgages 

For fixed-rate mortgages, proposed 

§ 226.38(c)(2)(i)(A) would require 

creditors to disclose the interest rate 

applicable at consummation. If the 

transaction does not provide for any 

payment increases, only one interest 

rate would be disclosed. However, some 

fixed-rate mortgages will have 

scheduled payment increases and in 

those cases the creditor must show the 

interest rate again, even though it is 

redundant, as discussed under 

§ 226.38(c)(2)(i)(C) below. 

Interest Rates for Adjustable-Rate 

Mortgages and Step-Rate Mortgages 

Interest rates at consummation, 

maximum possible at first adjustment, 

and maximum possible interest rate. As 

discussed, TILA Section 128(b)(2)(C) 

requires creditors to disclose examples 

of payment increases including the 

maximum possible payment, for 

adjustable-rate mortgages and mortgages 

where payments may vary. Under 

§ 226.38(c)(2)(i), creditors would 

disclose more than one interest rate and 

corresponding monthly payment for 

adjustable-rate mortgages and step-rate 

mortgages. Under proposed 

§ 226.38(c)(2)(i)A)(I), the creditor must 

provide the interest rate at 

consummation, and the period of time 

until the first adjustment. If the interest 

rate at consummation is less than the 

fully-indexed rate (the sum of the index 

and margin at consummation), the 

interest rate must be labeled as 

‘‘introductory.’’ Additional explanation 

of discounted introductory rates is 

required in proposed § 226.38(c)(2)(iii), 

as discussed below. 

Maximum at first adjustment. The 

Board proposes to require disclosure of 

the maximum rate and payment at first 

adjustment, as one of the examples 

required by TILA Section 128(b)(2)(C). 

Proposed § 226.38(c)(2)(i)(B)(1) requires 

the creditor to provide the maximum 

interest rate applicable at the first 

interest rate adjustment, and the 

calendar month and year in which the 

first scheduled adjustment occurs 

would be required to be disclosed. The 

creditor would take into account any 

limitations on interest rate increases 

when determining the interest rate to be 

disclosed under § 226.38(c)(2)(i)(B)(2). If 

the interest rate may reach the 

maximum possible at the first 

adjustment, the creditor should disclose 

the rate as the maximum possible as 

discussed below. 

The Board proposes to require 

disclosure of the maximum interest rate 

at first adjustment because many 

consumers may take out adjustable-rate 

mortgages, planning to sell the home or 

refinance the loan before the first 

interest rate adjustment. It is important 

for consumers to know how much their 

rate and payment might increase at that 

point, if they are unable to refinance or 

sell the home before the first 

adjustment. The Board believes that for 

the same reason, the first interest rate 

increase should be shown for step-rate 

mortgages. Although such mortgages do 

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not present the uncertainty that an 

adjustable-rate mortgage does, 

consumers need to be informed of what 

their rate will increase to at the first 

increase. Consumer testing conducted 

for the Board shows that most 

consumers would find this information 

useful in determining whether the loan 

is affordable and suitable to their needs. 

Maximum possible interest rate. 

Proposed § 226.38(c)(2)(i)(B)(3) would 

require creditors to disclose the 

maximum interest rate that could apply, 

and the earliest possible year in which 

that rate could apply, as required by 

TILA Section 128(b)(2)(C). The Board 

proposes to require this disclosure for 

step-rate mortgages as well, because the 

rate and payment will increase in such 

loans. Consumer testing conducted for 

the Board suggests that consumers find 

this information about the maximum 

rate and payment particularly important 

in evaluating a loan offer for an 

adjustable-rate mortgage. Participants 

indicated that this information is most 

useful to them in determining whether 

such a loan was affordable. If an 

amortizing adjustable-rate mortgage has 

intermediate limitation on interest rate 

increases, then the table required by 

proposed § 226.38(c) would have at least 

three columns; if the transaction has no 

intermediate limitation on interest rates 

then the table would have two columns, 

one showing the rate at consummation 

and the other showing the maximum 

possible under the loan’s terms. 

Interest rate applicable at scheduled 

payment increase. Some mortgages 

provide for a payment increase that is 

not attributable to an interest rate 

adjustment or increase. For example, a 

loan may permit the borrower to make 

payments that cover only accrued 

interest for some specified period, such 

as the first five years following 

consummation; at the end of this 

‘‘interest-only’’ period, the borrower 

must begin making larger payments to 

cover both interest accrued and 

principal. Proposed § 226.38(c)(2)(i)(C) 

would provide that, where such an 

increase will not coincide with an 

interest rate adjustment or increase, the 

creditor must include a column that 

discloses the interest rate that would 

apply at the time the adjustment is 

scheduled to occur, and the date in 

which the increase would occur. The 

creditor must include a description such 

as ‘‘first increase’’ or ‘‘first adjustment.’’ 

Thus, for a fixed-rate mortgage, the 

creditor would show the same interest 

rate twice (and the corresponding 

payments as discussed in § 226.38(c)(4) 

below). The Board believes this would 

help the consumer understand that the 

increase in payment is due to the 

requirement to begin repaying loan 

principal and not to an interest-rate 

adjustment. 

The same is true for adjustable-rate 

mortgages and step-rate mortgages. For 

example, some adjustable-rate 

mortgages permit the borrower to make 

interest-only payments for a specified 

period, such as the first five years 

following consummation. A scheduled 

payment increase may or may not 

coincide with a scheduled interest rate 

adjustment. Under proposed 

§ 226.38(c)(2)(i)(C), if a scheduled 

payment increase does not coincide 

with an interest rate adjustment (or rate 

increase for a step-rate mortgage), 

creditors must include a column that 

discloses the interest rate that would 

apply at the time of the increase, the 

date the increase is scheduled to occur, 

and an appropriate description such as 

‘‘first increase’’ or ‘‘first adjustment’’ as 

appropriate. Proposed comment 

38(c)(2)(i)(C)–1 provides clarifying 

examples. The Board is not aware of 

step-rate loans with interest-only 

features; however, if such a loan is 

offered, creditors would disclose the 

payment increase in the same manner as 

for an adjustable-rate mortgage. 

38(c)(2)(ii) Negative Amortization Loans 

Proposed § 226.38(c)(2)(ii) would 

require disclosure of the interest rate 

applicable at consummation. Many 

payment option loans do not provide 

any limitations on interest rate increases 

(‘‘interest rate caps’’); the only cap is the 

maximum possible interest rate required 

by § 226.30(a.) For payment option 

loans, the creditor would disclose the 

interest rate in effect at consummation, 

and assume that the interest rate reaches 

the maximum at the next adjustment— 

often the second month after 

consummation. The creditor would 

disclose that rate for the first and second 

scheduled payment increases, as 

explained more fully in § 226.38(c)(4) 

below, and in the last column, when the 

loan has recast and the consumer must 

first make a fully amortizing payment. 

The proposed approach to interest rates 

for negative amortization loans is 

consistent with the MDIA, which 

requires disclosure of the payment at 

the maximum possible rate, and other 

examples of payment increases. 

Additional proposed rules for 

disclosing the interest rate on a loan 

with negative amortization are 

discussed under 38(c)(6) Special 

Disclosures for Loans with Negative 

Amortization, below. 

38(c)(2)(iii) Introductory Rate Disclosure 

for Adjustable-Rate Mortgages 

Many adjustable-rate mortgages have 

an introductory or teaser rate, set below 

the index and margin used for later 

adjustments. Proposed § 226.38(c)(2)(iii) 

would require a special disclosure in 

the case of an introductory rate. In 

consumer testing conducted for the 

Board, many participants did not 

understand the ramifications of an 

introductory interest rate. Participants 

understood that if market interest rates 

increased, the interest rate and payment 

on their loan would increase. However, 

participants did not understand that if 

they had an introductory rate, their 

interest rate and payment would 

increase when the introductory rate 

expired, even if market interest rates did 

not increase. Several different 

disclosures designed to show the impact 

of an introductory rate were tested in 

tabular form, with mixed results. 

Therefore, the Board proposes to require 

an explanation of the introductory rate 

below the table itself. Proposed 

§ 226.38(c)(2)(iii) would require 

disclosure of the introductory rate, how 

long it will last, and that the interest 

rate will increase at the first scheduled 

adjustment even if market rates do not 

increase. Creditors would also disclose 

the fully indexed rate that otherwise 

would apply at consummation. 

Proposed § 226.37(d)(4) would provide 

that this disclosure must be prominent 

and placed in a box under the table. 

38(c)(3) Payments for Amortizing Loans 

38(c)(3)(i) Principal and Interest 

Payments 

Section 226.38(c)(3)(i) would require 

disclosure of the principal and interest 

payment that corresponds to each 

interest rate disclosed under proposed 

§ 226.38(c)(2)(i). Special itemization of 

the payment is required, however, if the 

loan permits the consumer to make any 

payments that will be applied only to 

interest accrued. Proposed 

§ 226.3(c)(3)(ii)(C) would require 

disclosure of an estimate of the amount 

of taxes and insurance, including 

mortgage insurance. Proposed 

§ 226.3(c)(3)(i)(D) would require 

disclosure of the estimated total 

payment including principal, interest, 

and taxes and insurance. 

Principal and interest payments. 

Proposed § 226.38(c)(3)(i) would require 

the disclosure of payment amounts that 

correspond to the interest rates 

disclosed under § 226.38(c)(2)(i). 

Proposed comment 38(c)(3)–1 would 

clarify that the interest rate and 

payment amount applicable at 

consummation are required to be 

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43302 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

disclosed for all loans. In addition, the 

comment would clarify that if a 

payment amount is required to be 

disclosed under more than one 

subparagraph, the payment should only 

be disclosed once. For example, in an 

adjustable-rate transaction with a 

balloon payment, if the balloon payment 

will occur at the same time the loan may 

reach its maximum interest rate, only 

one disclosure of the interest rate and 

payment is required. Proposed comment 

38(c)(3)–2 provides examples of the 

types of loans that trigger additional 

payment disclosures. 

Fixed-rate mortgages. Under proposed 

§ 226.38(c)(3)(i)(A), for fixed-rate 

transactions where the regular periodic 

payment fully amortizes the loan and 

there are no scheduled payment 

increases (such as upon the expiration 

of an interest-only feature), the payment 

amount including both principal and 

interest would be required to be 

disclosed. 

Fixed-rate interest-only loans. For 

fixed-rate transactions in which the 

consumer may make one or more 

interest-only payments, proposed 

§ 226.38(c)(3)(i)(B) would require 

disclosure of the payment at any 

scheduled increase in the payment 

amount and the date on which the 

increase is scheduled to occur. For 

example, in a fixed-rate interest-only 

loan a scheduled increase in the 

payment amount from an interest-only 

payment to a fully amortizing payment 

would be required to be disclosed. 

Similarly, in a fixed-rate balloon loan, 

the balloon payment must be disclosed, 

but it would be disclosed under the 

table pursuant to § 226.38(c)(5). 

Adjustable-rate and step-rate 

transactions. Under proposed 

§ 226.38(c)(3)(i), for adjustable-rate and 

step-rate transactions, a payment 

amount corresponding to each interest 

rate in § 226.38(c)(2) would be required 

to be disclosed. 

Adjustable-rate interest-only and 

balloon loans. For adjustable-rate 

transactions in which the consumer may 

make interest-only payments, proposed 

§ 226.38(c)(3)(ii) would require 

additional disclosures. Section 

226.38(c)(3)(i)(B) would require 

disclosure of the payment amount at 

any scheduled payment increase that 

does not coincide with an interest rate 

adjustment, and the date on which the 

increase is scheduled to occur. In 

addition, for an adjustable-rate balloon 

loan, if the balloon payment will not 

coincide with either the first interest 

rate adjustment or the time when the 

interest rate reaches its maximum, the 

balloon payment is required to be 

disclosed separately, below the table, in 

accordance with § 226.38(c)(5). 

Principal and interest payment 

itemization. Under proposed 

§ 226.38(c)(3)(i) and (ii), the format of 

the payment disclosure would vary 

depending on whether all regular 

periodic payment amounts will include 

principal and interest. If all regular 

periodic payments include principal 

and interest, under § 226.38(c)(3)(i) each 

payment amount would be listed in a 

single row in the table with a 

description such as principal and 

interest (except that a balloon payment 

would be disclosed in accordance with 

§ 226.38(c)(5)). If any regular periodic 

payment amounts will include interest 

but not principal, under 

§ 226.38(c)(3)(ii) all payments for the 

loan must be itemized into principal 

and interest. For a payment that 

includes no principal, the creditor must 

indicate that none of the payment 

amount will be applied to principal. 

The creditor must label the dollar 

amount to be applied to interest 

‘‘Interest Payment.’’ The Board proposes 

this itemization and labeling to 

emphasize for consumers the impact of 

making interest-only payments. Many 

participants in the Board’s consumer 

testing did not clearly understand that 

an ‘‘interest-only’’ loan was different 

from a loan in which all payments are 

applied to principal and interest 

without this emphasis and the statement 

in the loan summary required in 

proposed § 226.38(a)(3). 

Balloon payment. Under proposed 

§ 226.38(c)(5)(i), if a payment amount is 

a balloon payment, the payment must be 

disclosed in the last row of the table 

rather than in a column, unless it 

coincides with an interest rate 

adjustment or other payment increase 

such as the expiration of an interestonly option. Section 226.38(c)(5)(i) 

would clarify that a payment is a 

balloon payment if it is more than twice 

the amount of other payments. This is 

consistent with how balloon payments 

are defined for purposes of restrictions 

on balloon payments for higher-priced 

and HOEPA loans. 

Escrows; mortgage insurance 

premiums. Proposed § 226.38(c)(3)(i)(C) 

would provide that if an escrow account 

will be established, the creditor must 

disclose the estimated payment amount 

for taxes and insurance, including 

mortgage insurance. For transactions 

secured by real property or a dwelling, 

creditors would no longer have the 

flexibility provided in existing 226.18(g) 

to exclude escrow amounts. Consumer 

testing conducted for the Board shows 

that many consumers compare loans 

based on the monthly payment amount. 

The Board believes that in order for 

consumers to fully understand the 

monthly amount they actually will be 

required to pay for a particular loan, 

information about payments for taxes 

and insurance is necessary. Escrow 

information would be included in the 

table to make it easier for consumers to 

identify whether there is an escrow and 

how much of their payment would 

apply to the escrow. 

Proposed comment 38(c)(3)(i)(C)–1 

would clarify the types of taxes and 

insurance that would be required to be 

included in the estimate. Proposed 

comment 38(c)(i)(C)–2 would provide 

guidance on how to determine the 

length of time for which mortgage 

insurance payments must be included 

in the estimate. Under the proposed 

comment, which is substantially similar 

to current comment 18(g)–5, the 

payment amount should reflect the 

consumer’s mortgage insurance 

payments until the date on which the 

creditor must automatically terminate 

coverage under applicable law, even 

though the consumer may have a right 

to request that the insurance be 

canceled earlier. 

The Board solicits comment on 

whether premiums or other amounts for 

credit life insurance, debt suspension 

and debt cancellation agreements and 

other similar products should be 

included or excluded from the 

disclosure of escrows for taxes and 

insurance. Including such amounts in 

the estimated escrow and monthly 

payment, particularly on the early TILA 

disclosures delivered within three days 

of application, may cause some 

consumers to believe these products are 

required as part of the loan agreement. 

This may affect consumers’ ability to 

weigh the relative merits of credit 

insurance and other similar products 

and determine whether the product is 

appropriate for their circumstances. 

Total periodic payments. Proposed 

§ 226.38(c)(3)(i)(D) would require 

disclosure of the total estimated 

monthly payment. The total estimated 

monthly payment is the sum of the 

principal and interest payments and the 

estimated taxes and insurance payments 

required to be disclosed in 

§ 226.38(c)(3)(i)(C). 

38(c)(4) Periodic Payments for Loans 

With Negative Amortization 

For each interest rate disclosed under 

§ 226.38(c)(2)(ii), the creditor would 

disclose a corresponding payment. One 

row of the table would show the fully 

amortizing payment for each interest 

rate; for purposes of calculating these 

payments the creditor would assume the 

interest rate reaches the maximum at the 

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82 Interagency Guidance on Nontraditional 

Mortgage Product Risks, 71 FR 58609; October 4, 

2006. 

83 Id. 

84 72 FR 31825, 318231; Jun. 8, 2007 

earliest date, and that the consumer 

makes only fully amortizing payments. 

The other row of the table would show 

the minimum required payment for each 

rate, until the recast point. At the recast 

point, the minimum payment row 

would show the fully amortizing 

payment. For purposes of the minimum 

payment row, creditors must assume the 

interest rate reaches the maximum at the 

earliest date, and that the consumer 

makes only the minimum required 

payment for as long as permitted under 

the terms of the legal obligation. 

Minimum payment amounts. 

Proposed § 226.38(c)(4)(i)(A) would 

require disclosure of the minimum 

required payment at consummation. 

The proposal would require a disclosure 

of the amount of the minimum payment 

applicable for each interest rate required 

to be disclosed under § 226.38(c)(2)(ii), 

and the date. Under proposed 

§ 226.38(c)(4)(i)(C), the creditor must 

provide a statement that the minimum 

payment will cover only some of the 

interest accrued and none of the 

principal, and will cause the principal 

balance to increase. The Board proposes 

this required statement to ensure that 

consumers are informed about the 

consequences of making minimum 

payments. As stated above, participants 

in the Board’s consumer testing were 

unfamiliar with the concept of negative 

amortization and struggled to 

understand why a loan’s balance would 

increase when payments were made. 

Payment increases. As noted above, 

many payment option loans do not have 

interest rate caps, and thus the interest 

rate may reach its maximum possible 

amount at the first interest rate 

adjustment. However, such loans may 

have limits on the amount that the 

minimum payment may increase 

following an interest rate adjustment. 

For example, a minimum payment 

increase may be limited by a certain 

percentage, such as 7.5% greater than 

the previous minimum payment. (Such 

limits are generally subject to conditions 

and will not apply either at a specific 

time, such as at the fifth year of the loan, 

or when the loan balance reaches a 

certain maximum.) Under proposed 

§ 226.38(c)(2)(ii)(D), if adjustments in 

the minimum payment amount are 

limited such that the payment will not 

fully amortize the loan even after the 

interest rate has reached the maximum, 

a disclosure of the minimum payment 

amount at the first and second payment 

adjustments would be required. That is, 

in cases where the first interest rate 

adjustment will be the only interest rate 

adjustment, but payment adjustments 

will continue to occur before the 

minimum payment recasts to a fully 

amortizing payment, a disclosure of one 

additional minimum payment 

adjustment would be required. 

Fully amortizing payment amount. 

Proposed § 226.38(c)(4)(iii) would 

require disclosure of the amount of the 

fully amortizing payment, assuming that 

the consumer makes only fully 

amortizing payments beginning at 

consummation. The fully amortizing 

payment row must be filled in for each 

interest rate required to be disclosed 

under § 226.38(c)(4)(ii) and (iv). The 

Board believes that contrasting the fully 

amortizing payment with the minimum 

required payment will help consumers 

to understand the implications of 

making the fully amortizing payment 

and the minimum payment. In 

consumer testing, participants 

understood from the table that if they 

made the fully amortizing payment each 

month they would pay their loan off, 

and that if they instead made the 

minimum payment they would not pay 

the loan off and in fact would increase 

the amount that they owe. 

Statement of balance increase and 

other information. Proposed 

§ 226.38(c)(4)(vi) would require a 

statement of the amount of the increase 

in the loan’s principal balance if the 

consumer makes only minimum 

payments and the earliest month and 

year in which the minimum payment 

will recast to a fully amortizing payment 

under the terms of the legal obligation, 

assuming that the interest-rate reaches 

its maximum at the earliest possible 

time. As noted, participants in testing 

expressed confusion about negative 

amortization; the Board believes this 

disclosure and the other required 

disclosures in the table should help 

consumers understand the risks of 

making minimum payments. 

In addition, the explanation preceding 

the table would provide the consumer’s 

option to make fully amortizing 

payments or to make minimum 

payments, the maximum possible 

interest rate, the earliest number of 

months or years in which the interest 

rate could reach its maximum, and the 

amount of estimated taxes and 

insurance included in each payment 

disclosed. If the maximum interest rate 

may be reached in less than a year the 

statement would be required to provide 

the number of months after 

consummation in which the interest rate 

may reach its maximum, otherwise the 

statement would provide the number of 

years. In addition, the creditor would 

disclose whether an escrow account will 

be established and if so, an estimate of 

the amount for taxes and insurance 

included in each periodic payment. 

38(c)(6) Special Disclosures for Loans 

With Negative Amortization 

Some mortgage transactions permit 

the borrower to make payments that are 

insufficient to cover all of the interest 

accrued, and the unpaid interest is 

added to the loan’s balance. Thus, 

although the borrower is making 

payments, the loan balance is increasing 

instead of decreasing. Negative 

amortization could occur on a fixed-rate 

mortgage or an adjustable-rate mortgage. 

Mortgages with negative amortization 

were relatively rare until the early part 

of this decade, when the ‘‘payment 

option’’ loan began to grow in 

popularity.82 Payment option loans 

have adjustable rates, and allow the 

borrower to choose among up to five 

monthly payment options, including a 

minimum payment that would result in 

negative amortization. Other options 

would include an interest-only option, a 

fully amortizing option, and the option 

to make extra payments of principal and 

pay the loan off early. Typically, 

payment option loans permit consumers 

to make minimum payments for a 

limited time, such as for the first five 

years following consummation or until 

the loan’s principal balance reaches 115 

percent of the original balance, 

whichever occurs first. Upon either 

event, the consumer must begin to make 

fully amortizing payments. 

Payment option loans and other 

nontraditional mortgages can result in 

significant ‘‘payment shock’’ for 

borrowers, particularly when the loan 

‘‘recasts’’ and a fully amortizing 

payment must be made. Concerns about 

payment shock led the Board, OCC, 

OTS, FDIC and NCUA to propose 

supervisory guidance on nontraditional 

mortgages in 2005, and issue final 

guidance in October 2006.83 The 

guidance emphasizes that institutions 

should use prudence in underwriting 

nontraditional mortgages, and should 

provide accurate and balanced 

information to consumers before the 

consumer is obligated on such a 

mortgage. The agencies published 

illustrations to assist financial 

institutions in providing information 

that would help consumers understand 

the risks involved in nontraditional 

mortgages.84 Those illustrations were 

not consumer tested. 

The Board’s consumer testing 

indicates that the unusual and complex 

nature of negative amortization loans 

requires a different approach to the 

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disclosure of interest rates and 

payments than for amortizing loans. 

Nearly all participants in the Board’s 

consumer testing were unfamiliar with 

the concept of negative amortization, 

and technical explanations of negative 

amortization proved challenging for 

them. The Board believes that selected 

information about payment option loans 

may be more effective in conveying the 

risks of such mortgages than extensive 

text explaining negative amortization 

and its impact. 

Accordingly, the Board developed 

and tested an interest rate and payment 

summary table designed to inform 

consumers about the risks of a payment 

option loan. The proposed rules would 

also require disclosure of the interest 

rate and payment for a loan with 

negative amortization that is not an 

adjustable rate mortgage. However, the 

Board found no examples of such loans 

in the marketplace, and seeks comment 

on whether such loans are offered and 

if so, whether proposed § 226.38(c) 

provides sufficient guidance on 

disclosing such loans. 

The interest rate and payment 

summary would display only two 

payment options, even if the terms of 

the legal obligation provide for others, 

such as an option to make interest-only 

payments. The table would show only 

the option to make minimum payments 

that would result in negative 

amortization, and the option to make 

fully amortizing payments. The Board 

believes that displaying all of the 

options in the table would have the 

unintended consequence of confusion 

and information overload for 

consumers. Creditors would be free to 

provide information on options not 

displayed in the table, outside the 

segregated information required under 

this subsection. 

In addition, to help consumers 

navigate the information in the table, 

proposed § 226.38(c)(6) would require a 

statement directly above the interest rate 

and payment summary table explaining 

that the loan offers payment options. A 

disclosure of the maximum possible 

balance would also be required, directly 

below the table, to help ensure that 

consumers understand the nature and 

risks involved in loans with negative 

amortization. 

38(d) Key Questions About Risk 

Based on consumer testing, as 

discussed in greater detail in 

§ 226.19(b)(2) above, the Board proposes 

to require creditors to disclose certain 

information grouped together under the 

heading ‘‘Key Questions about Risk,’’ 

using that term. This disclosure would 

be specific to the loan program for 

which the consumer applied. Proposed 

§ 226.38(d)(1) would require the creditor 

to disclose information about the 

following three terms: (1) Rate increases, 

(2) payment increases, and (3) 

prepayment penalties. Proposed 

§ 226.38(d)(2) would require the creditor 

to disclose information about the 

following six terms, but only if they are 

applicable to the loan program: (1) 

interest-only payments, (2) negative 

amortization, (3) balloon payment, (4) 

demand feature, (5) no-documentation 

or low-documentation loans, and (6) 

shared-equity or shared-appreciation. 

The ‘‘Key Questions about Risk’’ 

disclosure would be subject to special 

format requirements, including a tabular 

format and a question and answer 

format, as described under proposed 

§ 226.38(d)(3). 

38(d)(1) Required Disclosures 

As noted above, proposed 

§ 226.38(d)(1) would require the creditor 

to disclose information about the 

following three terms: (1) Rate increases, 

(2) payment increases, and (3) 

prepayment penalties. The Board 

believes that these three factors should 

always be disclosed. Rate and payment 

increases pose the most direct risk of 

payment shock. In addition, consumer 

testing consistently showed that interest 

rate and monthly payment were the two 

most common terms that participants 

used to shop for a mortgage. The Board 

also believes that the prepayment 

penalty is a key risk factor because it is 

critical to the consumer’s ability to sell 

the home or refinance the loan to obtain 

a lower rate and payments. While the 

other risk factors are important if 

contained in the loan program, the 

Board believes it appropriate to include 

those factors only as applicable to avoid 

information overload. 

Rate increases. Proposed 

§ 226.38(d)(1)(i) would require the 

creditor to indicate whether or not the 

interest rate on the loan may increase. 

If the interest rate on the loan may 

increase, then the creditor would 

indicate the frequency with which the 

interest rate may increase and the date 

on which the first interest rate increase 

may occur. Proposed comment 38(d)(1)– 

1 would clarify that disclosing the date 

means that the creditor must disclose 

the calendar month and year. 

Payment increases. Proposed 

§ 226.38(d)(1)(ii) would require the 

creditor to indicate whether or not the 

periodic payment on the loan may 

increase. If the periodic payment on the 

loan may increase, then the creditor 

would be required to indicate the date 

on which the first payment increase 

may occur. For payment option loans, 

the creditor would be required to 

disclose the dates on which the full and 

minimum payments may increase. 

Proposed comment 38(d)(1)–1 would 

clarify that disclosing the date means 

that the creditor must disclose the 

calendar month and year. 

Prepayment penalty. As currently 

required under TILA Section 128(a)(11), 

15 U.S.C. 1638(a)(11), and 

§ 226.18(k)(1), if the obligation includes 

a finance charge computed from time to 

time by application of a rate to the 

unpaid principal balance, proposed 

§ 226.38(d)(1)(iii) would require the 

creditor to indicate whether or not a 

penalty will be imposed if the obligation 

is prepaid in full. If the creditor may 

impose a prepayment penalty, the 

creditor would disclose the 

circumstances under which and period 

in which the creditor would impose the 

penalty and the amount of the 

maximum penalty. Because of the 

importance of prepayment penalties, the 

proposed rule would also require 

disclosure of prepayment penalties, if 

applicable, under proposed 

§ 226.38(a)(5). To avoid duplication, 

proposed comments 38(d)(1)(iii)–1 to –3 

would cross-reference proposed 

comments 38(a)(5)–1 to –3 for 

information about whether there is a 

prepayment penalty, and examples of 

charges that are or are not prepayment 

penalties. In addition, proposed 

comment 38(d)(1)(iii)–4 would crossreference comment 38(a)(5)–6 to 

determine the maximum prepayment 

penalty. Proposed comment 

38(d)(1)(iii)–5 would cross-reference 

comment 38(a)(5)–7 for information 

about any differences resulting from the 

consumer’s payment patterns and 

basing disclosures on the required 

payment for a negative amortization 

loan. Although under proposed 

§ 226.38(a)(5) the disclosure of the 

prepayment penalty would appear on 

the first page of the transaction-specific 

TILA disclosure only if this feature were 

present in the loan, the disclosure 

would always appear on the second 

page in the ‘‘Key Questions’’ disclosure 

in order for the consumer to verify 

whether or not there is a prepayment 

penalty associated with the loan. 

38(d)(2) Additional Disclosures 

As noted above, proposed 

§ 226.38(d)(2) would require the creditor 

to disclose information about the 

following six terms, as applicable: (1) 

Interest-only payments, (2) negative 

amortization, (3) balloon payment, (4) 

demand feature, (5) no-documentation 

or low-documentation loans, and (6) 

shared-equity or shared-appreciation. 

Proposed comment 38(d)(2)–1 would 

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clarify that ‘‘as applicable’’ means that 

any disclosure not relevant to a 

particular loan may be omitted. 

Although consumer testing showed that 

some participants felt reassured by 

seeing all of the risk factors whether the 

factors were a feature of the loan or not, 

the Board is concerned about the 

potential for information overload if the 

entire list is included. 

Interest-only payments. Proposed 

§ 226.38(d)(2)(i) would require the 

creditor to disclose that periodic 

payments will be applied only toward 

interest on the loan. The creditor would 

also disclose any limitation on the 

number of periodic payments that will 

be applied only toward interest on the 

loan, that such payments will cover the 

interest owed each month, but none of 

the principal, and that making these 

periodic payments means the loan 

amount will stay the same and the 

consumer will be not have paid any of 

the loan amount. For payment option 

loans, the creditor would disclose that 

the loan gives the consumer the choice 

to make periodic payments that cover 

the interest owed each month, but none 

of the principal, and that making these 

periodic payments means the loan 

amount will stay the same and the 

consumer will not have paid any of the 

loan amount. 

Negative amortization. Proposed 

§ 226.38(d)(2)(ii) would require the 

creditor to disclose that the loan balance 

may increase even if the consumer 

makes the periodic payments. In 

addition, the creditor would be required 

to disclose that the minimum payment 

covers only a part of the interest the 

consumer owes each period and none of 

the principal, that the unpaid interest 

will be added to the consumer’s loan 

amount, and that over time this will 

increase the total amount the consumer 

is borrowing and cause the consumer to 

lose equity in the home. 

Balloon payment. Proposed 

§ 226.38(d)(2)(iii) would require the 

creditor to disclose that the consumer 

will owe a balloon payment, along with 

a statement of the amount that will be 

due and the date on which it will be 

due. Proposed comment 38(d)(2)(iii)–1 

would clarify that the creditor must 

make this disclosure if the loan program 

includes a payment schedule with 

regular periodic payments that when 

aggregated do not fully amortize the 

outstanding principal balance. 

Demand feature. As currently 

required under § 226.18(i), proposed 

§ 226.38(d)(2)(iv) would require the 

creditor to disclose a statement that the 

creditor may demand full repayment of 

the loan, along with a statement of the 

timing of any advance notice the 

creditor is required to give the consumer 

before the creditor exercises such right. 

Proposed comment 38(d)(2)(iv)–1 would 

clarify that this requirement would 

apply not only to transactions payable 

on demand from the outset, but also to 

transactions that convert to a demand 

status after a stated period. Proposed 

comment 38(d)(2)(iv)–2 would crossreference comment 18(i)–2 regarding 

covered demand features. 

No-documentation or lowdocumentation loans. Proposed 

§ 226.38(d)(2)(v) would require the 

creditor to disclose that the consumer’s 

loan will have a higher rate or fees 

because the consumer did not document 

employment, income, or other assets. In 

addition, the creditor would disclose 

that if the consumer provides more 

documentation, the consumer could 

decrease the interest rate or fees. 

Shared-equity or shared-appreciation. 

Proposed § 226.38(d)(2)(vi) would 

require the creditor to disclose a 

statement that any future equity or 

appreciation in the real property or 

dwelling that secures the loan must be 

shared, along with a statement of the 

events that may trigger such obligation. 

38(d)(3) Format Requirements 

Based on consumer testing, as 

discussed more fully in §§ 226.19(b)(2) 

and 226.37, proposed § 226.38(d)(3) 

would require the creditor to disclose 

the ‘‘Key Questions about Risk’’ using a 

special format. Proposed 

§ 226.38(d)(3)(i) would require the 

creditor to provide the disclosures 

required in § 226.38(d)(1) and (d)(2), as 

applicable, in the form of a table with 

headings, content and format 

substantially similar to Model Forms H– 

19(A), H–19(B), or H–19(C) in Appendix 

H. Only the information required or 

permitted by § 226.38(d)(1) and (2) 

would be permitted in this table. In 

addition, under § 226.38(d)(3)(ii), the 

disclosures would be required to be 

grouped together and presented in the 

format of a question and answer in a 

manner substantially similar to Model 

Form H–19(A), H–19(B), or H–19(C) in 

Appendix H. Proposed 

§ 226.38(d)(3)(iii) would further require 

the creditor to disclose each affirmative 

answer in bold text and in all 

capitalized letters, but negative answers 

would be disclosed in nonbold text. 

Finally, proposed 226.38(d)(3)(iv) 

would require the creditor to make the 

disclosures, as applicable, in the 

following order: rate increases under 

§ 226.38(d)(1)(i), payment increases 

under § 226.38(d)(1)(ii), interest-only 

payments under § 226.38(d)(2)(i), 

negative amortization under 

§ 226.38(d)(2)(ii), balloon payments 

under § 226.38(d)(2)(iii), prepayment 

penalties under § 226.38(d)(1)(iiii), 

demand feature under § 226.38(d)(2)(iv), 

no-documentation or lowdocumentation loans under 

§ 226.38(d)(2)(v), and shared-equity or 

shared-appreciation under 

§ 226.38(d)(2)(vi). This order would 

ensure that consumers receive critical 

information about their payments first. 

38(e) Information About Payments 

Proposed § 226.38(e) would require 

disclosure of additional information 

about interest rates and payments, 

including disclosure of the amount 

financed, the ‘‘interest and settlement 

charges,’’ (currently the ‘‘finance 

charge’’), the total of payments, and the 

number of payments. Proposed 

§ 226.38(e) would also require 

disclosure of whether or not an escrow 

account for taxes and insurance is 

required, a disclosure about private 

mortgage insurance, if applicable, and 

information about limitations on rate 

and payment changes. In the consumer 

testing conducted by the Board, 

consumers did not find certain terms 

that are prominently disclosed on the 

current transaction-specific TILA form 

to be useful. Specifically, the amount 

financed, the total of payments, and the 

finance charge were less useful to 

consumers than other information such 

as information about the loan amount, 

interest rates, and monthly payments. 

The Board believes that it would 

enhance consumers’ overall 

understanding of the disclosures if these 

items were placed less prominently on 

the form. In addition, by placing these 

terms in the context of a larger 

explanatory statement, some consumers 

may better be able to understand these 

terms. At the same time, consumer 

testing conducted for the Board has 

shown that there is other information 

about the loan terms that consumers 

find beneficial that is not currently 

disclosed on the transaction-specific 

form. Specifically, the Board believes 

that consumers would find it beneficial 

to have explanations of how the interest 

rate or payment amounts can change 

and whether there are limits on those 

changes, and notification of whether an 

escrow account or private mortgage 

insurance are required. 

38(e)(1) and (2) Rate Calculation; Rate 

and Payment Change Limits 

Proposed §§ 226.38(e)(1) and 

226.38(e)(2) would require disclosures 

of how the consumer’s variable interest 

rate is calculated, of any limitations on 

adjustments to the interest rate, and of 

any limitations on payment adjustments 

in negatively amortizing loans. The 

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85Section 128(a)(5) of TILA states that the total 

of payments should be disclosed as the sum of the 

amount financed and finance charge. 15 U.S.C. 

1638(a)(5). Since 1969, the Board has required that 

the total of payments equal the sum of payments 

disclosed in the payment schedule under TILA 

Section 128(a)(6) and § 226.18(g), which can 

include amounts beyond the amount financed and 

the finance charge. 15 U.S.C. 1638(a)(6). Thus, if a 

creditor includes escrowed taxes and insurance in 

its disclosure of scheduled payments under 

§ 226.18(g), it must also include those amounts in 

the total of payments disclosed under § 226.18(h). 

34 FR 02002; Feb. 11, 1969. 

requirements under proposed 

§§ 226.38(e)(1) and 226.38(e)(2) to 

provide disclosures of how the rate is 

calculated and any limitations on 

adjustments to the interest rate are 

similar to the requirements of current 

§§ 226.18(f)(1)(i) and 226.18(f)(1)(ii) for 

transactions not secured by the 

consumer’s principal dwelling or 

secured by the consumer’s principal 

dwelling with a term of one year or less. 

Currently, for transactions secured by 

the consumer’s principal dwelling with 

a term greater than one year, 

§ 226.19(b)(2) requires information 

about the variable interest rate to be 

disclosed at the time an application 

form is provided to the consumer, or 

before the consumer pays a 

nonrefundable fee, whichever is earlier. 

However, under current § 226.18(f)(2), 

in the transaction-specific disclosures 

provided before consummation, only a 

statement that the transaction contains a 

variable-rate feature, and a statement 

that variable-rate disclosures have been 

provided earlier, are required. The 

Board believes that providing 

information about how the interest rate 

is calculated and about limitations on 

interest rate adjustments along with 

other transaction-specific disclosures 

would provide consumers with 

meaningful information about their 

particular interest rate in the context of 

the entire transaction being disclosed. 

For adjustable-rate mortgages, proposed 

§ 226.38(e)(1) would require a statement 

of how the interest rate is calculated. In 

addition, if the interest rate at 

consummation is not based on the index 

and margin that will be used to make 

later interest rate adjustments, the 

statement would be required to include 

the time period when the initial interest 

rate expires. 

Proposed comment 38(e)(1)–1 is 

similar to current comment 18(f)(1)(i)–1 

for credit not secured by the consumer’s 

principal dwelling, or secured by the 

consumer’s principal dwelling with a 

term of one year or less. The proposed 

comment would clarify that if the 

interest rate is calculated based on the 

addition of a margin to an index the 

statement would have to identify the 

index to which the rate is tied and the 

margin that will be added to the index, 

as well as any conditions or events on 

which the increase is contingent. When 

no specific index is used, the factors 

used to determine whether to increase 

the rate would be required to be 

disclosed. When the increase in the rate 

is discretionary, the fact that any 

increase is within the creditor’s 

discretion would be required to be 

disclosed. When the index is internal 

(for example, the creditor’s prime rate), 

the creditor would be permitted to 

comply with the disclosure requirement 

by providing either a brief description of 

that index or a statement that any 

increase is in the discretion of the 

creditor. An external index, however, 

would be required to be identified. 

Proposed § 226.38(e)(2) would require 

a statement of any limitations on the 

increase in the interest rate in a 

variable-rate transaction, and, for 

negatively amortizing loans, a statement 

of any limitations on the increase in the 

minimum payment amount and the 

circumstances under which the 

minimum payment required may recast 

to a fully amortizing payment. Proposed 

comment 38(e)(2)–1, covering variablerate transactions, would be similar to 

current comment 18(f)(1)(ii)–1 and 

would clarify that the disclosure of 

limitations on adjustments to the 

interest rate must provide any 

maximum imposed on the amount of an 

increase in the rate at any time, as well 

as any maximum on the total increase 

over the transaction’s term to maturity. 

Proposed comment 38(e)(2)–2, 

covering negatively amortizing loans, 

would clarify that any limit imposed on 

the change of a minimum payment 

amount, whether or not the change 

follows an adjustment to the interest 

rate, would be required to be disclosed. 

In addition, any conditions to the 

limitation on payment increases would 

also be required to be disclosed. For 

example, some loan programs provide 

that the minimum payment will not 

increase by more than a certain 

percentage, regardless of the 

corresponding increase in the interest 

rate. However, there may be exceptions 

to the limitation on the payment 

increase, such as if the consumer’s 

principal balance reaches a certain 

threshold, or if the legal obligation sets 

out a scheduled time when payment 

increases will not be limited. 

38(e)(3) Escrow 

Proposed § 226.38(e)(3) would 

require, if applicable, a statement 

substantially similar to the following: 

‘‘An escrow account is required for 

property taxes and insurance (such as 

homeowner’s insurance). Your escrow 

payment is an estimate and can change 

at any time. See your Good Faith 

Estimate or HUD–1 form for more 

details.’’ If no escrow is required, the 

creditor would be required to state that 

fact and that the consumer must pay 

property taxes and insurance directly. 

38(e)(4) Mortgage Insurance 

Proposed § 226.38(e)(4) would 

require, if applicable, a statement 

substantially similar to the following: 

‘‘Private Mortgage Insurance (PMI) is 

required for this loan. It is included in 

your escrow.’’ If other mortgage 

insurance is required, such as insurance 

or guaranty obtained from a government 

agency, the creditor would be required 

to omit the word ‘‘private’’ from the 

description. 

38(e)(5) Total Payments 

38(e)(5)(i) Total Payments 

Section 226.18(h), which implements 

TILA Section 128(a)(5) and (8), requires 

creditors to disclose the total of 

payments, using that term, together with 

a descriptive statement that the 

disclosed amount reflects the sum of all 

scheduled payments disclosed under 

§ 226.18(g).85 15 U.S.C. 1638(a)(5), 

(a)(8). Current comment 18(h)–1 allows 

creditors to revise the total of payments 

descriptive statement for variable rate 

transactions to convey that the disclosed 

amount is based on the annual 

percentage rate and may change. In 

addition, current comments 18(h)–3 and 

–4 permit creditors to omit the total of 

payments disclosure in certain singlepayment transactions and for demand 

obligations that have no alternate 

maturity date. 

Consumer testing conducted by the 

Board showed that participants did not 

find the total of payments to be helpful 

in evaluating a loan offer. Most 

participants understood that the total of 

payments generally represented the sum 

of scheduled payments and charges, 

including interest; several suggested 

that an explanation of how the total of 

payments is calculated would facilitate 

comprehension of the term. Some 

participants expressed interest in 

knowing the total of payments required 

to pay off the loan obligation, but 

regarded this information as marginally 

useful to their shopping and decisionmaking process. On the other hand, 

some participants commented that 

information about the total of payments 

was unnecessary and therefore, could be 

removed from the form entirely. 

As part of consumer testing, the Board 

shortened the term ‘‘total of payments’’ 

to ‘‘total payments’’ because it is a more 

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86See also Improving Consumer Mortgage 

Disclosures (stating that a number of respondents 

misinterpreted the finance charge). 

direct and simple term to communicate 

to consumers what the dollar amount 

represented. In addition, an explanation 

of the assumptions underlying the total 

payments calculation was added with 

an explicit reference to whether the 

amount included escrowed amounts. 

The total payment amount was 

disclosed with a statement explaining 

that a portion of it goes towards interest 

and settlement charges. This approach 

enhanced consumer comprehension of 

the total payments and, as discussed 

more fully below, the interest and 

settlement charges disclosure. 

The Board proposes to rename ‘‘total 

of payments’’ as ‘‘total payments,’’ and 

require that it be disclosed with a 

descriptive statement, for transactions 

secured by real property or a dwelling. 

The Board proposes to make this 

adjustment pursuant to its exception 

authority under TILA Section 105(a). 15 

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

authorizes the Board to make exceptions 

and adjustments to TILA to effectuate 

the statute’s purposes, which include 

facilitating consumers’ ability to 

compare credit terms and helping 

consumers avoid the uninformed use of 

credit. 15 U.S.C. 1601(a), 1604(a). The 

Board believes that proposing the 

exception is appropriate. Consumer 

testing indicates that ‘‘total payments’’ 

is more understandable to consumers 

than ‘‘total of payments.’’ 

The Board proposes to add new 

§ 226.38(e)(5)(i), which would 

implement TILA Sections 128(a)(5), 

128(a)(6), in part, and 128(a)(8) for 

transactions secured by real property or 

a dwelling. 15 U.S.C. 1638(a)(5), (a)(6), 

and (a)(8). Proposed § 226.38(e)(5)(i) 

would require creditors to disclose for 

transactions secured by real property or 

a dwelling, the number and total 

amount of payments that the consumer 

would make over the full term of the 

loan. The Board proposes that this 

disclosure be made together with a brief 

statement that the amount is calculated 

assuming market rates will not change, 

and that the consumer will make all 

payments as scheduled for the full term 

of the loan. The Board believes that 

although the total payments disclosure 

is not critical to the shopping or 

decision-making process for many 

consumers, it provides information 

about the total cost of the loan that 

provides context for, and increases 

understanding of, other required 

disclosures, such as interest and 

settlement charges (formerly finance 

charge) and amount financed. 

Proposed comments 38(e)(5)(i)–1 

through –3 would be added to provide 

guidance to creditors on how to 

calculate and disclose the total 

payments amount and the number of 

payments. As discussed more fully 

under proposed § 226.38(c), the Board is 

proposing to require creditors to provide 

interest rate and monthly payment 

disclosures in a tabular format for 

transactions secured by real property or 

a dwelling. As a result, creditors would 

not be subject to the disclosure 

requirements for payment schedules 

under current § 226.18(g). However, 

proposed comment 38(e)(5)(i)–1 would 

clarify that creditors should continue to 

follow the rules in § 226.18(g) and 

associated commentary, and comments 

17(c)(1)–8 and –10 for adjustable rate 

transactions, to calculate the total 

payments for transactions secured by 

real property or a dwelling. New 

comment 38(e)(5)(i)–2 would crossreference to comment 18(g)–3, which 

the Board proposes to revise to require 

creditors to disclose the total number of 

payments for all payment levels as a 

single figure for transactions secured by 

real property or a dwelling. Proposed 

comment 38(e)(5)(i)–3 would provide 

guidance regarding demand obligations. 

In technical revisions, the text from 

current footnote 44 would be moved to 

the regulation text in § 226.18(h); 

however, this text is not included in 

proposed § 226.38(e)(5)(ii) because it is 

not applicable to transactions secured 

by real property or a dwelling. 

As discussed more fully under 

proposed § 226.38(e)(5)(ii) for interest 

and settlement charges (formerly 

‘‘finance charge’’), creditors would be 

required to group the total payments 

disclosure together with the interest and 

settlement charges and amount financed 

disclosures under proposed 

§ 226.38(e)(5)(ii) and (iii), respectively. 

38(e)(5)(ii) Finance Charge: Interest and 

Charges 

Section 226.18(d), which implements 

TILA Sections 128(a)(3) and (a)(8), 

requires creditors to disclose the 

‘‘finance charge,’’ using that term, and a 

brief description such as ‘‘the dollar 

amount the credit will cost you.’’ 15 

U.S.C. 1638(a)(3), (a)(8). Current 

comment 18(d)–1 allows creditors to 

modify this description for variable rate 

transactions with a phrase that the 

disclosed amount is subject to change. 

In addition, § 226.17(a)(2), which 

implements TILA Section 122(a), 

requires creditors to disclose the finance 

charge, and the annual percentage rate, 

more conspicuously than any other 

required disclosure, except the 

creditor’s identity. 15 U.S.C. 1633(a). 

The rules addressing which charges 

must be included in the finance charge 

are set forth under TILA Section 106 

and § 226.4, and are discussed more 

fully under § 226.4 of this proposal. 15 

U.S.C. 1605. 

Consumer testing conducted by the 

Board indicated that many participants 

could not correctly explain the term 

‘‘finance charge.’’86 Most participants 

thought that the finance charge 

represented the amount of interest the 

borrower would pay over the life of the 

loan, but did not realize that it also 

included fees until directed to read a 

statement that explained fees were 

included. Consumer testing showed that 

comprehension of the finance charge 

improved when it was renamed to 

reflect the costs it actually 

represented—the interest and settlement 

charges paid over the life of the loan. 

However, even when participants 

understood what the finance charge 

signified they tended to disregard it, 

often because it was such a large dollar 

amount. Several participants 

commented that it is helpful to know 

the total amount of interest and fees that 

would be paid, but that they could not 

otherwise purchase a home, or refinance 

an existing obligation, in cash and 

therefore, already understood they 

would pay a significant amount in 

interest and fees when repaying the 

loan. Still, participants expressed an 

interest in knowing the total amount of 

interest and other charges they would 

pay over the full term of the loan. 

The Board proposes to exercise its 

authority under TILA Section 105(a) to 

rename ‘‘finance charge’’ as ‘‘interest 

and settlement charges,’’ except it from 

the requirement under TILA Section 

122(a) that it be disclosed more 

conspicuously, and require that it be 

disclosed with a descriptive statement. 

15 U.S.C. 1632(a); 1604(a), (f). Section 

105(a) authorizes the Board to make 

exceptions or adjustments to TILA for 

any class of transactions to effectuate 

the statute’s purposes, which include 

facilitating consumers’ ability to 

compare credit terms and helping 

consumers avoid the uninformed use of 

credit. 15 U.S.C. 1601(a), 1604(a). In this 

case, the Board believes an exception 

from TILA’s requirements are necessary 

to effectuate the Act’s purposes for 

transactions secured by real property or 

a dwelling. Although some consumers 

expressed interest in the finance charge 

when evaluating a loan offer, consumer 

testing showed that for most consumers 

it is not as useful in the shopping or 

decision-making process as other terms, 

and therefore, should be de-emphasized 

relative to other disclosed terms. 

Consumer testing also showed that 

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43308 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

87See also Improving Consumer Mortgage 

Disclosures at 35 (finding that most respondents in 

consumer testing did not understand the term 

‘‘amount financed,’’ and confused it for the loan 

amount, and discussing the risks of falling subject 

to predatory lending practices as a result of this 

confusion). 

participants had a better understanding 

of the finance charge when it was 

disclosed as a portion of the total 

payments amount, accompanied by a 

statement that explained the finance 

charge amount plus the amount 

financed is used to calculate the APR. 

Thus, based on consumer testing, the 

Board believes that consumers will find 

the finance charge disclosure more 

meaningful when described in a manner 

consistent with consumers’ general 

understanding, and disclosed in context 

with other information that relate to 

loan payments, such as the total 

payments. 

The Board proposes to add new 

§ 226.38(e)(5)(ii), which would 

implement TILA Section 128(a)(3) and 

(8) for closed-end mortgage loans 

covered by § 226.38. 15 U.S.C. 

1638(a)(3), (8). Section 226.38(e)(5)(ii) 

would require creditors to disclose the 

‘‘interest and settlement charges,’’ using 

that term, together with a brief 

statement that the disclosed amount 

represents part of the total payments 

amount disclosed. Creditors would also 

be required to disclose the ‘‘interest and 

settlement charges’’ grouped together 

with the ‘‘total payments’’ and ‘‘amount 

financed’’ disclosures under proposed 

§ 226.38(e)(5)(i) and (iii), respectively, 

under the subheading ‘‘Total 

Payments,’’ using that term. Based on 

consumer testing, the Board believes 

this approach is appropriate to help 

serve TILA’s purpose of assuring a 

meaningful disclosure of credit terms. 

Consumer testing suggests that 

providing the disclosure of ‘‘interest and 

settlement charges’’ in context of the 

total payments improves consumers’ 

ability to understand that this disclosure 

represents the cost (i.e., interest and 

fees) of borrowing the loan amount. 

The Board also proposes comment 

38(e)(5)(ii)–1 to provide guidance on 

how creditors must calculate and 

disclose the interest and settlement 

charges. However, the proposed rule 

would not allow creditors to modify the 

description that accompanies the 

disclosure for variable-rate transactions. 

The Board proposes this restriction 

under TILA Section 105(a) to help serve 

TILA’s purpose of meaningful 

disclosure of credit terms so that 

consumers will be able to compare more 

readily the various credit terms 

available, and avoid the uninformed use 

of credit. 15 U.S.C. 1601(a). Consumer 

testing showed that the simple 

disclosure aided consumer 

understanding. The Board believes that 

adding language that states the 

disclosed amount is subject to change 

could dilute the significance of the 

disclosure. 

38(e)(5)(iii) Amount Financed 

Disclosure of amount financed. 

Section 226.18(b), which implements 

TILA Section 128(a)(2)(A) and (a)(8), 

requires creditors to disclose the 

amount financed, using that term, 

together with a brief description that it 

represents the amount of credit of which 

the consumer has actual use. 15 U.S.C. 

1638(a)(2)(A), (a)(8). Section 226.18(b) 

delineates how creditors should 

calculate the amount financed so that it 

reflects the net amount of credit being 

extended. 

In consumer testing conducted for the 

Board, virtually no participant 

understood the disclosure of the amount 

financed.87 The Board tested several 

versions of the amount financed 

disclosure, with alternative formatting 

and descriptions, to explain briefly that 

it represents the amount of credit of 

which the consumer has actual use to 

purchase a home or refinance an 

existing loan. However, these changes 

made no difference in participants’ 

understanding of the term. In addition, 

consumer testing showed that the 

amount financed disclosure actually 

detracted from consumers’ 

understanding of other disclosures. 

Many consumers mistook the amount 

financed for the loan amount. Some of 

these consumers were confused, 

however, because the amount financed 

was slightly lower than the amount 

borrowed in the hypothetical loan offer. 

Consumers offered various explanations 

regarding the difference in the disclosed 

amounts, including that the amount 

financed was the cost of purchasing a 

home less a down payment. Other 

participants stated that the amount 

financed represented escrowed 

amounts. Sample disclosures were used 

to try to explain that the difference 

between the loan amount and amount 

financed is attributable to prepaid 

finance charges, but this explanation 

did not appear to improve consumer 

comprehension. Consumer testing also 

indicated that participants would not 

consider the amount financed when 

shopping for a mortgage or evaluating 

competing loan offers. 

For these reasons, the Board proposes 

to add new § 226.38(e)(5)(iii), which 

would implement TILA Section 

128(a)(2)(A) and (a)(8) for transactions 

secured by real property or a dwelling. 

15 U.S.C. 1638(a)(2)(A), (a)(8). Section 

226.38(e)(5)(iii) would require creditors 

to disclose the amount financed with a 

brief statement that the amount 

financed, plus the interest and 

settlement charges, is the amount used 

to calculate the annual percentage rate. 

As noted above, creditors would be 

required to disclose the amount 

financed grouped together with the total 

payments and interest and settlement 

charges required under proposed 

§ 226.38(e)(5)(i) and (ii). 

The Board proposes this approach 

pursuant to its authority under TILA 

Section 105(a). 15 U.S.C. 1604(a). 

Section 105(a) authorizes the Board to 

prescribe regulations to effectuate the 

statute’s purposes, which include 

facilitating consumers’ ability to 

compare credit terms and helping 

consumers avoid the uninformed use of 

credit. 15 U.S.C. 1601(a), 1604(a). Based 

on consumer testing, the Board believes 

this proposal is appropriate to help 

serve TILA’s purpose of assuring a 

meaningful disclosure of credit terms. 

The Board believes that requiring 

creditors to disclose the amount 

financed in the loan summary with 

other key loan terms would add 

unnecessary complexity and result in 

‘‘information overload.’’ Consumer 

testing showed that when the amount 

financed was disclosed with the total 

payments and interest and settlement 

charges, that consumer comprehension 

of the term improved slightly, and 

confusion over other key loan terms, 

such as the loan amount, was 

eliminated. The Board believes that 

disclosing the amount financed as one 

component in the APR calculation 

provided consumers with a better 

understanding of its significance to the 

loan transaction. The Board also 

proposes new comment 38(e)(5)(iii)–3 to 

provide guidance regarding disclosure 

of the ‘‘amount financed.’’ 

Calculation of amount financed. The 

Board proposes to simplify the 

calculation of the amount financed for 

transactions subject to the disclosure 

requirements of proposed § 226.38, 

pursuant to the Board’s authority under 

TILA Section 105(a). The Board believes 

that the proposed simplification would 

improve understanding of the rules and 

facilitate compliance with Regulation Z. 

Under proposed § 226.38(e)(5)(iii), for a 

transaction secured by real property or 

a consumer’s dwelling, the creditor 

would determine the amount financed 

by subtracting all prepaid finance 

charges from the loan amount as defined 

in proposed § 226.38(a)(1), discussed 

above. Under existing § 226.18(b) and its 

staff commentary, creditors may elect 

from among multiple alternatives in 

calculating the amount financed. All of 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43309 

88Housing and Economic Recovery Act, Public 

Law 110–289, 122 Stat. 2655, § 2502(a)(6) (July 30, 

2008). 

the permissible methods yield the same 

mathematical result. 

The Board has received input from 

bank examiners and others that 

providing multiple approaches to 

calculation of the amount financed 

creates unnecessary complication. 

Examiners also indicate that, of the 

permissible approaches, mortgage 

lenders generally use the one that is 

simplest and most straightforward. The 

Board is now proposing to require that 

approach and to eliminate the 

alternatives. The Board also is 

proposing to make a conforming 

amendment to the staff commentary 

under § 226.18(b) to reflect the fact that 

it would not apply to mortgages. 

TILA provides that the amount 

financed is calculated as follows: 

(1) Take the principal amount of the 

loan (or cash price less downpayment); 

(2) Add any charges that are not part 

of the finance charge or of the principal 

amount and that are financed by the 

consumer; and 

(3) Subtract any prepaid finance 

charge. 

TILA Section 128(a)(2)(A), 15 U.S.C. 

1638(a)(2)(A). Regulation Z provides a 

substantially identical calculation. See 

§ 226.18(b). Neither the statute nor 

Regulation Z defines ‘‘principal amount 

of the loan.’’ As a result, more than one 

understanding of that term is possible, 

and Regulation Z seeks to address 

several of those understandings rather 

than to define principal amount 

definitively. 

Current Regulation Z permits nonfinance charges and prepaid finance 

charges that are financed to be included 

in the principal loan amount under step 

(1) or not, at the creditor’s option. The 

creditor then must add in under step (2) 

any financed non-finance charges that 

were not included under step (1). See 

comment 18(b)(2)–1. Similarly, the 

creditor must subtract under step (3) 

any financed prepaid finance charges 

only if they were included under step 

(1). See comment 18(b)(3)–1. Proposed 

§ 226.38(e)(5)(iii) effectively would 

define ‘‘principal loan amount’’ as the 

loan amount, as that is defined in 

proposed § 226.38(a)(1), which would 

mean the principal amount the 

consumer will borrow reflected in the 

loan contract. Under that definition, all 

amounts that are financed necessarily 

would be included in step (1), whether 

they are finance charges or not. 

Consequently, no amount ever would be 

added under step (2). The new 

provision therefore would streamline 

the calculation to eliminate that step. 

Similarly, the current commentary 

providing that financed prepaid finance 

charges should be subtracted in step (3) 

only if they were included in step (1) 

would be unnecessary, as such finance 

charges always would be included in 

step (1). Proposed § 226.38(e)(5)(iii) 

would provide definitively that the 

amount financed is determined simply 

by subtracting the prepaid finance 

charge from the loan amount. 

The Board also is proposing comment 

38(e)(5)(iii)–2 to clarify how to treat 

creditor or third-party premiums and 

buy-downs for purposes of the amount 

financed calculation. This proposed 

comment is based on existing comment 

18(b)–2, which relates to rebates and 

loan premiums. The discussion in 

comment 18(b)–2 was primarily 

intended to address situations that are 

more common in non-mortgage 

transactions, especially credit sales, 

such as automobile financing. It 

provides that creditor-paid premiums 

and seller- or manufacturer-paid rebates 

may be reflected in the disclosures 

under § 226.18 or not, at the creditor’s 

option. Although such premiums and 

rebates are less likely to exist in 

mortgage transactions precisely as they 

are described in comment 18(b)–2, 

analogous situations can apply to 

mortgage financing. For example, real 

estate developers may offer to pay some 

or all closing costs or to buy down the 

consumer’s interest rate, and creditors 

may agree to pay certain closing costs in 

return for a particular interest rate. 

Rather than permit any treatment at the 

creditor’s option, however, proposed 

comment 38(e)(5)(iii)–2 would reflect 

the Board’s belief that such situations 

are analogous to buydowns. Like 

buydowns, such premiums and rebates 

may or may not be funded by the 

creditor and reduce costs otherwise 

borne by the consumer. Accordingly, 

their impact on the amount financed, 

like that of buydowns, properly depends 

on whether they are part of the legal 

obligation. See comments 17(c)(1)–1 

through –5. Proposed comment 

38(e)(5)(iii)–2 would clarify that the 

disclosures, including the amount 

financed, must reflect loan premiums 

and rebates regardless of their source, 

but only if they are part of the terms of 

the legal obligation between the creditor 

and the consumer. As noted above, the 

Board also is proposing similar 

revisions to existing comment 18(b)–2. 

38(f) Additional Disclosures 

38(f)(1) No Obligation Statement 

The MDIA amended Section 128(b)(2) 

of TILA to require creditors to disclose, 

in conspicuous type size and format, 

that receiving and signing a TILA 

disclosure does not obligate a consumer 

to accept the loan (‘‘the MDIA 

statement’’). 15 U.S.C. 1638(b)(2). The 

MDIA sets forth the following language 

for creditors to use in making this 

disclosure: ‘‘You are not required to 

complete this agreement merely because 

you have received these disclosures or 

signed a loan application.’’ 88 The Board 

proposes to modify this statutory 

language to facilitate consumers’ use 

and understanding of the MDIA 

statement pursuant to its authority 

under TILA Section 105(a) to make 

adjustments that are necessary to 

effectuate the purposes of TILA. 15 

U.S.C. 1604(a). Based on consumer 

testing, the Board believes that using 

plain language principles to revise the 

statutory language improves consumers’ 

ability to understand the disclosure and 

would help serve TILA’s purpose to 

provide meaningful disclosure of credit 

terms. 

As part of consumer testing, the Board 

included the MDIA statement on the 

front page of the TILA, modified to 

replace legalistic phrasing with more 

common word usage. On the second 

page, the Board included a signature 

line and date, as most creditors require 

the consumer to sign the disclosure 

form to establish compliance with TILA. 

Most participants did not notice the 

MDIA statement, but indicated that they 

understood they were under no 

obligation to accept the loan; 

participants who did notice the text 

similarly understood they were under 

no obligation to accept the loan. 

However, upon seeing the signature 

line, some participants believed they 

would be obligated to accept the loan if 

they signed or initialized the disclosure. 

Based on consumer testing, the Board is 

concerned that although consumers may 

initially understand they are not 

obligated to accept a loan, this belief 

may be altered by creditors’ practice of 

requiring consumers to sign or initial 

receipt of the disclosures. This may 

further discourage negotiation and 

shopping among loan products and 

lenders. 

To implement the new disclosure 

required by the MDIA, the Board 

proposes to add new § 226.38(f)(1) for 

all transactions secured by real property 

or a dwelling. Proposed § 226.38(f)(1) 

would require a statement that a 

consumer is not obligated to accept the 

loan because he or she has signed the 

disclosure. In addition, the Board 

proposes that if a creditor provides 

space for the consumer to sign or initial 

the TILA disclosures, then the creditor 

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43310 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

89Specifically, the MDIA requires that the Board 

use consumer testing to develop disclosures for 

variable rate transactions, including the fact that 

‘‘there is no guarantee that the borrower will be able 

to refinance to a lower amount.’’ Public Law 109– 

8, 119 Stat. 23, § 2502(a)(6). 

must place the statement in close 

proximity to the space provided for the 

consumer’s signature or initials. The 

statement must also specify that a 

signature only confirms receipt of the 

disclosure statement. 

The Board proposes this approach 

pursuant to its authority under TILA 

Section 105(a) to effectuate the statute’s 

purposes, which include facilitating 

consumers’ ability to compare credit 

terms and helping consumers avoid the 

uninformed use of credit. 15 U.S.C. 

1601(a), 1604(a). The Board believes 

that this proposal is necessary to 

encourage consumers to shop among 

available credit alternatives. The Board 

tested the disclosure as proposed under 

§ 226.38(f)(1). Most participants 

understood they were not obligated to 

accept the loan and could refuse to 

accept the loan offer even after signing. 

As a result, the Board believes the 

disclosure proposed by new 

§ 226.38(f)(1) is necessary to ensure that 

consumers are not discouraged from 

shopping or negotiating with the lender. 

38(f)(2) Security Interest 

TILA Section 128(a)(9), 15 U.S.C. 

1638(a)(9), and § 226.18(m) require the 

creditor to disclose whether it has a 

security interest in the property 

securing the transaction. During 

consumer testing of the current TILA 

disclosure, participants were shown the 

following language: ‘‘Security: You are 

giving a security interest in the real 

property, and fixtures and rents if 

indicated in the rider mortgage.’’ Very 

few participants understood the current 

language regarding a security interest. 

The Board is concerned that consumers 

might not understand that the creditor 

can take the consumer’s home if the 

consumer defaults on the loan 

agreement. To clarify the significance of 

the security interest disclosure to 

consumers, the Board proposes 

§ 226.38(f)(2) to require the creditor to 

state that the consumer could lose the 

home if the consumer is unable to make 

the payments on the loan. This would 

provide a clearer disclosure regarding 

the effect of the lender taking a security 

interest in the home. 

38(f)(3) No Guarantee to Refinance 

Statement 

The MDIA also amended Section 

128(b)(2) of TILA to require creditors to 

disclose for variable rate transactions, in 

conspicuous type size and format, that 

there is no guarantee that the consumer 

will be able to refinance the transaction 

to lower the interest rate or monthly 

payments (‘‘MDIA refinancing 

warning’’).89 15 U.S.C. 1638(b)(2). To 

implement the disclosure required by 

the MDIA, the Board proposes to add 

§ 226.38(f)(3) to require that creditors 

disclose that there is no guarantee that 

the consumer will be able to refinance 

the loan to obtain a lower interest rate 

and payment. The Board believes that 

including such a statement on the TILA 

disclosure form will alert consumers to 

consider the impact of future rate 

adjustments and increased monthly 

payments 

Although the MDIA requires this 

refinancing warning only for variable 

rate transactions secured by a dwelling, 

the Board proposes to expand the scope 

of the requirement to also include fixedrate transactions secured by a dwelling, 

as well as transactions secured by real 

property without a dwelling. The Board 

proposes this approach pursuant to its 

authority under TILA Section 105(a) to 

effectuate the statute’s purposes, which 

include facilitating consumers’ ability to 

compare credit terms and helping 

consumers avoid the uninformed use of 

credit. 15 U.S.C. 1601(a), 1604(a). The 

Board is concerned that some 

consumers may accept loan terms that 

could present refinancing concerns 

similar to variable rate transactions, 

such as a three-year fixed-rate mortgage 

with a balloon payment. Based on 

consumer testing, the Board believes all 

consumers, regardless of transactiontype, would benefit from a statement 

that encourages consideration of future 

possible market rate increases. 

38(f)(4) Tax Deductibility 

The Board is also proposing changes 

to the closed-end disclosures to 

implement provisions of the Bankruptcy 

Abuse Prevention and Consumer 

Protection Act of 2005 (the ‘‘Bankruptcy 

Act’’) which requires disclosure of the 

tax implications for home-secured credit 

that may exceed the dwelling’s fair 

market value. See Public Law 109–8, 

119 Stat. 23. The Bankruptcy Act 

primarily amended the federal 

bankruptcy code, but also contained 

several provisions amending TILA. 

Section 1302 of the Bankruptcy Act 

amendments requires that 

advertisements and applications for 

credit (either open-end or closed-end) 

that may exceed the fair market value of 

the dwelling include a statement that 

the interest on the portion of the credit 

extension that exceeds the fair market 

value is not tax-deductible and a 

statement that the consumer should 

consult a tax advisor for further 

information on tax deductibility. 

The Board stated its intent to 

implement the Bankruptcy Act 

amendments in an ANPR published in 

October 2005 as part of the Board’s 

ongoing review of Regulation Z (October 

2005 ANPR). 70 FR 60235; Oct. 17, 

2005. The Board received approximately 

50 comment letters: forty-five letters 

were submitted by financial institutions 

and their trade groups, and five letters 

were submitted by consumer groups. In 

general, creditors asked for flexibility in 

providing the disclosure regarding the 

tax implications for home-secured credit 

that may exceed the dwelling’s fair 

market value, either by permitting the 

notice to be provided to all mortgage 

applicants, or to be provided later in the 

approval process after creditors have 

determined whether the disclosure is 

triggered. Creditor commenters asked 

for guidance on loan-to-value 

calculations and safe harbors for how 

creditors should determine property 

values. Consumer advocates favored 

triggering the disclosure when negative 

amortization could occur. A number of 

commenters stated that in order for the 

disclosure to be effective and useful to 

the borrower, it should be given when 

the new extension of credit, combined 

with existing credit secured by the 

dwelling (if any), may exceed the fair 

market value of the dwelling. A few 

industry comments took the opposite 

view that the disclosure should be 

limited only to when a new extension 

of credit itself exceeds fair market value, 

citing the difficulty in determining how 

much debt is already secured by the 

dwelling at the time of application. 

The Board implemented section 1302 

with regard to advertisements in its 

2008 HOEPA Final Rule. See 73 FR 

44522, 44600; July 30, 2008. In the 

supplementary information to that rule, 

the Board stated that it intends to 

implement the application disclosure 

portion of the Bankruptcy Act during its 

forthcoming review of closed-end and 

HELOC disclosures under TILA. 

Proposed § 226.38(f)(4) would 

implement provisions of the Bankruptcy 

Act by requiring creditors to include the 

disclosure of the tax implications for a 

loan secured by a dwelling, if extension 

of credit may, by its terms, exceed the 

fair market value of the dwelling. The 

text of the proposed disclosure is based 

on the Board’s consumer testing of 

model HELOC disclosure forms. The 

disclosure would be segregated and 

located directly below the table. 

The Board recognizes that creditors 

may not be able to determine whether 

the amount of credit extended exceeds 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43311 

the fair market value of the dwelling, 

especially three days after application 

when they are required to provide an 

early transaction-specific disclosures. 

The creditor may not be able to verify 

the value on the property until later in 

the loan underwriting process. The 

Board has considered whether the 

disclosure should be provided later in 

the approval process after the creditor 

has determined that the disclosure is 

triggered, for instance, after receiving 

the appraisal report or completing the 

underwriting process. However, such 

late timing of the disclosure would not 

satisfy the requirements of the 

Bankruptcy Act which requires that the 

disclosures be provided at the time of 

application. See 15 U.S.C. 1638(a)(15). 

The Board also considered whether 

the disclosure should be provided to all 

mortgage applicants, regardless of 

whether the amount of credit extended 

exceeds the fair market value of the 

dwelling. To address the situations in 

which the creditor is not certain 

whether the credit extended may exceed 

the fair market value of the dwelling, 

comment 38(f)(4)–2 permits the 

disclosure to be provided to all 

mortgage applicants at creditors’ 

discretion and provides model language. 

The Board recognizes that the scope 

of the proposed § 226.38(f)(4) is limited 

to dwellings whereas proposed § 226.38 

would apply to real property and 

dwellings. While the Bankruptcy Act 

amendment specifically references 

‘‘consumer’s dwelling,’’ the Board 

believes that it would be unnecessarily 

burdensome to require creditors to 

create separate disclosures for the 

transactions secured by real property 

and those secured by a dwelling solely 

for the purposes of the tax implications 

disclosure. For that reason, a creditor 

would be permitted, but not required, to 

provide the disclosures about the tax 

implications in connection with 

transactions secured by both real 

property and dwellings. 

38(f)(5) Additional Information and Web 

Site 

Consumer testing showed that many 

participants educated themselves about 

the mortgage process through informal 

networking with family, friends, and 

colleagues, while others relied on the 

Internet for information. To improve 

consumers’ ability to make informed 

decisions about credit, the Board 

proposes § 226.38(f)(5) to require the 

creditor to disclose that if the consumer 

does not understand any of the 

disclosures, then the consumer should 

ask questions. The creditor would also 

disclose that the consumer may obtain 

additional information at the Web site of 

the Federal Reserve Board and disclose 

a reference to that Web site. The Board 

will enhance its Web site to further 

assist consumers in shopping for a 

mortgage. Although it is hard to predict 

from the results of the consumer testing 

how many consumers might use the 

Board’s Web site, and recognizing that 

not all consumers have access to the 

Internet, the Board believes that this 

Web site may be helpful to some 

consumers as they shop for a mortgage. 

The Board seeks comment on the 

content for the Web site. 

38(f)(6) Format 

The Board is proposing to specify 

precise formatting requirements for the 

disclosures required by § 226.38(f)(1) 

through (5). Proposed § 226.38(f)(6)(i) 

would set forth location requirements, 

providing that the no obligation and 

confirmation of receipt statements must 

be disclosed together, the security 

interest and no guarantee to refinance 

statements must be disclosed together, 

and the recommendation to ask 

questions and statement regarding the 

Board’s Web site must be disclosed 

together. Proposed § 226.38(f)(6)(ii) 

would set forth highlighting 

requirements, providing that the no 

obligation and security interest 

statements, and the advice to ask 

questions, must be disclosed in bold 

text. 

38(g) Identification of Originator and 

Creditor 

38(g)(1) Creditor 

Currently, § 226.18(a), which 

implements TILA Section 128(a)(1), 15 

U.S.C. 1638(a)(1), requires the creditor 

to disclose the identity of the creditor 

making the disclosure. Proposed 

§ 226.38(g)(1) would require the same 

disclosure. In addition, proposed 

comment 38(g)(1)–1 would parallel 

existing comment 18(a)–1 to clarify that 

use of the creditor’s name is sufficient, 

but the creditor may also include an 

address and/or telephone number. In 

transactions with multiple creditors, 

any one of them may make the 

disclosures, but the one doing so must 

be identified. The Board solicits 

comment on whether the creditor 

making the disclosures should be 

required to disclose its contact 

information, such as its address and/or 

telephone number. 

Existing footnote 38 to § 226.17(a), 

which implements TILA Section 

128(b)(1), 15 U.S.C. 1638(b)(1), states 

that the creditor’s identity may be made 

together with or separately from the 

other required disclosures. The Board 

proposes to amend the substance of 

current footnote 38 to remove the 

reference to the creditor’s identity 

disclosure required under § 226.18(a), 

thereby making it subject to the 

grouped-together and segregation 

requirement for all non-mortgage 

closed-end credit. Similarly, 

§ 226.37(a)(2) would require the 

disclosure of the creditor’s identity to be 

subject to the grouped-together and 

segregation requirement for closed-end 

credit transactions secured by real 

property or a dwelling. 

The Board proposes to make this 

adjustment pursuant to its authority 

under TILA Section 105(a). 15 U.S.C. 

1604(a). Section 105(a) authorizes the 

Board to make exceptions and 

adjustments to TILA to effectuate the 

statute’s purposes, which include 

facilitating consumers’ ability to 

compare credit terms, and avoid the 

uninformed use of credit. 15 U.S.C. 

1604(a), 15 U.S.C. 1601(a). The Board 

believes it is important to disclose the 

creditor’s identity so that consumers can 

more easily identify the appropriate 

entity. Thus, the Board believes this 

proposal would help serve TILA’s 

purpose to provide meaningful 

disclosure of credit terms. 

38(g)(2) Loan Originator 

On July 30, 2008, the Secure and Fair 

Enforcement for Mortgage Licensing Act 

of 2008 (SAFE Act), 12 U.S.C. 5101– 

5116, was enacted to create a 

Nationwide Mortgage Licensing System 

and Registry of loan originators to 

increase uniformity, reduce fraud and 

regulatory burden, and enhance 

consumer protection. 12 U.S.C. 5102. 

Under the SAFE Act, a ‘‘loan originator’’ 

is defined as ‘‘an individual who (I) 

takes a residential mortgage loan 

application; and (II) offers or negotiates 

terms of a residential mortgage loan for 

compensation or gain.’’ 12 U.S.C. 

5102(3)(A)(i). Each loan originator is 

required to obtain a unique identifier 

through the Nationwide Mortgage 

Licensing System and Registry. 12 

U.S.C. 5103(a)(2). The term ‘‘unique 

identifier’’ is defined as ‘‘a number or 

other identifier that (i) permanently 

identifies a loan originator; (ii) is 

assigned by protocols established by the 

Nationwide Mortgage Licensing System 

and Registry and the Federal banking 

agencies to facilitate electronic tracking 

of loan originators and uniform 

identification of, and public access to, 

the employment history of and the 

publicly adjudicated disciplinary and 

enforcement actions against loan 

originators; and (iii) shall not be used 

for purposes other than those set forth 

under this title.’’ 15 U.S.C. 5102(12)(A). 

The system is intended to provide 

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43312 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

consumers with easily accessible 

information to research a loan 

originator’s history of employment and 

any disciplinary or enforcement actions 

against that person. 12 U.S.C. 5101(7). 

To facilitate the use of the Nationwide 

Mortgage Licensing System and Registry 

and promote the informed use of credit, 

the Board proposes § 226.38(g)(2) to 

require the loan originator to disclose 

his or her unique identifier on the TILA 

disclosure, as defined by the SAFE Act. 

Proposed comment 38(g)(2)–1 would 

clarify that in transactions with multiple 

loan originators, each loan originator’s 

unique identifier must be listed on the 

disclosure. For example, in a transaction 

where a mortgage broker meets the 

SAFE Act definition of a loan originator, 

the identifiers for the broker and for its 

employee loan originator meeting that 

definition would be listed on the 

disclosure. 

The Board notes that the Board, FDIC, 

OCC, OTS, NCUA, and Farm Credit 

Administration have published a 

proposed rule to implement the SAFE 

Act. See 74 FR 27386; June 9, 2009. In 

this proposed rule, the federal banking 

agencies have requested comment on 

whether there are mortgage loans for 

which there may be no mortgage loan 

originator. For example, the agencies 

query whether there are situations 

where a consumer applies for and is 

offered a loan through an automated 

process without contact with a mortgage 

loan originator. See id. at 27397. The 

Board solicits comments on the scope of 

this problem and its impact on the 

requirements of proposed § 226.38(g)(2). 

38(h) Credit Insurance and Debt 

Cancellation and Debt Suspension 

Coverage 

As discussed more fully in 

§ 226.4(d)(1) and (3), concerns have 

been raised that consumers do not 

understand the voluntary nature, costs, 

and eligibility restrictions of credit 

insurance and debt cancellation and 

debt suspension coverage. For this 

reason, the Board proposes § 226.38(h) 

to require creditors to provide certain 

disclosures, which would be grouped 

together and substantially similar in 

headings, content and format to Model 

Clause H–17(C) in Appendix H to this 

part. Proposed comment 38(h)–1 would 

clarify that this disclosure may, at the 

creditor’s option, appear apart from the 

other disclosures. It may appear with 

any other information, including the 

amount financed itemization, any 

information prescribed by State law, or 

other information. When this 

information is disclosed with the other 

segregated disclosures, however, no 

additional explanatory material may be 

included. 

The proposed disclosures seek to 

address concerns that consumers may 

not understand that some products are 

voluntary and not required as a 

condition of receiving credit. If the 

product is optional, proposed 

§ 226.38(h)(1)(i) would require the 

creditor to disclose the term 

‘‘OPTIONAL COSTS,’’ in capitalized 

and bold letters, along with the name of 

the program in bold letters. If the 

product is required, then proposed 

§ 226.38(h)(1)(ii) would require the 

creditor to disclose only the name of the 

program in bold letters. In addition, if 

the product is optional, proposed 

§ 226.38(h)(2) would require the creditor 

to disclose the term ‘‘STOP,’’ in 

capitalized and bold letters, along with 

a statement that the consumer does not 

have to buy the product to get the loan. 

The term ‘‘not’’ would be in bold letters 

and underlined. 

Concerns have also been raised that 

consumers may not realize that there are 

alternatives to the product. Therefore, 

under proposed § 226.38(h)(3), the 

creditor would disclose that if the 

consumer already has insurance, then 

the policy or coverage may not provide 

the consumer with additional benefits. 

Under proposed § 226.38(h)(4), the 

creditor would disclose that other types 

of insurance may give the consumer 

similar benefits and are often less 

expensive. 

As described more fully in 

§ 226.4(d)(1) and (3), concerns have 

been raised that consumers are not 

aware that they could incur a cost for a 

product that may offer no benefit if the 

eligibility criteria are not met at the time 

of enrollment. That is, consumers may 

not be aware that if they do not meet the 

eligibility criteria at the time of 

enrollment, the product would not pay 

off, cancel, or suspend the credit 

obligation. Although the creditor 

typically has information about the 

consumer’s age or employment status, 

some creditors do not use this 

information to determine whether the 

consumer meets the age or employment 

eligibility restrictions at the time of 

enrollment. Some consumers are later 

denied benefits based on these 

eligibility restrictions. 

For these reasons, the Board is 

proposing under § 226.38(h)(5)(i) to 

require the creditor to disclose a 

statement that based on the creditor’s 

review of the consumer’s age and/or 

employment status at the time of 

enrollment, the consumer would be 

eligible to receive benefits. However, if 

there are other eligibility restrictions, 

such as pre-existing health conditions, 

the creditor would be required to make 

certain other disclosures. Under 

proposed § 226.38(h)(5)(ii), the creditor 

would disclose that based on the 

creditor’s review of the consumer’s age 

and/or employment status at the time of 

enrollment, the consumer may be 

eligible to receive benefits. Under 

proposed § 226.38(h)(6), the creditor 

would also disclose that the consumer 

may not be eligible to receive any 

benefits because of other eligibility 

restrictions. 

Proposed comment 38(h)(5)–1 would 

state that if, based on the creditor’s 

review of the consumer’s age and/or 

employment status at the time of 

enrollment in the product, the consumer 

would not qualify for the benefits of the 

product, then providing the disclosure 

under § 226.38(h)(5) would not comply 

with this provision. That is, if the 

consumer does not meet the age and/or 

employment eligibility criteria, then the 

creditor cannot state that the consumer 

may be eligible to receive benefits and 

cannot comply with this provision. In 

addition, the proposed comment would 

clarify that if the creditor offers a 

bundled product (such as credit life 

insurance combined with credit 

involuntary unemployment insurance) 

and the consumer is not eligible for all 

of the bundled products, then the 

disclosure under § 226.38(h)(5) would 

not comply with this provision. Finally, 

the proposed comment would clarify 

that the disclosure would still satisfy 

this provision if an event subsequent to 

enrollment, such as the consumer 

passing the age limit of the product, 

made the consumer ineligible for the 

product based on the product’s age or 

employment eligibility restrictions. 

Proposed comment 38(h)(5)–2 would 

clarify that the disclosure under 

§ 226.38(h)(5) would be deemed to 

comply with this provision if the 

creditor used reasonably reliable 

evidence to determine whether the 

consumer met the age or employment 

eligibility criteria of the product. 

Reasonably reliable evidence of a 

consumer’s age would include using the 

date of birth on the consumer’s credit 

application, on the driver’s license or 

other government-issued identification, 

or on the credit report. Reasonably 

reliable evidence of a consumer’s 

employment status would include a 

consumer’s statement on a credit 

application form, an Internal Revenue 

Service Form W–2, tax returns, payroll 

receipts, or other written evidence such 

as a letter or e-mail from the consumer 

or the consumer’s employer. 

Finally, the disclosure would contain 

the debt suspension coverage 

disclosure, a Web site reference, cost 

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90See, e.g., Credit CARD Act of 2009, Public Law 

No. 111–24, § 509; 123 Stat. 1734, 1763 (2009) 

(requiring the General Accounting Office to provide 

a report to Congress by December 31, 2010, of the 

suitability of credit insurance, debt cancellation 

agreements, and debt suspension agreements for 

target customers, the ‘‘predatory nature’’ of such 

offers, and the loss rates compared to more 

traditional insurance products). 

information, and a space for the 

consumer’s signature and the date. To 

ensure consistency with the debt 

suspension coverage provisions of the 

December 2008 Open-End Final Rule, 

proposed § 226.38(h)(7) would require 

the creditor to disclose, as applicable, a 

statement that the obligation to pay loan 

principal and interest is only 

suspended, and that interest will 

continue to accrue during the period of 

suspension. To provide more 

information to consumers, proposed 

§ 226.38(h)(8) would require the creditor 

to disclose a statement that the 

consumer may obtain additional 

information about credit insurance or 

debt suspension or debt cancellation 

coverage at the Web site of the Federal 

Reserve Board, and a reference to that 

Web site. If the product is optional, 

proposed § 226.38(h)(9)(i) would require 

the creditor to disclose a statement of 

the consumer’s request to purchase or 

enroll in the optional product and a 

statement of the cost of the product 

expressed as a dollar amount per month 

or per year, as applicable, together with 

the loan amount and the term of the 

product in years. This disclosure 

parallels § 226.4(d)(1) and (3), which 

requires cost disclosures in order to 

exclude from the finance charge the 

credit insurance premium or debt 

cancellation or debt suspension 

coverage charge. If the product is 

required, proposed § 226.38(h)(9)(ii) 

would require the creditor to disclose 

that fact, along with a statement of the 

cost of the product expressed as a dollar 

amount per month or per year, as 

applicable, together with the loan 

amount and the term of the product in 

years. The cost, month or year, loan 

amount, and term of the product would 

be underlined. The provisions regarding 

required products would be applicable 

to the extent Regulation Y, 12 CFR part 

225, or State or other law would not 

prohibit requiring the product. Finally, 

proposed § 226.38(h)(10) would require 

the creditor to provide a designation for 

the signature of the consumer and the 

date of the signing. 

The Board proposes to require this 

disclosure using its authority under 

TILA Section 105(a), 15 U.S.C. 1604(a). 

Because proposed § 226.4(g) would treat 

a premium or charge for credit 

insurance or debt cancellation or debt 

suspension as a finance charge for 

closed-end credit transactions secured 

by real property or a dwelling, the 

creditor would not be required to 

provide the disclosure under 

§ 226.4(d)(1) and (3) to exclude the 

premium or charge from the finance 

charge. The Board believes, however, 

that the consumer would still benefit 

from a disclosure of the voluntary 

nature, costs, and eligibility restrictions 

of credit insurance or debt cancellation 

or debt suspension coverage, and thus 

the proposal would require a 

substantially similar disclosure. 

TILA Section 105(a), 15 U.S.C. 

1604(a), authorizes the Board to 

prescribe regulations to carry out the 

purposes of the act. TILA’s purpose 

includes promoting ‘‘the informed use 

of credit,’’ which ‘‘results from an 

awareness of the cost thereof by 

consumers.’’ TILA Section 102(a), 15 

U.S.C. 1601(a). A premium or charge for 

credit insurance or debt cancellation or 

debt suspension coverage is a cost 

assessed in connection with credit. The 

credit transaction and the relationship 

between the creditor and the consumer 

are the reasons the product is offered or 

available. Because the merits of this 

product have long been debated,90 the 

Board believes that consumers would 

benefit from clear and meaningful 

disclosures regarding the costs, benefits, 

and risks associated with this product. 

As discussed more fully in § 226.4(d)(1) 

and (3), consumer testing showed that 

without clear disclosures participants 

were unaware of the voluntary nature, 

costs, and eligibility restrictions. For 

these reasons, the Board believes that 

this proposed rule would serve to 

inform consumers of the cost of this 

credit product. 

38(i) Required Deposit 

Proposed § 226.38(i) addresses 

disclosure requirements when creditors 

require consumers to maintain deposits 

as a condition to the specific 

transaction, for transactions secured by 

real property or a dwelling. Proposed 

§ 226.38(i) is consistent with § 226.18(r), 

which applies to transactions not 

secured by real property or a dwelling. 

The Board is proposing to revise 

§ 226.18(r) and associated commentary, 

as discussed above, and proposed 

§ 226.38(i) reflects the revised text and 

associated commentary. 

38(j) Separate Disclosures 

Consumer testing indicated that 

participants generally felt overwhelmed 

by the amount of information presented 

throughout the loan process and 

especially at consummation. As a result, 

the Board seeks to streamline the TILA 

disclosures and focus on the terms that 

participants stated were important for 

shopping and for understanding their 

loan terms. Currently, TILA and 

Regulation Z mandate that the following 

disclosures be grouped together with the 

required disclosures and segregated 

from everything else: rebate, late 

payment, property insurance, contract 

reference, and assumption policy. See 

TILA Sections 128(a)(9), (10), (11), (12), 

(13) and (b) and 106(c); 15 U.S.C. 

§§ 1638(a)(9), (10), (11), (12), (13) and 

(b) and 1605(c); §§ 226.4(d)(2), 

226.17(a)(1), and 226.18(k)(2), (l), (n), 

(p), and (q). Consumer testing showed 

that these terms were not of primary 

importance to consumers in choosing a 

mortgage. With respect to assumption, 

for example, very few participants 

understood the language indicating that 

the loan was assumable, and even fewer 

felt it was important information. With 

respect to property insurance, most 

participants understood the language 

indicating that the borrower can obtain 

property insurance from anyone that is 

acceptable to the lender, but the 

participants felt that this was not 

important to their decision making. 

TILA Section 105(a) authorizes the 

Board to make exceptions to TILA to 

effectuate the statute’s purposes, which 

includes promoting the informed use of 

credit. 15 U.S.C. 1601(a), 1604(a). The 

Board believes that requiring these 

disclosures to appear separately from 

the other required disclosures would 

improve the consumer’s ability to focus 

on the terms most useful to evaluating 

the proposed credit transaction. 

TILA Section 105(f) authorizes the 

Board to exempt any class of 

transactions from coverage under any 

part of TILA if the Board determines 

that coverage under that part does not 

provide a meaningful benefit to 

consumers in the form of useful 

information or protection. 15 U.S.C. 

1604(f)(1). TILA Section 105(f) directs 

the Board to make this determination in 

light of specific factors. 15 U.S.C. 

1604(f)(2). These factors are (1) the 

amount of the loan and whether the 

disclosure provides a benefit to 

consumers who are parties to the 

transaction; (2) the extent to which the 

requirement complicates, hinders, or 

makes more expensive the credit 

process for the class of transactions; (3) 

the status of the borrower, including any 

related financial arrangements of the 

borrower, the financial sophistication of 

the borrower relative to the type of 

transaction, and the importance to the 

borrower of the credit, related 

supporting property, and coverage 

under TILA; (4) whether the loan is 

secured by the principal residence of 

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91 24 CFR 3500.10(b). The settlement agent must 

provide the borrower with an opportunity to 

inspect the HUD–1 during the business day 

preceding settlement, but only completed to reflect 

all information known to the settlement agent at the 

time. Id. 3500.10(a). 

the consumer; and (5) whether the 

exemption would undermine the goal of 

consumer protection. Although a credit 

transaction secured by real property or 

a dwelling is important to the borrower, 

the Board believes that removing these 

disclosures from the other segregated 

information would further, rather than 

undermine, the goal of consumer 

protection because consumers would 

then focus on the terms that are most 

important to their decision making 

process. The proposed rule would still 

require that the information be 

disclosed but would simply no longer 

require the disclosures to be provided 

with the segregated information. 

38(j)(1) Itemization of Amount Financed 

TILA Section 128(a)(2)(B), 15 U.S.C. 

1638(a)(2)(B), and § 226.18(c) currently 

require that the creditor provide the 

consumer with a notice that an 

itemization of amount financed is 

available on request and to provide it 

when the consumer so requests. 

Regulation Z also provides that the good 

faith estimate of settlement costs (GFE) 

provided pursuant to RESPA suffices to 

satisfy the itemization of amount 

financed requirement. See 

§ 226.18(c)(1), fn. 40. The staff 

commentary provides further that the 

HUD–1 settlement statement provided 

at settlement under RESPA also may be 

substituted for the itemization in 

connection with later disclosures made 

pursuant to § 226.19(a). See comment 

18(c)–4. 

Proposed § 226.38(j)(1) would mirror 

the rules currently found under 

§ 226.l8(c) permitting a creditor to 

provide disclosures pursuant to RESPA 

in lieu of the itemization of amount 

financed. These rules originally were 

established by the Board pursuant to its 

authority under TILA Section 105(a) to 

make exceptions to facilitate 

compliance with TILA, and the Board is 

proposing to permit similar treatment 

under the same authority. Proposed 

§ 226.38(j)(1) would differ from current 

§ 226.18(c), as discussed below, to 

reflect recent changes to Regulation Z. 

Under the proposal, the provisions 

permitting substitution of RESPA 

disclosures for the itemization of 

amount financed would be removed 

from § 226.18 and included under 

proposed § 226.38(j)(1). That section 

would govern the itemization disclosure 

contents for mortgage transactions, 

including all those subject to RESPA. As 

noted above, the Board also is proposing 

to make certain technical and 

conforming amendments under 

§ 226.18(c). 

Proposed § 226.38(j)(1)(i) would 

provide the same four categories of the 

itemization as currently appear in 

§ 226.18(c)(1)—the amount of proceeds 

distributed directly to the consumer, the 

amount credited to the consumer’s 

account, amounts paid to other persons 

on the consumer’s behalf, and the 

prepaid finance charge. Proposed 

§ 226.38(j)(1)(ii) similarly would 

provide to creditors the alternative 

under current § 226.18(c)(2) of 

disclosing the right to receive an 

itemization and providing it when the 

consumer so requests, instead of 

delivering the itemization routinely. 

Finally, proposed § 226.38(j)(1)(iii) 

would provide the alternative of 

substituting the RESPA GFE for the 

itemization. It also would state a 

parallel alternative of substituting the 

HUD–1 settlement statement for the 

itemization when a creditor provides 

later disclosures pursuant to 

§ 226.19(a)(2), which currently is 

addressed only in the staff commentary 

under § 226.18(c). And proposed 

§ 226.38(j)(1)(iii) would provide that the 

substitution is permissible for any 

transaction subject to § 226.38, whether 

subject to RESPA or not. 

The Board notes that the timing of the 

HUD–1 settlement statement no longer 

is consistent with the timing of the TILA 

redisclosure under § 226.19(a)(2). 

Regulation X under RESPA requires the 

HUD–1 to be provided at settlement,91

which generally corresponds with 

consummation of the transaction under 

Regulation Z. Under the MIDA final 

rule, and the proposed revisions to 

§ 226.19 under this proposal, the 

redisclosure required under 

§ 226.19(a)(2) must be received by the 

consumer at least three business days 

before consummation of the transaction. 

As current comment 18(c)–1 provides, 

and proposed § 226.38(j)(1) also would 

require, the itemization must be 

provided at the same time as the 

segregated disclosures. Accordingly, 

proposed § 226.38(j)(1)(iii) would 

provide that the HUD–1 settlement 

statement is a permissible substitute for 

the itemization of amount financed only 

if it is received by the consumer at least 

three business days prior to 

consummation, in accordance with 

§ 226.19(a)(2). 

The Board realizes that, in general, 

consumers currently receive a fully 

completed HUD–1 settlement statement 

only at consummation, in accordance 

with RESPA’s requirements. For this 

reason, mortgage creditors might not 

take advantage of the alternative in 

proposed § 226.38(j)(1)(iii) as widely as 

they historically have done under 

§ 226.18(c)(1), fn. 40. On the other hand, 

the Board notes that a creditor that does 

not avail itself of that alternative must 

follow one of the other two alternatives. 

Under proposed §§ 226.19(a) and 

226.38(j)(1)(i), the creditor still must 

provide substantially the same 

information three business days before 

consummation. Under proposed 

§§ 226.19(a) and 226.38(j)(1)(ii), the 

creditor also must do so, at least in 

those cases where the consumer 

requests the itemization. Further, given 

the proposed expansion of the finance 

charge under § 226.4, discussed above, 

all of the information contained in 

either the good faith estimate or the 

itemization would have to be firmly 

established by three business days 

before consummation so that the 

creditor can comply with the timing 

requirements of proposed § 226.19(a)(2). 

In any event, the Board believes that 

to permit substitution of the HUD–1 

settlement statement for the itemization 

without requiring that it be delivered 

three business days before 

consummation would be inconsistent 

with the purposes of the MDIA 

amendments. The Board seeks comment 

on whether creditors would continue to 

make significant use of this alternative 

as proposed § 226.38(j)(1)(iii) would 

implement it and, if not, whether the 

alternative should be retained. If it 

should be retained, the Board seeks 

comment on how it might be structured 

without requiring that the HUD–1 

settlement statement be received by the 

consumer earlier than RESPA requires 

while also preserving the purposes of 

the MDIA. 

38(j)(2) Through (6) Rebate; Late 

Payment; Property Insurance; Contract 

Reference; Assumption Policy 

The Board proposes to use its 

exception and exemption authorities 

under TILA Section 105(a), 15 U.S.C. 

1604(a), to require creditors to provide 

the following disclosures separately 

from the other required disclosures: 

rebate under proposed § 226.38(j)(2), 

late payment under proposed 

§ 226.38(j)(3), property insurance under 

proposed § 226.38(j)(4), contract 

reference under proposed § 226.38(j)(5), 

and assumption policy under proposed 

§ 226.38(j)(6). The Board is not 

proposing to change the substantive 

content of these disclosures. Proposed 

§ 226.38(j) would mirror § 226.18, 

except that the proposed requirement 

would be provided separately from the 

other required disclosures. The 

proposed comments for these 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43315 

disclosures would also parallel the 

applicable comments under § 226.18. 

In addition, the Board proposes 

Model Clauses at Appendix H–23 for 

the following non-segregated 

disclosures: rebate, late payment, 

property insurance, contract reference, 

and assumption policy. The Model 

Clauses are based on the Board’s 

consumer testing and the Board believes 

that model clauses will enhance 

consumer understanding of the 

information, helping consumers to 

avoid the uninformed use of credit. 

Appendices G and H—Open-End and 

Closed-End Model Forms and Clauses 

Appendices G and H set forth model 

forms, model clauses and sample forms 

that creditors may use to comply with 

the requirements of Regulation Z. 

Appendix G contains model forms, 

model clauses and sample forms 

applicable to open-end plans. Appendix 

H contains model forms, model clauses 

and sample forms applicable to closedend loans. Although use of the model 

forms and clauses is not required, 

creditors using them properly will be 

deemed to be in compliance with the 

regulation with regard to those 

disclosures. As discussed above, the 

Board proposes to revise or add several 

model forms, model clauses and sample 

forms to Appendix H for transactions 

secured by real property or a dwelling. 

The revised or new model forms and 

clauses, and sample forms, are 

discussed above in the section-bysection analysis applicable to the 

regulatory provisions to which the 

forms or clauses relate. See discussion 

under §§ 226.19(b), 226.20(c)–(e), and 

226.38(a)–(j). In addition, the Board 

proposes to add new model clauses and 

a sample form relating to credit 

insurance, debt cancellation and debt 

suspension coverage to both Appendix 

G and H for open-end and closed-end 

loans. These model clauses and sample 

forms are discussed under proposed 

§ 226.4(d)(1) and (3) and 226.38(h). In 

Appendix H, all other existing forms 

and clauses applicable to transactions 

not secured by real property or a 

dwelling have been retained without 

revision. 

The Board also proposes to revise or 

add commentary to the model forms, 

model clauses and sample forms in 

Appendix H, as discussed below. The 

Board solicits comments on the 

proposed revisions below, as well as 

whether any additional commentary 

should be added to explain the forms 

and clauses contained in Appendix H. 

Permissible Changes 

The commentary to appendices G and 

H currently states that creditors may 

make certain changes in the format and 

content of the model forms and clauses, 

and may delete any disclosures that are 

inapplicable to a transaction or a plan 

without losing the Act’s protection from 

liability. However, certain formatting 

changes may not be made with respect 

to certain model and sample forms in 

Appendix G. See comment app. G and 

H–1. As discussed above, the Board is 

proposing format and content 

requirements with respect to disclosures 

for transactions secured by real property 

or a dwelling, such as a tabular 

requirement for ARM loan program 

disclosures and ARM adjustment 

notices, and transaction-specific 

disclosures required for loans secured 

by real property or a dwelling. See 

proposed §§ 226.19(b), 226.20(c), and 

226.38(a)–(j). Accordingly, the Board 

would amend comment app. G and H– 

1 to indicate that certain formatting 

changes may not be made with respect 

to certain model forms, model clauses 

and sample forms in Appendix H. In 

addition, as discussed more fully under 

§ 226.38, the Board proposes to require 

creditors to provide disclosures for 

transactions secured by real property or 

a dwelling only as applicable. As a 

result, the Board would not allow 

creditors to use multi-purpose forms; 

the Board would amend comment app. 

G and H–1(vi) to clarify that the use of 

multipurpose standard forms is not 

permitted for transactions secured by 

real property or a dwelling. See 

discussion under § 226.37(a)(2). 

Debt Cancellation Coverage 

Currently, commentary to appendices 

G and H states that creditors are not 

authorized to characterize debtcancellation fees as insurance premiums 

for purposes of the regulation. The 

Board proposes to amend comment app. 

G and H–2 to clarify that the 

commentary also applies to debt 

suspension fees. 

Appendix H—Closed-End Model Forms 

and Clauses 

Model Forms, Model Clauses, and 

Sample Forms for Closed-End 

Disclosures 

As noted above, the Board proposes a 

new disclosure regime under § 226.38 

for transactions secured by real property 

or a dwelling. As a result, the following 

sample forms are rendered unnecessary 

and deleted: Sample H–13 (mortgage 

with demand feature sample); Sample 

H–14 (variable-rate mortgage sample); 

and Sample H–15 (graduated-payment 

mortgage sample). Comment app. H–1 

would be revised to reflect the deletion 

of Samples H–13 through H–15. The 

Board would further amend comment 

app. H–1 to reflect that, under the 

proposal, new model clauses are added 

regarding credit life insurance, debt 

cancellation, or debt suspension 

disclosures, and creditor-placed 

property insurance disclosures. See 

discussion under §§ 226.4(d)(1) and (3), 

226.38(h), and 226.20(e). These deleted 

samples forms and new model clauses 

are discussed more fully below. 

Currently, comment app. H–2 

addresses the flexibility given to 

creditors in providing the itemization of 

amount financed disclosure required 

under current § 226.18(c) and illustrated 

by Model Clause H–3. As discussed 

above, the Board is proposing new 

§ 226.38(j)(1) regarding disclosure of the 

itemization of amount financed for 

transactions secured by real property or 

a dwelling. As a result, the Board would 

amend comment app. H–2 to update 

cross-references. In a technical revision, 

the Board would amend comment app. 

H–3 to clarify that the guidance applies 

to new Model Clauses H–4(B) and H– 

4(C), H–4(H), H–16, H–17(A) and H– 

17(C), H–18, and H–20 through H–23. 

These new model clauses are discussed 

more fully below. 

Model Forms, Model Clauses, and 

Sample Forms for ARM Loan Program 

Disclosures 

Currently, Appendix H contains 

several model clauses, and a sample 

form, related to variable-rate loan 

program disclosures required under 

current § 226.18(f)(1), 226.18(f)(2) and 

226.19(b). Current Model Clause H–4(A) 

contains model clauses for variable-rate 

disclosures required under § 226.18(f)(1) 

for transactions not secured by a 

principal dwelling, or transactions 

secured by a dwelling with a term of 

one year or less. Current Model Clause 

H–4(B) contains model clauses for 

variable-rate disclosures for transactions 

that are secured by a principal dwelling 

with a term greater than one year. 

Current Model Clause H–4(C) contains 

model clauses related to variable-rate 

loan program disclosures required 

under § 226.19(b). Current Sample H–14 

is a sample disclosure illustrating 

required disclosures under current 

§ 226.19(b) of interest rate and monthly 

payment changes, as well as an 

historical example, for variable-rate loan 

programs. 

Under the proposal, the Board would 

require new disclosures under 

§ 226.19(b) for adjustable-rate loan 

programs, and would revise 

§ 226.18(f)(1) and delete § 226.18(f)(2) to 

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43316 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

reflect such proposed changes to 

§ 226.19(b). Accordingly, the Board 

proposes to delete current Model Clause 

H–4(B) and add new Model H–4(B) to 

illustrate, in the tabular format, the 

disclosures required under § 226.19(b) 

for adjustable-rate transactions secured 

by real property or a dwelling. The 

Board also would delete current Model 

Clause H–4(C) and add new Model 

Clauses H–4(C) to reflect the proposed 

changes to § 226.19(b), as discussed 

above, and to provide model clauses 

regarding interest rate carryover, 

conversion features, and preferred rates. 

The Board proposes to add Samples H– 

4(D) through H–4(F) to provide 

examples of how certain disclosures 

under § 226.19(b) may be provided, in 

the tabular format, for adjustable-rate 

loan programs that contain a hybrid, 

interest only, or payment option feature, 

respectively. In addition, the heading to 

Model Clause H–4(A) would be revised 

to update the cross-reference to 

§ 226.18(f), and current Sample H–14 

regarding variable-rate disclosures 

would be deleted and reserved. 

The Board also proposes to revise 

existing commentary that provides 

guidance to creditors on how to use 

current Model Clauses H–4(A) through 

(C). Currently, comments app. H–4 

through H–6 provide guidance regarding 

variable-rate loan program disclosures 

required under current §§ 226.18(f)(1)– 

(2) and 226.19(b). Under the proposal, 

the Board would delete guidance 

contained in current comment app. H– 

5 regarding disclosures under 

§ 226.18(f)(2) as unnecessary, and 

instead provide that disclosures 

required under § 226.19(b) for 

adjustable-rate transactions be provided 

in the tabular format, as illustrated by 

Model H–4(B), and Samples H–4(D) 

through H–4(F). The Board also would 

delete guidance currently contained in 

comment app. H–6 relating to variablerate disclosures, and instead provide 

guidance regarding model clauses on 

carryover interest, a conversion feature, 

or a preferred rate. In a technical 

revision, the Board would revise 

comment app. H–4 to update the crossreference to § 226.18(f). 

Model Forms, Model Clauses, and 

Sample Forms for ARM Adjustment 

Notices 

Currently, Appendix H contains 

Model Clause H–4(D), which contains 

model clauses regarding interest rate 

and payment adjustment notices 

required for variable-rate transactions 

under current § 226.20(c). As discussed 

above under proposed§ 226.20(c), the 

Board proposes new timing and 

disclosure requirements regarding 

interest rate and payment changes for 

adjustable-rate transactions secured by 

real property or a dwelling. 

Accordingly, the Board would add a 

model form and two samples forms to 

illustrate, in the tabular format, the 

disclosures required under proposed 

§ 226.20(c)(2) for ARM adjustment 

notices when there is an interest rate 

and payment change. See proposed 

Model H–4(G) and Samples H–4(I) and 

H–4(J). In addition, the Board proposes 

to add a model form to illustrate 

disclosures required under proposed 

§ 226.20(c)(3) when there is an interest 

rate adjustment without any change to 

payment. See proposed Model H–4(K). 

Current Model Clause H–4(D) would be 

deleted and new Model Clauses H–4(H) 

would be added to reflect the proposed 

changes to § 226.20(c), as discussed 

above. The Board also proposes to revise 

current comment app. H–7 to provide 

that disclosures required under 

§ 226.20(c) be provided in the tabular 

format, as illustrated by new Model H– 

4(G), and Samples H–4(I) and H–4(J). 

Model Forms, Model Clauses, and 

Sample Forms for Periodic Statements 

Currently, creditors are not required 

to provide certain disclosures with 

respect to periodic statements for loans 

that are negatively amortizing. As 

discussed under proposed § 226.20(d), 

the Board would require creditors to 

disclose periodic payment options on a 

monthly basis for transactions secured 

by real property or a dwelling that offer 

payment options and are negatively 

amortizing. Accordingly, the Board is 

proposing to add new Model Form H– 

4(L) that creditors may use to comply 

with the requirements in proposed 

§ 226.20(d). 

Model Clauses for Section 32 (HOEPA) 

Disclosures 

Currently, Appendix H contains 

Mortgage Sample H–16, which provides 

model clauses for disclosures required 

under § 226.32(c), such as a notice to the 

borrower that he or she is not obligated 

to accept the terms of the loan and 

security interest disclosures. As 

discussed under proposed 

§ 226.32(c)(1), the Board would require 

creditors to provide plain-language 

versions of the ‘‘no obligation’’ and 

‘‘security interest’’ disclosures to better 

inform consumers who are considering 

obtaining HOEPA loans. The Board 

would revise Mortgage Sample H–16 

accordingly. In addition, the Board 

proposes to revise commentary 

currently contained in comment app. 

H–20 to clarify that these disclosures are 

required for all HOEPA loans, and as 

noted below, would move this 

commentary to current comment app. 

H–17. In a technical revision, the Board 

would revise the heading to Mortgage 

Sample H–16 to reflect that it contains 

model clauses. 

Model Clause for Credit Insurance, 

Debt Cancellation, or Debt Suspension 

Currently, Appendix H contains a 

model clause and sample form that 

creditors may use to comply with the 

disclosure requirements under current 

§ 226.4(d)(3) for debt suspension. See 

Model Clause H–17(A) and Sample H– 

17(B). As discussed above, the Board 

proposes new disclosure requirements 

for credit insurance, debt cancellation 

and debt suspension for all closed-end 

loans. See proposed §§ 226.4(d)(1), 

(d)(3) and 226.38(h). Accordingly, the 

Board proposes to add Model Clause H– 

17(C) and Sample H–17(D) that creditors 

may use to comply with the proposed 

requirements under §§ 226.4(d)(1), (d)(3) 

and 226.38(h). 

Model Clause for Creditor-Placed 

Property Insurance 

Currently, creditors are not required 

to provide any disclosures to the 

consumer with respect to creditorplaced property insurance. As discussed 

under proposed § 226.20(e), the Board 

would require creditors to provide 

notice of the cost and coverage of 

creditor-placed property insurance 

before charging the consumer for such 

insurance for transactions secured by 

real property or a dwelling. For all other 

closed-end loans, these disclosures 

would be required if creditors intend to 

exclude the creditor-placed property 

insurance fee from the finance charge 

under § 226.4(d). Accordingly, the 

Board proposes to add Model Clause H– 

18 that creditors may use to comply 

with the proposed requirements under 

§ 226.20(e). 

Model Forms, Model Clauses, and 

Sample Forms for Transaction-Specific 

Disclosures for Loans Secured by Real 

Property or a Dwelling 

Currently, Appendix H contains 

several model forms, model clauses and 

samples that creditors may use to 

comply with the disclosures required 

under current § 226.18 for transactions 

secured by real property or a dwelling. 

Current Model H–2 illustrates the 

format and content of disclosures 

currently required under § 226.18 for 

mortgages. Current Model Clause H–6 

contains a model clause for an 

assumption policy. Current Samples H– 

13 and H–15 are sample disclosures 

illustrating a mortgage with a demand 

feature and a graduated-payment 

mortgage, respectively. 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43317 

As discussed under proposed 

§ 226.38, the Board proposes a new 

disclosure regime for transactions 

secured by real property or a dwelling. 

Accordingly, the Board proposes to add 

new Model Forms, Model Clauses, and 

Sample Forms H–19 through H–23 that 

creditors may use to comply with the 

requirements in proposed § 226.38(a) 

through (j). The Board proposes to add 

Models H–19(A) through H–19(C) to 

illustrate the format and content of 

disclosures required under proposed 

§ 226.38 for fixed-rate, hybrid 

adjustable-rate, and payment option 

mortgages, respectively. In addition, the 

Board would add Model Clauses H–20 

and H–21 to provide guidance to 

creditors on how to disclose a balloon 

payment or introductory rate feature, 

respectively. Model Clause H–22 would 

be added to provide model clauses 

relating to key questions about risk 

disclosures required under proposed 

§ 226.38(d)(2). Model Clause H–23 

would be added to provide model 

clauses for the following disclosures 

required under proposed § 226.38(j)(2)– 

(6) for transactions secured by real 

property or a dwelling: rebate; late 

payment; property insurance; contract 

reference; and assumption policy. 

Under the proposal, current Samples H– 

13 and H–15 would be rendered 

unnecessary and therefore, are deleted 

and reserved. Model Clause H–6, which 

contains the current model clause for 

assumption, would be deleted because 

assumption policies are only applicable 

to transactions secured by real property 

or a dwelling; H–6 would be reserved. 

In addition, the Board proposes to add 

several sample forms to provide 

examples of how creditors can provide 

certain disclosures required under 

proposed § 226.38 in the tabular format 

or scaled graph, as applicable, for 

various transaction types secured by 

real property or a dwelling. Specifically, 

proposed Samples H–19(D) through H– 

19(I) illustrate disclosures required 

under proposed § 226.38 for the 

following transaction-types, 

respectively: a fixed mortgage with 

balloon payment; an interest only, fixed 

mortgage; a step-payment mortgage; a 

hybrid adjustable-rate mortgage; an 

interest-only ARM; and a payment 

option ARM. 

The Board also proposes to add or 

revise commentary to provide guidance 

to creditors on the purpose of the 

sample forms, and how to use Model 

Forms, Model Clauses, and Sample 

Forms H–19 through H–23 for 

transactions secured by real property or 

a dwelling. Current comment app. H–12 

provides guidance to creditors regarding 

the purpose of sample forms generally. 

Under the proposal, the Board would 

update the cross-references contained in 

current comment app. H–12 to clarify 

that the commentary applies to 

proposed Sample H–4(D) through-4(F) 

for ARM loan program disclosures 

required under proposed § 226.19(b); 

Samples H–4(I) and H–4(J) for ARM 

adjustment notice disclosures required 

under § 226.20(c); Sample H–17(D) for 

credit insurance, debt cancellation or 

debt suspension disclosures required 

under § 226.4(d)(1), (d)(3) and 226.38(h); 

and Samples H–19(D) through H–19(I) 

for disclosures required under § 226.38 

for transactions secured by real property 

or a dwelling. 

Current comment app. H–16 provides 

guidance regarding the sample forms 

that creditors may use to illustrate 

required disclosures for mortgages 

subject to RESPA and would be updated 

to include cross-references to proposed 

Samples H–19(D) through H–19(I), and 

to the itemization of amount financed 

disclosure under proposed 

§ 226.38(j)(1)(iii). Under the proposal, 

guidance contained in current comment 

app. H–17 regarding disclosure of a 

mortgage with a demand feature under 

§ 226.18 would be deleted as 

unnecessary. As noted above, 

commentary regarding disclosures 

required under § 226.32(c) for HOEPA 

loans would be moved from comment 

app. H–20 to comment app. H–17. 

In addition, under the proposal, 

current comment app. H–18, which 

contains guidance relating to variablerate disclosures required under current 

§ 226.19(b), would be deleted. New 

commentary would be added to 

comment app. H–18 to provide format 

details about proposed sample forms 

that illustrate the disclosures required 

for transactions secured by real property 

or a dwelling under proposed 

§ 226.19(b) or 226.38, as applicable. For 

example, the commentary indicates that 

Samples H–4(D) through H–4(F), and H– 

19(D) through H–19(I) are designed to be 

printed on an 81⁄2x11 inch sheet of 

paper. In addition, the following 

formatting techniques were used in 

presenting the information in the table 

to ensure that the information was 

readable: 

1. A readable font style and font size 

(10-point Ariel font style, except for the 

APR which is shown in 16-point type). 

2. Sufficient spacing between lines of 

the text. That is, words were not 

compressed to appear smaller than 10- 

point type, except for headings used to 

provide interest rate and payment 

summary disclosures required under 

proposed § 226.28(c), in the tabular 

format, which are shown in 9-point 

type. 

3. Standard spacing between words 

and characters. 

4. Sufficient white space around the 

text of the information in each row, by 

providing sufficient margins above, 

below and to the sides of the text. 

5. Sufficient contrast between the text 

and the background. Black text was 

used on white paper. 

Although the Board is not requiring 

creditors to use the above formatting 

techniques in presenting information in 

the table (except for the 10-point and 

16-point font size), the Board 

encourages creditors to consider these 

techniques when disclosing information 

in the tabular format, or scaled graph, to 

ensure that the information is presented 

in a readable format. 

Under the proposal, commentary 

currently contained in comment app. 

H–19 regarding the terms of a 

graduated-payment mortgage would be 

deleted, and would instead indicate the 

terms of the fixed-rate mortgage 

illustrated in Sample H–19(D). As noted 

above, guidance contained in current 

app. 

H–20 regarding disclosures required 

under § 226.32(c) would be moved to 

comment app. H–17. The Board 

proposes to add new commentary to 

comment app. H–20 to indicate the 

terms of the interest-only, fixed-rate 

mortgage illustrated in Sample H–19(E). 

The Board also proposes to add 

comments app. H–21 through –24 to 

indicate the terms of the following 

transaction types, which are illustrated 

in Samples H–19(F) through 19(I), 

respectively: a step-payment mortgage; a 

hybrid ARM; an interest-only ARM; and 

a payment option ARM. The 

transactions discussed in revised 

comments app. H–19 and H–20, and 

new comments app. H–21 through –24, 

all assume the average prime offer rates 

(APORs) that would be used in 

providing the disclosures required 

under proposed § 226.38(b), and are not 

representative of the actual APORs for 

the respective weeks. 

Further, the Board proposes to add 

comments app. H–25 through –28 

relating to the following, respectively: 

the disclosure required under proposed 

§ 226.38(c) for a balloon payment 

feature; the disclosure required under 

proposed § 226.38(c)(2)(iii) for 

transactions that have an initial 

discounted rate that later adjusts; 

disclosures required under proposed 

§ 226.19(d)(2) for key questions about 

risk that would be provided only as 

applicable; and disclosures required 

under proposed § 226.38(j)(2)–(6) that 

would be provided separately from 

disclosures required under proposed 

§ 226.38(a)–(j). In a technical revision, 

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43318 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

92See comments 25(a)–3 and –4 and proposed 

comment 25(a)–5. 

current comments app. H–21 through 

–24, which contain guidance relating to 

forms issued by the U.S. Department of 

Health and Human Services and 

approved for certain student loans, 

would be redesignated as comments 

app. H–29 through –32, respectively; no 

substantive change is intended. 

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 proposed rule 

under the authority delegated to the 

Board by the Office of Management and 

Budget (OMB). The collection of 

information that is required by this 

proposed rule is found in 12 CFR part 

226. The Board may not conduct or 

sponsor, and an organization is not 

required to respond to, this information 

collection unless the information 

collection displays a currently valid 

OMB control number. The OMB control 

number is 7100–0199. 

This information collection is 

required to provide benefits for 

consumers and is mandatory (15 U.S.C. 

1601 et seq.). Since the Board does not 

collect any information, no issue of 

confidentiality arises. The respondents/ 

recordkeepers are creditors and other 

entities subject to Regulation Z. 

TILA and Regulation Z are intended 

to ensure effective disclosure of the 

costs and terms of credit to consumers. 

For open-end credit, creditors are 

required to, among other things, 

disclose information about the initial 

costs and terms and to provide periodic 

statements of account activity, notice of 

changes in terms, and statements of 

rights concerning billing error 

procedures. Regulation Z requires 

specific types of disclosures for credit 

and charge card accounts and home 

equity plans. For closed-end loans, such 

as mortgage and installment loans, cost 

disclosures are required to be provided 

prior to consummation. Special 

disclosures are required in connection 

with certain products, such as reverse 

mortgages, certain variable-rate loans, 

and certain mortgages with rates and 

fees above specified thresholds. TILA 

and Regulation Z also contain rules 

concerning credit advertising. Creditors 

are required to retain evidence of 

compliance for two years, § 226.25, but 

Regulation Z identifies only a few 

specific types of records that must be 

retained.92

Under the PRA, the Board accounts 

for the paperwork burden associated 

with Regulation Z for the State member 

banks and other creditors supervised by 

the Federal Reserve that engage in 

consumer credit activities covered by 

Regulation Z and, therefore, are 

respondents under the PRA. Appendix 

I of Regulation Z defines the Federal 

Reserve-regulated institutions as: State 

member banks, branches and agencies of 

foreign banks (other than federal 

branches, federal agencies, and insured 

State branches of foreign banks), 

commercial lending companies owned 

or controlled by foreign banks, and 

organizations operating under section 

25 or 25A of the Federal Reserve Act. 

Other federal agencies account for the 

paperwork burden imposed on the 

entities for which they have 

administrative enforcement authority. 

The current total annual burden to 

comply with the provisions of 

Regulation Z is estimated to be 734,127 

hours for the 1,138 Federal Reserveregulated institutions that are deemed to 

be respondents for the purposes of the 

PRA. To ease the burden and cost of 

complying with Regulation Z 

(particularly for small entities), the 

Board provides model forms, which are 

appended to the regulation. 

As discussed in the preamble, the 

Board proposes changes to format, 

timing, and content requirements for the 

four main types of credit disclosures for 

closed-end mortgages governed by 

Regulation Z: (1) Disclosures at or before 

application; (2) disclosures within three 

days after application; (3) disclosures 

before consummation; and (4) 

disclosures after consummation. The 

proposed rule would impose a one-time 

increase in the total annual burden 

under Regulation Z for all respondents 

regulated by the Federal Reserve by 

227,600 hours, from 734,127 to 961,727 

hours. In addition, the Board estimates 

that, on a continuing basis, the proposed 

revisions to the rules would increase the 

total annual burden on a continuing 

basis from 734,127 to 1,280,367 hours. 

The total estimated burden increase, 

as well as the estimates of the burden 

increase associated with each major 

section of the proposed rule as set forth 

below, represents averages for all 

respondents regulated by the Federal 

Reserve. The Board expects that the 

amount of time required to implement 

each of the proposed changes for a given 

institution may vary based on the size 

and complexity of the respondent. 

Furthermore, the burden estimate for 

this rulemaking does not include the 

burden of complying with proposed 

disclosure and timing requirements that 

apply to private educational lenders 

making private education loans as 

announced in a separate proposed 

rulemaking (Docket No. R–1353) or the 

proposed disclosure and timing 

requirements of the Board’s separate 

notice published simultaneously with 

this proposal for open-end credit plans 

secured by real property. 

The Board estimates that 1,138 

respondents regulated by the Federal 

Reserve would take, on average, 200 

hours (five business weeks) to update 

their systems, internal procedure 

manuals, and provide training for 

relevant staff to comply with the 

proposed disclosure requirements in 

§§ 226.38 and 226.20(d), and revisions 

to existing disclosure requirements in 

§§ 226.19(b) and 226.20(c). This onetime revision would increase the burden 

by 227,600 hours. On a continuing basis 

the Board estimates that 1,138 

respondents regulated by the Federal 

Reserve would take, on average, 40 

hours a month to comply with the 

closed-end disclosure requirements and 

would increase the ongoing burden from 

304,756 hours to 546,240 hours. To ease 

the burden and cost of complying with 

the new and proposed requirements 

under Regulation Z the Board proposes 

to revise or add several model forms, 

model clauses and sample forms to 

Appendix H. 

The other federal financial agencies: 

Office of the Comptroller of the 

Currency (OCC), Office of Thrift 

Supervision (OTS), the Federal Deposit 

Insurance Corporation (FDIC), and the 

National Credit Union Administration 

(NCUA) are responsible for estimating 

and reporting to OMB the total 

paperwork burden for the domestically 

chartered commercial banks, thrifts, and 

federal credit unions and U.S. branches 

and agencies of foreign banks for which 

they have primary administrative 

enforcement jurisdiction under TILA 

Section 108(a), 15. U.S.C. 1607(a). These 

agencies are permitted, but are not 

required, to use the Board’s burden 

estimation methodology. Using the 

Board’s method, the total current 

estimated annual burden for the 

approximately 17,200 domestically 

chartered commercial banks, thrifts, and 

federal credit unions and U.S. branches 

and agencies of foreign banks 

supervised by the Federal Reserve, OCC, 

OTS, FDIC, and NCUA under TILA 

would be approximately 13,568,725 

hours. The proposed rule would impose 

a one-time increase in the estimated 

annual burden for such institutions by 

3,440,000 hours to 17,765,525 hours. On 

a continuing basis the proposed rule 

would impose an increase in the 

estimated annual burden by 8,256,000 

to 21,824,725 hours. The above 

estimates represent an average across all 

respondents; the Board expects 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43319 

93 13 CFR 121.201. 

94Regulation Z generally applies to ‘‘each 

individual or business that offers or extends credit 

when four conditions are met: (i) The credit is 

offered or extended to consumers; (ii) the offering 

or extension of credit is done regularly, (iii) the 

credit is subject to a finance charge or is payable 

by a written agreement in more than four 

installments, and (iv) the credit is primarily for 

personal, family, or household purposes.’’ 

§ 226.1(c)(1). 

variations between institutions based on 

their size, complexity, and practices. 

Comments are invited on: (1) Whether 

the proposed collection of information 

is necessary for the proper performance 

of the Board’s functions; including 

whether the information has practical 

utility; (2) the accuracy of the Board’s 

estimate of the burden of the proposed 

information collection, including the 

cost of compliance; (3) ways to enhance 

the quality, utility, and clarity of the 

information to be collected; and (4) 

ways to minimize the burden of 

information collection on respondents, 

including through the use of automated 

collection techniques or other forms of 

information technology. Comments on 

the collection of information should be 

sent to Cynthia Ayouch, Acting Federal 

Reserve Board Clearance Officer, 

Division of Research and Statistics, Mail 

Stop 95–A, Board of Governors of the 

Federal Reserve System, Washington, 

DC 20551, with copies of such 

comments sent to the Office of 

Management and Budget, Paperwork 

Reduction Project (7100–0199), 

Washington, DC 20503. 

VIII. Initial Regulatory Flexibility 

Analysis 

In accordance with section 3(a) of the 

Regulatory Flexibility Act (RFA), 5 

U.S.C. 601–612, the Board is publishing 

an initial regulatory flexibility analysis 

for the proposed amendments to 

Regulation Z. The RFA requires an 

agency either to provide an initial 

regulatory flexibility analysis with a 

proposed rule or to certify that the 

proposed rule will not have a significant 

economic impact on a substantial 

number of small entities. Under 

regulations issued by the Small 

Business Administration, an entity is 

considered ‘‘small’’ if it has $175 

million or less in assets for banks and 

other depository institutions; and $7 

million or less in revenues for non-bank 

mortgage lenders and mortgage 

brokers.93

Based on its analysis and for the 

reasons stated below, the Board believes 

that this proposed rule will have a 

significant economic impact on a 

substantial number of small entities. A 

final regulatory flexibility analysis will 

be conducted after consideration of 

comments received during the public 

comment period. The Board requests 

public comment in the following areas. 

A. Reasons for the Proposed 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. One of 

the stated purposes of TILA is to 

provide a 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. In this regard, 

the goal of the proposed amendments to 

Regulation Z is to improve the 

effectiveness of the disclosures that 

creditors provide to consumers 

beginning before application and 

throughout the life of a closed-end 

mortgage transaction. Accordingly, the 

Board is proposing changes to format, 

timing, and content requirements for 

closed-end disclosures required by 

Regulation Z: (1) Program and other 

educational information provided before 

application; (2) transaction-specific 

disclosures provided at or shortly after 

application; (3) transaction-specific 

disclosures provided at or three 

business days before consummation; 

and notices of changes to the 

transaction’s terms and regarding 

certain payment options provided 

during the life of the 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 proposed regulations would 

revise and enhance many of the closedend disclosure requirements of 

Regulation Z for transactions secured by 

real property or a dwelling. The Board’s 

proposal also would require TILA 

disclosures for closed-end mortgages to 

be provided to the consumer earlier in 

the loan process and would expand on 

the post-consummation notification 

requirements concerning changes in 

mortgage terms. These amendments are 

proposed in furtherance of the Board’s 

responsibility to prescribe regulations to 

carry out the purposes of TILA, 

including promoting consumers’ 

awareness of the cost of credit and their 

informed use thereof. Finally, the 

proposal would restrict certain loan 

originator compensation practices for 

closed-end mortgage loans to address 

problems that have been observed in the 

mortgage market. These restrictions are 

proposed pursuant to the Board’s 

statutory responsibility to prohibit 

unfair and deceptive acts and practices 

in connection with mortgage loans. 

B. Statement of Objectives and Legal 

Basis 

The SUPPLEMENTARY INFORMATION

contains this information. In summary, 

the proposed amendments to Regulation 

Z are designed to achieve three goals: (1) 

Revise the disclosures required for 

closed-end mortgage loans; (2) restrict 

certain loan originator compensation 

practices for mortgage loans; and (3) 

require disclosures for closed-end 

mortgage loans to be provided earlier in 

the transaction and additional postconsummation disclosures for certain 

changes in terms. 

The legal basis for the proposed rule 

is in Sections 105(a), 105(f), and 

129(l)(2) of TILA. 15 U.S.C. 1604(a), 

1604(f), and 1639(l)(2). A more detailed 

discussion of the Board’s rulemaking 

authority is set forth in part IV of the 

SUPPLEMENTARY INFORMATION. 

C. Description of Small Entities to 

Which the Proposed Rule Would Apply 

The proposed regulations would 

apply to all institutions and entities that 

engage in originating or extending 

closed-end, home-secured credit. The 

Board is not aware of a reliable source 

for the total number of small entities 

likely to be affected by the proposal, and 

the credit provisions of TILA and 

Regulation Z have broad applicability to 

individuals and businesses that 

originate, extend and service even small 

numbers of home-secured credit. See 

§ 226.1(c)(1).94 All small entities that 

originate, extend, or service closed-end 

loans secured by real property or a 

dwelling potentially could be subject to 

at least some aspects of the proposed 

rule. 

The Board can, however, identify 

through data from Reports of Condition 

and Income (‘‘call reports’’) approximate 

numbers of small depository institutions 

that would be subject to the proposed 

rules. Based on December 2008 call 

report data, approximately 9,418 small 

institutions would be subject to the 

proposed rule. Approximately 16,345 

depository institutions in the United 

States filed call report data, 

approximately 11,907 of which had total 

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43320 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

95The 8,610 lenders (both depository institutions 

and mortgage companies) covered by HMDA in 

2007 accounted for an estimated 80% of all home 

lending in the United States (2008 HMDA data are 

not yet available). Under HMDA, lenders use a 

‘‘loan/application register’’ (HMDA/LAR) to report 

information annually to their Federal supervisory 

agencies for each application and loan acted on 

during the calendar year. Lenders must make their 

HMDA/LARs available to the public by March 31 

following the year to which the data relate, and they 

must remove the two date-related fields to help 

preserve applicants’ privacy. Only lenders that have 

offices (or, for non-depository institutions, are 

deemed to have offices) in metropolitan areas are 

required to report under HMDA. However, if a 

lender is required to report, it must report 

information on all of its home loan applications and 

loans in all locations, including non-metropolitan 

areas. 

96The 2007 HMDA Data, http:// 

www.federalreserve.gov/pubs/bulletin/2008/ 

articles/hmda/default.htm. 

97 http://www.namb.org/namb/ 

Industry_Facts.asp?SnID=719224934. This page of 

the NAMB Web site, however, no longer provides 

an estimate of the number of mortgage brokerage 

companies. 

98http://www.census.gov/prod/ec02/ 

ec0252a1us.pdf (NAICS code 522310). Data on this 

industry sector are not yet available from the 2007 

Economic Census. 

domestic assets of $175 million or less 

and thus were considered small entities 

for purposes of the Regulatory 

Flexibility Act. Of 4,231 banks, 565 

thrifts and 7,111 credit unions that filed 

call report data and were considered 

small entities, 4,091 banks, 530 thrifts, 

and 4,797 credit unions, totaling 9,418 

institutions, extended mortgage credit. 

For purposes of this analysis, thrifts 

include savings banks, savings and loan 

entities, co-operative banks and 

industrial banks. 

The Board cannot identify with 

certainty the number of small nondepository institutions that would be 

subject to the proposed rule. Home 

Mortgage Disclosure Act (HMDA) 95 data 

indicate that 1,752 non-depository 

institutions filed HMDA reports in 

2007.96 Based on the small volume of 

lending activity reported by these 

institutions, most are likely to be small. 

The proposal’s restrictions on 

compensation of loan originators would 

apply to mortgage brokers. Loan 

originators other than mortgage brokers 

that would be affected by the proposal 

are employees of creditors (or of 

brokers) and, as such, are not business 

entities in their own right. In its 2008 

proposed rule under HOEPA, 73 FR 

1672, 1720; Jan. 9, 2008, the Board 

noted that, according to the National 

Association of Mortgage Brokers 

(NAMB), in 2004 there were 53,000 

mortgage brokerage companies that 

employed an estimated 418,700 

people.97 The Board estimated that most 

of these companies are small entities. 

On the other hand, the U.S. Census 

Bureau’s 2002 Economic Census 

indicates that there were only 17,041 

‘‘mortgage and nonmortgage loan 

brokers’’ in the United States at that 

time.98

D. Projected Reporting, Recordkeeping, 

and Other Compliance Requirements 

The compliance requirements of the 

proposed rules are described in parts V 

and VI of the SUPPLEMENTARY

INFORMATION. The effect of the proposed 

revisions to Regulation Z on small 

entities is unknown. Some small entities 

would be required, among other things, 

to modify their home-secured credit 

disclosures and processes for delivery 

thereof to comply with the revised rules. 

The precise costs to small entities of 

updating their systems and disclosures 

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 prepare and 

provide disclosures and to administer 

and maintain accounts, the complexity 

of the terms of credit products that they 

offer, and the range of such product 

offerings. 

Additionally, the proposed rules 

could affect how loan originators are 

compensated and would impose certain 

related recordkeeping requirements on 

creditors. The precise costs that the 

proposed rule would impose on 

mortgage creditors and loan originators 

are also difficult to ascertain. 

Nevertheless, the Board believes that 

these costs will have a significant 

economic effect on small entities, 

including small mortgage creditors and 

brokers. The Board seeks information 

and comment on any costs, compliance 

requirements, or changes in operating 

procedures arising from the application 

of the proposed rule to small businesses. 

E. Identification of Duplicative, 

Overlapping, or Conflicting Federal 

Rules 

Other Federal Rules 

The Board has not identified any 

federal rules that conflict with the 

proposed revisions to Regulation Z. 

Overlap With SAFE Act 

The proposed rule’s required 

disclosure contents for closed-end 

mortgage transactions would overlap 

with the Secure and Fair Enforcement 

for Mortgage Licensing Act of 2008 

(SAFE Act) by requiring that the 

disclosure include the loan originator’s 

unique identifier, as defined by that Act, 

if applicable. 

Overlap With RESPA 

Certain terms defined in the proposed 

rule, such as ‘‘total settlement charges’’ 

cross-reference definitions under the 

U.S. Department of Housing and Urban 

Development’s (HUD’s) Regulation X 

under the Real Estate Settlement 

Procedures Act (RESPA). The proposed 

rule also would modify the existing 

prerequisites for use of the RESPA good 

faith estimate of settlement costs and 

HUD–1 settlement statement in lieu of 

the itemization of the amount financed 

under Regulation Z. 

Overlap With HUD’s Guidance 

The Board recognizes that HUD has 

issued policy statements regarding 

creditor payments to mortgage brokers 

under RESPA and guidance as to 

disclosure of such payments on the 

Good Faith Estimate and HUD–1 

Settlement Statement. HUD also has 

published revised disclosures for broker 

compensation under RESPA to become 

effective January 1, 2010. The Board 

intends that its proposal would 

complement HUD’s final rule. The 

proposed provision regarding creditor 

payments to loan originators is intended 

to be consistent with HUD’s existing 

guidance regarding broker 

compensation under Section 8 of 

RESPA. The proposed provision 

regarding record retention to evidence 

compliance with the provision 

regarding creditor payments to loan 

originators would cross-reference the 

HUD–1 settlement statement as an 

acceptable record of such compensation 

paid in a given transaction. 

F. Identification of Duplicative, 

Overlapping, or Conflicting State Laws 

State Laws Regulating Creditor 

Payments to Loan Originators 

The Board is aware that many states 

regulate loan originators, especially 

mortgage brokers, and their 

compensation in various respects. 

Under TILA Section 111, the proposed 

rule would not preempt such State laws 

except to the extent they are 

inconsistent with the proposal’s 

requirements. 15 U.S.C. 1610. 

State Equivalents to TILA and HOEPA 

Many states regulate consumer credit 

through statutory disclosure schemes 

similar to TILA. Similarly to State laws 

regulating loan originator compensation, 

such state disclosure laws would be 

preempted only to the extent they are 

inconsistent with the proposal’s 

requirements. Id. 

The Board also is aware that many 

states regulate ‘‘high-cost’’ or ‘‘highpriced’’ mortgage loans, under laws that 

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resemble HOEPA. Many such State laws 

set their coverage tests in part on the 

APR of the transaction. The proposed 

rule would overlap with these laws 

indirectly by virtue of the proposal to 

modify the definition of the finance 

charge for closed-end mortgage 

transactions, which would result in 

APRs being higher generally and 

potentially more loans being covered 

under such State laws. 

The Board seeks comment regarding 

any State or local statutes or regulations 

that would duplicate, overlap, or 

conflict with the proposed rule. 

G. Discussion of Significant Alternatives 

The Board considered whether 

improved disclosures could protect 

consumers against unfair loan originator 

compensation practices for mortgages as 

well as the proposed rule. While the 

Board is proposing improvements to 

mortgage loan disclosures, it does not 

appear that better disclosures would 

address loan originator compensation 

practices adequately. 

The Board welcomes comments on 

any significant alternatives, consistent 

with the requirements of TILA, that 

would minimize the impact of the 

proposed rule on small entities. 

List of Subjects in 12 CFR Part 226 

Advertising, Consumer protection, 

Federal Reserve System, Mortgages, 

Reporting and recordkeeping 

requirements, Truth in lending. 

Text of Proposed Revisions 

Certain conventions have been used 

to highlight the proposed revisions. 

New language is shown inside bold 

arrows, and language that would be 

deleted is shown inside bold brackets. 

Authority and Issuance 

For the reasons set forth in the 

preamble, the Board proposes to amend 

Regulation Z, 12 CFR part 226, as set 

forth below: 

PART 226—TRUTH IN LENDING 

(REGULATION Z) 

1. The authority citation for part 226 

continues to read as follows: 

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

1637(c)(5), and 1639(l); Public Law 111–24 

§ 2, 123 Stat. 1734. 

Subpart A—General 

2. Section 226.1, as amended on 

January 29, 2009 (74 FR 5397) is 

amended by revising paragraphs (b) and 

(d)(5) to read as follows: 

§ 226.1 Authority, purpose, coverage, 

organization, enforcement and liability. 

* * * * * 

(b) Purpose. The purpose of this 

regulation is to promote the informed 

use of consumer credit by requiring 

disclosures about its terms and cost. The 

regulation also gives consumers the 

right to cancel certain credit 

transactions that involve a lien on a 

consumer’s principal dwelling, 

regulates certain credit card practices, 

and provides a means for fair and timely 

resolution of credit billing disputes. The 

regulation does not govern charges for 

consumer credit. The regulation 

requires a maximum interest rate to be 

stated in variable-rate contracts secured 

by the consumer’s dwelling. It also 

imposes limitations on home-equity 

plans that are subject to the 

requirements of § 226.5b and mortgages 

that are subject to the requirements of 

§ 226.32. The regulation prohibits 

certain acts or practices in connection 

with credit secured by flreal property 

orfi a consumer’s [principal] dwelling 

flin § 226.36, and credit secured by a 

consumer’s principal dwelling in 

§ 226.35.fi 

* * * * * 

(d) * * * 

(5) Subpart E contains special rules 

for mortgage transactions. Section 

226.32 requires certain disclosures and 

provides limitations for flclosed-endfi 

loans that have rates and fees above 

specified amounts. Section 226.33 

requires disclosures, including the total 

annual loan cost rate, for reverse 

mortgage transactions. Section 226.34 

prohibits specific acts and practices in 

connection with flclosed-endfi 

mortgage transactions that are subject to 

§ 226.32. Section 226.35 prohibits 

specific acts and practices in connection 

with flclosed-endfi higher-priced 

mortgage loans, as defined in 

§ 226.35(a). Section 226.36 prohibits 

specific acts and practices in connection 

with flextensions offi credit secured 

by flreal property orfi a consumer’s 

[principal] dwelling. flSection 226.37 

provides general disclosure 

requirements for closed-end extensions 

of credit secured by real property or a 

consumer’s dwelling. Section 38 

provides the content of disclosures for 

closed-end extensions of credit secured 

by real property or a consumer’s 

dwelling.fi 

* * * * * 

3. Section 226.4, as amended on 

January 29, 2009 (74 FR 5399) is revised 

to read as follows: 

§ 226.4 Finance charge. 

(a) Definition. The finance charge is 

the cost of consumer credit as a dollar 

amount. It includes any charge payable 

directly or indirectly by the consumer 

and imposed directly or indirectly by 

the creditor as an incident to or a 

condition of the extension of credit. It 

does not include any charge of a type 

payable in a comparable cash 

transaction. 

(1) Charges by third parties. The 

finance charge includes fees and 

amounts charged by someone other than 

the creditor, unless otherwise excluded 

under this section, if the creditor: 

(i) Requires the use of a third party as 

a condition of or an incident to the 

extension of credit, even if the 

consumer can choose the third party; or 

(ii) Retains a portion of the third-party 

charge, to the extent of the portion 

retained. 

(2) Special rule; closing agent charges. 

flExcept as provided in § 226.4(g), 

feesfi [Fees] charged by a third party 

that conducts the loan closing (such as 

a settlement agent, attorney, or escrow 

or title company) are finance charges 

only if the creditor: 

(i) Requires the particular services for 

which the consumer is charged; 

(ii) Requires the imposition of the 

charge; or 

(iii) Retains a portion of the thirdparty charge, to the extent of the portion 

retained. 

(3) Special rule; mortgage broker fees. 

Fees charged by a mortgage broker 

(including fees paid by the consumer 

directly to the broker or to the creditor 

for delivery to the broker) are finance 

charges even if the creditor does not 

require the consumer to use a mortgage 

broker and even if the creditor does not 

retain any portion of the charge. 

(b) Examples of finance charge. The 

finance charge includes the following 

types of charges, except for charges 

specifically excluded by paragraphs (c) 

through (e) of this section: 

(1) Interest, time price differential, 

and any amount payable under an addon or discount system of additional 

charges. 

(2) Service, transaction, activity, and 

carrying charges, including any charge 

imposed on a checking or other 

transaction account to the extent that 

the charge exceeds the charge for a 

similar account without a credit feature. 

(3) Points, loan fees, assumption fees, 

finder’s fees, and similar charges. 

(4) Appraisal, investigation, and 

credit report fees. 

(5) Premiums or other charges for any 

guarantee or insurance protecting the 

creditor against the consumer’s default 

or other credit loss. 

(6) Charges imposed on a creditor by 

another person for purchasing or 

accepting a consumer’s obligation, if the 

consumer is required to pay the charges 

in cash, as an addition to the obligation, 

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5 [Reserved]. 

6 [Reserved]. 

or as a deduction from the proceeds of 

the obligation. 

(7) Premiums or other charges for 

credit life, accident, health, or loss-ofincome insurance, written in connection 

with a credit transaction. 

(8) Premiums or other charges for 

insurance against loss of or damage to 

property, or against liability arising out 

of the ownership or use of property, 

written in connection with a credit 

transaction. 

(9) Discounts for the purpose of 

inducing payment by a means other 

than the use of credit. 

(10) Charges or premiums paid for 

debt cancellation or debt suspension 

coverage written in connection with a 

credit transaction, whether or not the 

debt cancellation coverage is insurance 

under applicable law. 

(c) Charges excluded from the finance 

charge. flExcept as provided in 

§ 226.4(g), thefi [The] following charges 

are not finance charges: 

(1) Application fees charged to all 

applicants for credit, whether or not 

credit is actually extended. 

(2) Charges for actual unanticipated 

late payment, for exceeding a credit 

limit, or for delinquency, default, or a 

similar occurrence. 

(3) Charges imposed by a financial 

institution for paying items that 

overdraw an account, unless the 

payment of such items and the 

imposition of the charge were 

previously agreed upon in writing. 

(4) Fees charged for participation in a 

credit plan, whether assessed on an 

annual or other periodic basis. 

(5) Seller’s points. 

(6) Interest forfeited as a result of an 

interest reduction required by law on a 

time deposit used as security for an 

extension of credit. 

(7) Real-estate related fees. The 

following fees in flan open-end credit 

planfi [a transaction] secured by real 

property or in flan open-endfi [a] 

residential mortgage transaction, if the 

fees are bona fide and reasonable in 

amount: 

(i) Fees for title examination, abstract 

of title, title insurance, property survey, 

and similar purposes. 

(ii) Fees for preparing loan-related 

documents, such as deeds, mortgages, 

and reconveyance or settlement 

documents. 

(iii) Notary and credit report fees. 

(iv) Property appraisal fees or fees for 

inspections to assess the value or 

condition of the property if the service 

is performed prior to closing, including 

fees related to pest infestation or flood 

hazard determinations. 

(v) Amounts required to be paid into 

escrow or trustee accounts if the 

amounts would not otherwise be 

included in the finance charge. 

(8) Discounts offered to induce 

payment for a purchase by cash, check, 

or other means, as provided in section 

167(b) of the Act. 

(d) Insurance and debt cancellation 

and debt suspension coverage. (1) 

Voluntary credit insurance premiums. 

flExcept as provided in § 226.4(g), 

premiumsfi [Premiums] for credit life, 

accident, health, or loss-of-income 

insurance may be excluded from the 

finance charge if the following 

conditions are met: 

(i) The insurance coverage is not 

required by the creditor, and this fact is 

disclosed in writing. 

(ii) The premium for the initial term 

of insurance coverage is disclosed in 

writing. If the term of insurance is less 

than the term of the transaction, the 

term of insurance also shall be 

disclosed. The premium may be 

disclosed on a unit-cost basis only in 

open-end credit transactions, closed-end 

credit transactions by mail or telephone 

under § 226.17(g), and certain closedend credit transactions involving an 

insurance plan that limits the total 

amount of indebtedness subject to 

coverage. 

(iii) The consumer signs or initials an 

affirmative written request for the 

insurance after receiving the disclosures 

specified in this paragraph, except as 

provided in paragraph (d)(4) of this 

section. Any consumer in the 

transaction may sign or initial the 

request. 

fl(iv) The creditor determines at the 

time of enrollment that the consumer 

meets any applicable age or 

employment eligibility criteria for 

insurance coverage.fi 

(2) Property insurance premiums. 

Premiums for insurance against loss of 

or damage to property, or against 

liability arising out of the ownership or 

use of property, including single interest 

insurance if the insurer waives all right 

of subrogation against the consumer,5

may be excluded from the finance 

charge if the following conditions are 

met: 

(i) The insurance coverage may be 

obtained from a person of the 

consumer’s choice,6 and this fact is 

disclosed. (A creditor may reserve the 

right to refuse to accept, for reasonable 

cause, an insurer offered by the 

consumer.) 

(ii) If the coverage is obtained from or 

through the creditor, the premium for 

the initial term of insurance coverage 

shall be disclosed. If the term of 

insurance is less than the term of the 

transaction, the term of insurance shall 

also be disclosed. The premium may be 

disclosed on a unit-cost basis only in 

open-end credit transactions, closed-end 

credit transactions by mail or telephone 

under § 226.17(g), and certain closedend credit transactions involving an 

insurance plan that limits the total 

amount of indebtedness subject to 

coverage. 

(3) Voluntary debt cancellation or 

debt suspension fees. flExcept as 

provided in § 226.4(g), chargesfi 

[Charges] or premiums paid for debt 

cancellation coverage for amounts 

exceeding the value of the collateral 

securing the obligation or for debt 

cancellation or debt suspension 

coverage in the event of the loss of life, 

health, or income or in case of accident 

may be excluded from the finance 

charge, whether or not the coverage is 

insurance, if the following conditions 

are met: 

(i) The debt cancellation or debt 

suspension agreement or coverage is not 

required by the creditor, and this fact is 

disclosed in writing. 

(ii) The fee or premium for the initial 

term of coverage is disclosed in writing. 

If the term of coverage is less than the 

term of the credit transaction, the term 

of coverage also shall be disclosed. The 

fee or premium may be disclosed on a 

unit-cost basis only in open-end credit 

transactions, closed-end credit 

transactions by mail or telephone under 

§ 226.17(g), and certain closed-end 

credit transactions involving a debt 

cancellation agreement that limits the 

total amount of indebtedness subject to 

coverage. 

(iii) The following are disclosed, as 

applicable, for debt suspension 

coverage: That the obligation to pay loan 

principal and interest is only 

suspended, and that interest will 

continue to accrue during the period of 

suspension. 

(iv) The consumer signs or initials an 

affirmative written request for coverage 

after receiving the disclosures specified 

in this paragraph, except as provided in 

paragraph (d)(4) of this section. Any 

consumer in the transaction may sign or 

initial the request. 

fl(v) The creditor determines at the 

time of enrollment that the consumer 

meets any applicable age or 

employment eligibility criteria for the 

debt cancellation or debt suspension 

agreement or coverage.fi 

(4) Telephone purchases. If a 

consumer purchases credit insurance or 

debt cancellation or debt suspension 

coverage for an open-end [(not homesecured)] plan by telephone, the creditor 

must make the disclosures under 

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37fl[Reserved]fi[The disclosures may include 

an acknowledgment of receipt, the date of the 

transaction, and the consumer’s name, address, and 

account number.] 

38fl[Reserved]fi[The following disclosures may 

be made together with or separately from other 

required disclosures: the creditor’s identity under 

§ 226.18(a), the variable-rate example under 

§ 226.18(f)(1)(iv), insurance or debt cancellation 

under § 226.18(n), and certain security interest 

charges under § 226.18(o).] 

paragraphs (d)(1)(i) and (ii) or (d)(3)(i) 

through (iii) of this section, as 

applicable, orally. In such a case, the 

creditor shall: 

(i) Maintain evidence that the 

consumer, after being provided the 

disclosures orally, affirmatively elected 

to purchase the insurance or coverage; 

and 

(ii) Mail the disclosures under 

paragraphs (d)(1)(i) and (ii) or (d)(3)(i) 

through (iii) of this section, as 

applicable, within three business days 

after the telephone purchase. 

(e) Certain security interest charges. 

flExcept as provided in § 226.4(g), iffi 

[If] itemized and disclosed, the 

following charges may be excluded from 

the finance charge: 

(1) Taxes and fees prescribed by law 

that actually are or will be paid to 

public officials for determining the 

existence of or for perfecting, releasing, 

or satisfying a security interest. 

(2) The premium for insurance in lieu 

of perfecting a security interest to the 

extent that the premium does not 

exceed the fees described in paragraph 

(e)(1) of this section that otherwise 

would be payable. 

(3) Taxes on security instruments. 

Any tax levied on security instruments 

or on documents evidencing 

indebtedness if the payment of such 

taxes is a requirement for recording the 

instrument securing the evidence of 

indebtedness. 

(f) Prohibited offsets. Interest, 

dividends, or other income received or 

to be received by the consumer on 

deposits or investments shall not be 

deducted in computing the finance 

charge. 

fl(g) Special rule; closed-end 

mortgage transactions. Paragraphs (a)(2) 

and (c) through (e) of this section, other 

than §§ 226.4(c)(2), 226.4(c)(5) and 

226.4(d)(2), do not apply to closed-end 

transactions secured by real property or 

a dwelling.fi 

Subpart C—Closed-End Credit 

4. Section 226.17 is revised to read as 

follows: 

§ 226.17 General disclosure requirements. 

(a) Form of disclosures. (1) The 

creditor shall make the disclosures 

required by this subpart clearly and 

conspicuously in writing, in a form that 

the consumer may keep. flIn addition, 

transactions secured by real property or 

a dwelling are subject to the 

requirements under § 226.37.fi The 

disclosures required by this subpart may 

be provided to the consumer in 

electronic form, subject to compliance 

with the consumer-consent and other 

applicable provisions of the Electronic 

Signatures in Global and National 

Commerce Act (E-Sign Act) (15 U.S.C. 

7001 et seq.). flFor transactions secured 

by real property or a dwelling, 

disclosures required by § 226.19(b) or (c) 

must be provided in electronic form in 

specified circumstances.fi The 

disclosures required by §§ 226.17(g), 

226.19(b),fl 226.19(c),fi and 226.24 

may be provided to the consumer in 

electronic form without regard to the 

consumer consent or other provisions of 

the E–Sign Act in the circumstances set 

forth in those sections. The disclosures 

flrequired by § 226.18 or § 226.38fi 

shall be grouped together, shall be 

segregated from everything else, and 

shall not contain any information not 

directly related 37 to the disclosures 

required under § 226.18 38flor § 226.38; 

however, the disclosures may include 

an acknowledgement of receipt, the date 

of the transaction, and the consumer’s 

name, address, and account number. 

The following disclosures may be made 

together with or separately from other 

required disclosures: the variable-rate 

example under § 226.18(f)(4), insurance, 

debt cancellation, or debt suspension 

under § 226.18(n), and certain security 

interest charges under § 226.18(o)fi. 

The itemization of the amount financed 

under § 226.18(c)(1) must be separate 

from the other disclosures under that 

section. 

(2)flExcept for transactions secured 

by real property or a dwelling subject to 

§ 226.38, tfi[T]he terms finance charge 

and annual percentage rate, when 

required to be disclosed under 

§ 226.18(d) and (e) together with a 

corresponding amount or percentage 

rate, shall be more conspicuous than 

any other disclosure, except the 

creditor’s identity under § 226.18(a). 

(b) Time of disclosures. The creditor 

shall make disclosures before 

consummation of the transaction. [In 

certain mortgage transactions, special 

timing requirements are set forth in 

§ 226.19(a). In certain variable-rate 

transactions, special timing 

requirements for variable-rate 

disclosures are set forth in § 226.19(b) 

and § 226.20(c).] flSpecial disclosure 

timing requirements for transactions 

secured by real property or a dwelling 

are set forth in § 226.19(a). Additional 

disclosure timing requirements for 

adjustable-rate transactions secured by 

real property or a dwelling are set forth 

in § 226.19(b) and § 226.20(c).fi In 

certain transactions involving mail or 

telephone orders or a series of sales, the 

timing of disclosures may be delayed in 

accordance with paragraphs (g) and (h) 

of this section. 

(c) Basis of disclosures and use of 

estimates. (1) flLegal obligation.fi The 

disclosures flrequired by this 

subpartfi shall reflect the terms of the 

legal obligation between the parties. 

fl(i) Buydowns. The creditor shall 

disclose an annual percentage rate that 

is a composite rate based on the interest 

rate in effect during the initial period of 

the term of the loan and the interest rate 

in effect for the remainder of the term, 

if the consumer’s interest rate or 

payments are reduced for all or part of 

the loan term based on payments made 

by: 

(A) The seller or another third party, 

if the legal obligation reflects such an 

arrangement; or 

(B) The consumer. 

(ii) Wrap-around financing. If a 

transaction involves combining the 

outstanding balance on an existing loan 

with additional funds advanced to a 

consumer without paying off the 

outstanding balance, the amount 

financed shall equal the sum of the 

outstanding balance and the new funds 

advanced. 

(iii) Variable- or adjustable-rate 

transactions. The creditor shall base 

disclosures for a variable- or adjustablerate transaction on the full term of the 

transaction. Except as otherwise 

provided in § 226.38(a)(3) and (c) for 

adjustable-rate mortgage transactions 

secured by real property or a dwelling: 

(A) If the initial interest rate for a 

transaction with a variable or adjustable 

rate is determined using the index or 

formula used to adjust the interest rate, 

the disclosures shall reflect the terms in 

effect at the time of consummation. 

(B) If the initial interest rate for a 

transaction with a variable or adjustable 

rate is not determined using the index 

or formula used to adjust the interest 

rate, the disclosures shall reflect a 

composite annual percentage rate based 

on the initial rate for the time it is in 

effect and, for the remainder of the term, 

the rate that would have applied if such 

index or formula had been used at the 

time of consummation. 

(iv) Repayment upon occurrence of 

future event. If disbursements for a 

transaction secured by real property or 

a dwelling are made during a specified 

period but repayment is required only 

upon the occurrence of a future event, 

the creditor shall base disclosures on 

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43324 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

39 [Reserved.] 

the assumption that repayment will 

occur when disbursements end. 

(v) Tax refund-anticipation loans. For 

a tax refund-anticipation loan, the 

creditor shall estimate the time a tax 

refund will be delivered to the 

consumer and shall include in the 

finance charge any repayment amount 

that exceeds the loan amount that is not 

otherwise excluded from the finance 

charge under § 226.4. 

(vi) Pawn transactions. For a pawn 

transaction, the creditor shall disclose: 

(A) The initial sum paid to the 

consumer as the amount financed; 

(B) A finance charge that includes the 

difference between the initial sum paid 

to the consumer and the price at which 

the item is pledged or sold; and 

(C) The annual percentage rate is 

determined using the earliest date on 

which the item pledged or sold may be 

redeemed as the end of the loan term.fi 

(2)flEstimates.fi (i) flReasonably 

available information.fi If any 

information necessary for an accurate 

disclosure is unknown to the creditor, 

the creditor shall make the disclosure 

based on the best information 

reasonably available at the time the 

disclosure is provided to the 

consumer[,] and shall state clearly that 

the disclosure is an estimatefl(except 

that § 226.19(a) limits the circumstances 

in which creditors may provide 

estimated disclosures, for mortgage 

transactions secured by real property or 

a dwelling)fi. 

(ii)flPer-diem interest.fi For a 

transaction in which a portion of the 

interest is determined on a per-diem 

basis and collected at consummation, 

any disclosure affected by the per-diem 

interest shall be considered accurate if 

the disclosure is based on the 

information known to the creditor at the 

time that the disclosure documents are 

prepared for consummation of the 

transaction. 

(3)flDisregarded effects.fi The 

creditor may disregard the effects of the 

following in making calculations and 

disclosures: 

(i) That payments must be collected in 

whole cents. 

(ii) That dates of scheduled payments 

and advances may be changed because 

the scheduled date is not a business 

day. 

(iii) That months have different 

numbers of days. 

(iv) The occurrence of leap year. 

(4)flDisregarded irregularities.fi In 

making calculations and disclosures, the 

creditor may disregard any irregularity 

in the first period that falls within the 

limits described below and any 

[payment schedule] irregularity flin the 

payment schedule, in a transaction not 

secured by real property or a dwelling, 

or payment summary, in a transaction 

secured by real property or a 

dwelling,fi that results from the 

irregular first period: 

(i) For transactions in which the term 

is less than 1 year, a first period not 

more than 6 days shorter or 13 days 

longer than a regular period; 

(ii) For transactions in which the term 

is at least 1 year and less than 10 years, 

a first period not more than 11 days 

shorter or 21 days longer than a regular 

period; and 

(iii) For transactions in which the 

term is at least 10 years, a first period 

shorter than or not more than 32 days 

longer than a regular period. 

(5)flDemand obligations.fi If an 

obligation is payable on demand, the 

creditor shall make the disclosures 

based on an assumed maturity of 1 year. 

If an alternate maturity date is stated in 

the legal obligation between the parties, 

the disclosures shall be based on that 

date. 

(6) Multiple advance loans. 

(i)flSeries of advances.fi A series of 

advances under an agreement to extend 

credit up to a certain amount may be 

considered as one transaction. 

(ii)flMultiple-advance construction 

loan.fi When a multiple-advance loan 

to finance the construction of a dwelling 

may be permanently financed by the 

same creditor, the construction phase 

and the permanent phase may be treated 

as either one transaction or more than 

one transaction. 

(d) Multiple creditors; multiple 

consumers. If a transaction involves 

more than one creditor, only one set of 

disclosures shall be given and the 

creditors shall agree among themselves 

which creditor must comply with the 

requirements that this regulation 

imposes on any or all of them. If there 

is more than one consumer, the 

disclosures may be made to any 

consumer who is primarily liable on the 

obligation. If the transaction is 

rescindable under § 226.23, however, 

the disclosures shall be made to each 

consumer who has the right to rescind. 

(e) Effect of subsequent events. If a 

disclosure becomes inaccurate because 

of an event that occurs after the creditor 

delivers the required disclosures, the 

inaccuracy is not a violation of this 

regulation, although new disclosures 

may be required under paragraph (f) of 

this section, § 226.19, or § 226.20. 

(f) Early disclosures. If disclosures 

required by this subpart are given before 

the date of consummation of a 

transaction and a subsequent event 

makes them inaccurate, the creditor 

shall disclose before consummation 

([subject to the provisions of]flexcept 

that additional timing requirements 

apply underfi § 226.19(a)(2) and 

flalternative timing requirements apply 

underfi § 226.19(a)[(5)]fl(4)fi(iii)): 39

(1) Any changed term unless the term 

was based on an estimate in accordance 

with § 226.17(c)(2) and was labelled an 

estimate; 

(2) All changed terms, if the annual 

percentage rate at the time of 

consummation varies from the annual 

percentage rate disclosed earlier by 

more than 1⁄8 of 1 percentage point in a 

regular transaction, or more than 1⁄4 of 

1 percentage point in an irregular 

transaction, as defined in § 226.22(a). 

(g) Mail or telephone orders—delay in 

disclosures. flExcept for transactions 

secured by real property or a dwelling 

subject to § 226.38, ifi[I]f a creditor 

receives a purchase order or a request 

for an extension of credit by mail, 

telephone, or facsimile machine without 

face-to-face or direct telephone 

solicitation, the creditor may delay the 

disclosures until the due date of the first 

payment, if the following information 

for representative amounts or ranges of 

credit is made available in written form 

or in electronic form to the consumer or 

to the public before the actual purchase 

order or request: 

(1) The cash price or the principal 

loan amount. 

(2) The total sale price. 

(3) The finance charge. 

(4) The annual percentage rate, and if 

the rate may increase after 

consummation, the following 

disclosures: 

(i) The circumstances under which 

the rate may increase. 

(ii) Any limitations on the increase. 

(iii) The effect of an increase. 

(5) The terms of repayment. 

(h) Series of sales—delay in 

disclosures. If a credit sale is one of a 

series made under an agreement 

providing that subsequent sales may be 

added to an outstanding balance, the 

creditor may delay the required 

disclosures until the due date of the first 

payment for the current sale, if the 

following two conditions are met: 

(1) The consumer has approved in 

writing the annual percentage rate or 

rates, the range of balances to which 

they apply, and the method of treating 

any unearned finance charge on an 

existing balance. 

(2) The creditor retains no security 

interest in any property after the 

creditor has received payments equal to 

the cash price and any finance charge 

attributable to the sale of that property. 

For purposes of this provision, in the 

case of items purchased on different 

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40fl[Reserved]fi[Good faith estimates of 

settlement costs provided for transactions subject to 

the Real Estate Settlement Procedures Act (12 

U.S.C. 2601 et seq.) may be substituted for the 

disclosures required by paragraph (c) of this 

section.] 

41fl[Reserved]fi[The following payees may be 

described using generic or other general terms and 

need not be further identified: public officials or 

government agencies, credit reporting agencies, 

appraisers, and insurance companies.] 

42fl[Reserved]fi [For any transaction involving 

a finance charge of $5 or less on an amount 

financed of $75 or less, or a finance charge of $7.50 

or less on an amount financed of more than $75, 

the creditor need not disclose the annual percentage 

rate.] 

43fl[Reserved]fi[Information provided in 

accordance with Sections 226.18(f)(2) and 

226.19(b), may be substituted for the disclosures 

required by paragraph (f)(1) of this section.] 

44fl[Reserved]fi [In any transaction involving a 

single payment, the creditor need not disclose the 

total of payments.] 

dates, the first purchased is deemed the 

first item paid for; in the case of items 

purchased on the same date, the lowest 

priced is deemed the first item paid for. 

(i) Interim student credit extensions. 

For each transaction involving an 

interim credit extension under a student 

credit program, the creditor need not 

make the following disclosures: the 

finance charge under § 226.18(d), the 

payment schedule under § 226.18(g), the 

total of payments under § 226.18(h), or 

the total sale price under § 226.18(j). 

5. Section 226.18 is revised to read as 

follows: 

§ 226.18 General disclosure requirements. 

For each transaction, the creditor 

shall disclose the following information 

as applicablefl, except that for each 

transaction secured by real property or 

a dwelling, the creditor shall make the 

disclosures required by § 226.38fi: 

(a) Creditor. The identity of the 

creditor making the disclosures. 

(b) Amount financed. The amount 

financed, using that term, and a brief 

description such as the amount of credit 

provided to you or on your behalf. The 

amount financed is calculated by: 

(1) Determining the principal loan 

amount or the cash price (subtracting 

any downpayment); 

(2) Adding any other amounts that are 

financed by the creditor and are not part 

of the finance charge; and 

(3) Subtracting any prepaid finance 

charge. 

(c) Itemization of amount financed. 

(1) A separate written itemization of the 

amount financed, including: 40

(i) The amount of any proceeds 

distributed directly to the consumer. 

(ii) The amount credited to the 

consumer’s account with the creditor. 

(iii) Any amounts paid to other 

persons by the creditor on the 

consumer’s behalf. The creditor shall 

identify those personsfl,fi[.]41

flexcept that the following payees may 

be described using generic or other 

general terms and need not be further 

identified: public officials or 

government agencies, credit reporting 

agencies, appraisers, and insurance 

companies.fi 

(iv) The prepaid finance charge. 

(2) The creditor need not comply with 

paragraph (c)(1) of this section if the 

creditor provides a statement that the 

consumer has the right to receive a 

written itemization of the amount 

financed, together with a space for the 

consumer to indicate whether it is 

desired, and the consumer does not 

request it. 

(d) Finance charge. The finance 

charge, using that term, and a brief 

description such as ‘‘the dollar amount 

the credit will cost you.’’ 

[(1) Mortgage loans. In a transaction 

secured by real property or a dwelling, 

the disclosed finance charge and other 

disclosures affected by the disclosed 

finance charge (including the amount 

financed and the annual percentage 

rate) shall be treated as accurate if the 

amount disclosed as the finance 

charge— 

(i) Is understated by no more than 

$100; or 

(ii) Is greater than the amount 

required to be disclosed. 

(2) Other credit. In any other 

transaction, the]flThefi amount 

disclosed as the finance charge shall be 

treated as accurate if[,]fl: 

(1)fiIn a transaction involving an 

amount financed of $1,000 or less, it is 

not more than $5 above or below the 

amount required to be disclosed; or[,] 

fl(2)fi In a transaction involving an 

amount financed of more than $1,000, it 

is not more than $10 above or below the 

amount required to be disclosed. 

(e) Annual percentage rate. The 

annual percentage rate, using that term, 

and a brief description such as ‘‘the cost 

of your credit as a yearly rate.’’ 42 flFor 

any transaction involving a finance 

charge of $5 or less on an amount 

financed of $75 or less, or a finance 

charge of $7.50 or less on an amount 

financed of more than $75, the creditor 

need not disclose the annual percentage 

rate.fi 

(f) Variable-rate loan [with term of 

one year or less]flnot secured by real 

property or a dwellingfi. 

[(1)] If the annual percentage rate may 

increase after consummation in a 

transaction not secured by [the 

consumer’s principal dwelling or a 

transaction secured by the consumer’s 

principal dwelling with a term of one 

year or less]flreal property or a 

dwellingfi, the following disclosures: 43

[(i)]fl(1)fi The circumstances under 

which the interest rate may increase. 

[(ii)]fl(2)fi Any limitations on the 

increase. 

[(iii)]fl(3)fi The effect of an increase. 

[(iv)]fl(4)fi An example of the 

payment terms that would result from 

an increase. 

[(2) If the annual percentage rate may 

increase after consummation in a 

transaction secured by the consumer’s 

principal dwelling with a term greater 

than one year, a following disclosures: 

(i) The fact that the transaction 

contains a variable-rate feature. 

(ii) A statement that variable-rate 

disclosure have been provided earlier.] 

(g) Payment schedule. The number, 

amounts, and timing of payments 

scheduled to repay the obligation. 

(1) In a demand obligation with no 

alternate maturity date, the creditor may 

comply with this paragraph by 

disclosing the due dates or payment 

periods of any scheduled interest 

payments for the first year. 

(2) In a transaction in which a series 

of payments varies because a finance 

charge is applied to the unpaid 

principal balance, the creditor may 

comply with this paragraph by 

disclosing the following information: 

(i) The dollar amounts of the largest 

and smallest payments in the series. 

(ii) A reference to the variations in the 

other payments in the series. 

(h) Total of payments. The ‘‘total of 

payments,’’ using that term, and a 

descriptive explanation such as ‘‘the 

amount you will have paid when you 

have made all scheduled payments.’’ 44

flIn any transaction involving a single 

payment, the creditor need not disclose 

the total of payments.fi 

(i) Demand feature. If the obligation 

has a demand feature, that fact shall be 

disclosed. When the disclosures are 

based on an assumed maturity of 1 year 

as provided in § 226.17(c)(5), that fact 

shall also be disclosed. 

(j) Total sale price. In a credit sale, the 

total sale price, using that term, and a 

descriptive explanation (including the 

amount of any downpayment) such as 

‘‘the total price of your purchase on 

credit, including your downpayment of 

$lll.’’ The total sale price is the sum 

of the cash price, the items described in 

paragraph (b)(2), and the finance charge 

disclosed under paragraph (d) of this 

section. 

(k) Prepayment. (1) When an 

obligation includes a finance charge 

computed from time to time by 

application of a rate to the unpaid 

principal balance, a statement 

indicating whether or not a penalty may 

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45fl[Reserved]fi [A required deposit need not 

include, for example: (1) An escrow account for 

items such as taxes, insurance or repairs; (2) a 

deposit that earns not less than 5 percent per year; 

or (3) payments under a Morris Plan.] 

be imposed if the obligation is prepaid 

in full. 

(2) When an obligation includes a 

finance charge other than the finance 

charge described in paragraph (k)(1) of 

this section, a statement indicating 

whether or not the consumer is entitled 

to a rebate of any finance charge if the 

obligation is prepaid in full. 

(l) Late payment. Any dollar or 

percentage charge that may be imposed 

before maturity due to a late payment, 

other than a deferral or extension 

charge. 

(m) Security interest. The fact that the 

creditor has or will acquire a security 

interest in the property purchased as 

part of the transaction, or in other 

property identified by item or type. 

(n) Insurancefl,fi [and] debt 

cancellation fl, and debt suspensionfi. 

The items required by § 226.4(d) in 

order to exclude certain insurance 

premiumsfl,fi and debt-cancellation 

flor debt suspensionfi fees from the 

finance charge. 

(o) Certain security interest charges. 

The disclosures required by § 226.4(e) in 

order to exclude from the finance charge 

certain fees prescribed by law or certain 

premiums for insurance in lieu of 

perfecting a security interest. 

(p) Contract reference. A statement 

that the consumer should refer to the 

appropriate contract document for 

information about nonpayment, default, 

the right to accelerate the maturity of 

the obligation, and prepayment rebates 

and penalties. At the creditor’s option, 

the statement may also include a 

reference to the contract for further 

information about security interests and, 

in a residential mortgage transaction, 

about the creditor’s policy regarding 

assumption of the obligation. 

(q) [Assumption policy. In a 

residential mortgage transaction, a 

statement whether or not a subsequent 

purchaser of the dwelling from the 

consumer may be permitted to assume 

the remaining obligation on its original 

terms.] fl[Reserved.]fi 

(r) Required deposit. If the creditor 

requires the consumer to maintain a 

deposit as a condition of the specific 

transaction, a statement that the annual 

percentage rate does not reflect the 

effect of the required deposit.45 flA 

required deposit need not include: 

(1) An escrow account for items such 

as taxes, insurance or repairs; or 

(2) A deposit that earns not less than 

5 percent per year.fi 

6. Section 226.19 is revised to read as 

follows: 

§ 226.19 [Certain mortgage and variablerate transactions.]flEarly disclosures and 

adjustable-rate disclosures for transactions 

secured by real property or a dwelling. 

In connection with a closed-end 

transaction secured by real property or 

a dwelling, subject to paragraph (a)(4) of 

this section, the following requirements 

shall apply:fi 

(a) Mortgage transactions [subject to 

RESPA]—(1)(i) Time of flgood faith 

estimates offi disclosures. [In a 

mortgage transaction subject to the Real 

Estate Settlement Procedures Act (12 

U.S.C. 2601 et seq.) that is secured by 

the consumer’s dwelling, other than a 

home equity line of credit subject to 

§ 226.5b or mortgage transaction subject 

to paragraph (a)(5) of this section, 

t]flTfihe creditor shall make good 

faith estimates of the disclosures 

required by [§ 226.18]fl§ 226.38fi and 

shall deliver or place them in the mail 

not later than the third business day 

after the creditor receives the 

consumer’s written application. 

(ii) Imposition of fees. Except as 

provided in paragraph (a)(1)(iii) of this 

section, neither a creditor nor any other 

person may impose a fee on a consumer 

in connection with the consumer’s 

application for a mortgage transaction 

subject to paragraph (a)(1)(i) of this 

section before the consumer has 

received the disclosures required by 

paragraph (a)(1)(i) of this section. If the 

disclosures are mailed to the consumer 

flor delivered to the consumer by 

means other than delivery in personfi, 

the consumer is considered to have 

received them three business days after 

they are mailed flor deliveredfi. 

(iii) Exception to fee restriction. A 

creditor or other person may impose a 

fee for obtaining the consumer’s credit 

history before the consumer has 

received the disclosures required by 

paragraph (a)(1)(i) of this section, 

provided the fee is bona fide and 

reasonable in amount. 

[(2) Waiting periods for early 

disclosures and corrected disclosures. 

(i)]fl(2)(i) Seven-business-day waiting 

period.fi The creditor shall deliver or 

place in the mail the good faith 

estimates required by paragraph (a)(1)(i) 

of this section not later than the seventh 

business day before consummation of 

the transaction. 

fl(ii) Three-business-day waiting 

period. After providing the disclosures 

required by paragraph (a)(1)(i) of this 

section, the creditor shall provide the 

disclosures required by § 226.38 before 

consummation. The consumer must 

receive the new disclosures no later 

than three business days before 

consummation. Only the disclosures 

required by §§ 226.38(c)(3)(i)(C), 

226.38(c)(3)(ii)(C), 226.38(c)(6)(i) and 

226.38(e)(5)(i) may be estimated 

disclosures.fi 

Alternative 1—Paragraph (a)(2)(iii) 

[(ii) If the annual percentage rate 

disclosed under paragraph (a)(1)(i) of 

this section becomes inaccurate, as 

defined in § 226.22, the creditor shall 

provide corrected disclosures with all 

changed terms.]fl(iii) Additional threebusiness-day waiting period. If a 

subsequent event makes the disclosures 

required by paragraph (a)(2)(ii) 

inaccurate, the creditor shall provide 

corrected disclosures, subject to 

paragraph (a)(2)(iv) of this section.fi 

The consumer must receive the 

corrected disclosures no later than three 

business days before consummation. fl 

Only the disclosures required by 

§§ 226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C), 

226.38(c)(6)(i) and 226.38(e)(5)(i) may 

be estimated disclosures.fi [If the 

corrected disclosures are mailed to the 

consumer or delivered to the consumer 

by means other than delivery in person, 

the consumer is deemed to have 

received the corrected disclosures three 

business days after they are mailed or 

delivered.] 

Alternative 2—Paragraph (a)(2)(iii) 

[(ii)]fl(iii) Additional three-businessday waiting period.fi If the annual 

percentage rate disclosed under 

paragraph [(a)(1)(i)]fl(a)(2)(ii)fi of this 

section becomes inaccurate, as defined 

in § 226.22, flor a transaction that was 

disclosed as a fixed-rate transaction 

becomes an adjustable-rate 

transaction,fi the creditor shall provide 

corrected disclosures with all changed 

termsfl, subject to paragraph (a)(2)(iv) 

of this sectionfi. The consumer must 

receive the corrected disclosures no 

later than three business days before 

consummation. fl Only the disclosures 

required by §§ 226.38(c)(3)(i)(C), 

226.38(c)(3)(ii)(C), 226.38(c)(6)(i) and 

226.38(e)(5)(i) may be estimated 

disclosures.fi [If the corrected 

disclosures are mailed to the consumer 

or delivered to the consumer by means 

other than delivery in person, the 

consumer is deemed to have received 

the corrected disclosures three business 

days after they are mailed or delivered.] 

fl(iv) Annual percentage rate 

accuracy. An annual percentage rate 

disclosed under paragraph (a)(2)(ii) or 

(a)(2)(iii) shall be considered accurate as 

provided by § 226.22, except that even 

if one of the following subsequent 

events makes the disclosed annual 

percentage rate inaccurate under 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43327 

45aflReserved.fi[Information provided in 

accordance with variable-rate regulations of other 

Federal agencies may be substituted for the 

disclosures required by paragraph (b) of this 

section.] 

45bflReserved.fi[Disclosures may be delivered 

or placed in the mail not later than three business 

days following receipt of a consumer’s application 

when the application reaches the creditor by 

telephone, or through an intermediary agent or 

broker.] 

§ 226.22, the APR shall be considered 

accurate for purposes of paragraph 

(a)(2)(ii) and (a)(2)(iii) of this section: 

(A) A decrease in the loan’s annual 

percentage rate due to a discount the 

creditor gives the consumer to induce 

periodic payments by automated debit 

from a consumer’s deposit or other 

account. 

(B) A decrease in the loan’s annual 

percentage rate due to a discount a title 

insurer gives the consumer on voluntary 

owners’ title insurance. 

(v) Timing of receipt. If the 

disclosures required by paragraph 

(a)(2)(ii) or paragraph (a)(2)(iii) of this 

section are mailed to the consumer or 

delivered by means other than delivery 

in person, the consumer is considered to 

have received the disclosures three 

business days after they are mailed or 

delivered.fi 

(3) Consumer’s waiver of waiting 

period before consummation. If the 

consumer determines that the extension 

of credit is needed to meet a bona fide 

personal financial emergency, the 

consumer may modify or waive the 

seven-business-day waiting period or 

[the]flafi three-business-day waiting 

period required by paragraph (a)(2) of 

this section, after receiving the 

disclosures required by 

[§ 226.18]fl§ 226.38fi. To modify or 

waive a waiting period, the consumer 

shall give the creditor a dated written 

statement that describes the emergency, 

specifically modifies or waives the 

waiting period, and bears the signature 

of all the consumers who are primarily 

liable on the legal obligation. Printed 

forms for this purpose are prohibited. 

[(4) Notice. Disclosures made 

pursuant to paragraph (a)(1) or 

paragraph (a)(2) of this section shall 

contain the following statement: ‘‘You 

are not required to complete this 

agreement merely because you have 

received these disclosures or signed a 

loan application.’’ The disclosure 

required by this paragraph shall be 

grouped together with the disclosures 

required by paragraph (a)(1) or (a)(2) of 

this section.] 

[(5)]fl(4)fi Timeshare plans. In a 

mortgage transaction [subject to the Real 

Estate Settlement Procedures Act (12 

U.S.C. 2601 et seq.)] that is secured by 

a consumer’s interest in a timeshare 

plan described in 11 U.S.C. 101(53(D)): 

(i) The requirements of paragraphs 

(a)(1) through [(a)(4)]fl(a)(3)fi of this 

section do not apply; 

(ii) The creditor shall make good faith 

estimates of the disclosures required by 

[§ 226.18] fl§ 226.38fi before 

consummation, or shall deliver or place 

them in the mail not later than three 

business days after the creditor receives 

the consumer’s written application, 

whichever is earlier; and 

(iii) If the annual percentage rate at 

the time of consummation varies from 

the annual percentage rate disclosed 

under paragraph (a)[(5)]fl(4)fi(ii) of 

this section by more than 1⁄8; of 1 

percentage point in a regular transaction 

or @ of 1 percentage point in an irregular 

transaction, the creditor shall disclose 

all the changed terms no later than 

consummation or settlement. 

[(b) Certain variable-rate 

transactions.45a If the annual percentage 

rate may increase after consummation in 

a transaction secured by the consumer’s 

principal dwelling with a term greater 

than one year, the following disclosures 

must be provided at the time an 

application form is provided or before 

the consumer pays a non-refundable fee, 

whichever is earlier: 45b

(1) The booklet titled Consumer 

Handbook on Adjustable Rate 

Mortgages published by the Board and 

the Federal Home Loan Bank Board, or 

a suitable substitute. 

(2) A loan program disclosure for each 

variable-rate program in which the 

consumer expresses an interest. The 

following disclosures, as applicable, 

shall be provided: 

(i) The fact that the interest rate, 

payment, or term of the loan can 

change. 

(ii) The index or formula used in 

making adjustments, and a source of 

information about the index or formula. 

(iii) An explanation of how the 

interest rate and payment will be 

determined, including an explanation of 

how the index is adjusted, such as by 

the addition of a margin. 

(iv) A statement that the consumer 

should ask about the current margin 

value and current interest rate. 

(vii) Any rules relating to changes in 

the index, interest rate, payment 

amount, and outstanding loan balance 

including, for example, an explanation 

of interest rate or payment limitations, 

negative amortization, and interest rate 

carryover. 

(viii) At the option of the creditor, 

either of the following: 

(A) A historical example, based on a 

$10,000 loan amount, illustrating how 

payments and the loan balance would 

have been affected by interest rate 

changes implemented according to the 

terms of the loan program disclosure. 

The example shall reflect the most 

recent 15 years of index values. The 

example shall reflect all significant loan 

program terms, such as negative 

amortization, interest rate carryover, 

interest rate discounts, and interest rate 

and payment limitations, that would 

have been affected by the index 

movement during the period. 

(B) The maximum interest rate and 

payment for a $10,000 loan originated at 

the initial interest rate (index value plus 

margin, adjusted by the amount of any 

discount or premium) in effect as of an 

identified month and year for the loan 

program disclosure assuming the 

maximum periodic increases in rates 

and payments under the program; and 

the initial interest rate and payment for 

that loan and a statement that the 

periodic payment may increase or 

decrease substantially depending on 

changes in the rate. 

(ix) An explanation of how the 

consumer may calculate the payments 

for the loan amount to be borrowed 

based on either: 

(A) The most recent payment shown 

in the historical example in paragraph 

(b)(2)(viii)(A) of this section; or 

(B) The initial interest rate used to 

calculate the maximum interest rate and 

payment in paragraph (b)(2)(viii)(B) of 

this section. 

(x) The fact that the loan program 

contains a demand feature. 

(xi) The type of information that will 

be provided in notices of adjustments 

and the timing of such notices. 

(xii) A statement that disclosure forms 

are available for the creditor’s other 

variable-rate loan programs.] 

fl(b) Adjustable-rate loan program 

disclosures. For adjustable-rate 

mortgages described in § 226.38(a)(3) 

secured by real property or a consumer’s 

dwelling, the creditor shall provide to 

the consumer an adjustable-rate loan 

program disclosure for each loan 

program in which the consumer 

expresses an interest. The creditor shall 

disclose the heading ‘‘Adjustable-Rate 

Mortgage’’ or ‘‘ARM’’ in accordance 

with § 226.19(b)(4)(iii). The creditor 

shall provide disclosures under this 

paragraph (b) in circumstances where an 

open-end credit account converts to a 

closed-end mortgage transaction under a 

written agreement with the consumer. 

The creditor need not provide such 

disclosures in circumstances where the 

consumer assumes an adjustable-rate 

mortgage originated to another 

consumer. 

(1) Interest rate and payment. As 

applicable, the creditor shall disclose 

the information required in paragraph 

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43328 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

(b)(1) of this section, grouped together 

under the heading ‘‘Interest Rate and 

Payment,’’ using that term: 

(i) Introductory period. The time 

period for which the interest rate or 

payment remains fixed, a statement that 

the interest rate or payment may 

increase after that period, and an 

explanation of the effect on the interest 

rate of having an initial interest rate that 

is not determined using the index or 

formula that applies for interest rate 

adjustments. 

(ii) Frequency of rate and payment 

change. The frequency of interest rate 

and payment changes permitted under 

the legal obligation. 

(iii) Index. The index or formula used 

in making adjustments, a source of 

information about the index or formula, 

and an explanation of how the interest 

rate will be determined flwhen 

adjustedfi, including an explanation of 

how the index is adjusted, such as by 

the addition of a margin. 

(iv) Limit on rate changes. An 

explanation of interest rate or payment 

limitations and interest rate carryover. 

(v) Conversion feature. An 

explanation of any fixed-rate conversion 

feature that describes any limitations on 

the period during which the loan may 

be converted, a statement that the fixed 

interest rate may be higher than the 

adjustable rate at the time of conversion, 

a statement that conversion fees may be 

charged, and any interest rate and 

payment limitations that apply if the 

consumer exercises the conversion 

option. 

(vi) Preferred rate. An explanation of 

the events that will cause the interest 

rate on an adjustable rate mortgage with 

a preferred rate to increase, a statement 

of the increase in the interest rate, and 

a statement that fees may be charged if 

one or more of the events occurs. 

(2) Key questions about risk. The 

creditor shall disclose the information 

required in paragraphs (b)(2)(i) and 

(b)(2)(ii) of this section, grouped 

together under the heading ‘‘Key 

Questions About Risk,’’ using that term: 

(i) Required disclosures. The creditor 

shall disclose the following 

information— 

(A) Rate increases. A statement that 

the interest rate may increase, along 

with a statement indicating when the 

first interest rate increase may occur and 

the frequency with which the interest 

rate may increase. 

(B) Payment increases. A statement 

indicating whether or not the periodic 

payment on the loan may increase. If the 

periodic payment may increase, a 

statement that if the interest rate 

increases, the periodic payment will 

increase. For a pay option loan, if the 

periodic payment may increase, a 

statement indicating when the first 

minimum payment may increase. 

(C) Prepayment penalty. If the 

obligation includes a finance charge 

computed from time to time by 

application of a rate to the unpaid 

principal balance, a statement 

indicating whether or not a penalty 

could be imposed if the obligation is 

prepaid in full. If the creditor could 

impose a prepayment penalty, a 

statement of the circumstances under 

which and period in which the creditor 

could impose the penalty. 

(ii) Additional disclosures. The 

creditor shall disclose the following 

information as applicable: 

(A) Interest-only payments. A 

statement that periodic payments will 

be applied only toward interest on the 

loan, along with a statement of any 

limitation on the number of periodic 

payments that will be applied only 

toward interest on the loan, that such 

payments will cover the interest owed 

each month, but none of the principal, 

and that making these periodic 

payments means the loan amount will 

stay the same and the consumer will not 

have paid any of the loan amount. For 

payment-option loans, a statement that 

the loan gives the consumer the choice 

to make periodic payments that cover 

the interest owed each month, but none 

of the principal, and that making these 

periodic payments means the loan 

amount will stay the same and the 

consumer will not have paid any of the 

loan amount. 

(B) Negative amortization. A 

statement that the loan balance may 

increase even if the consumer makes the 

periodic payments, along with a 

statement that the minimum payment 

covers only a part of the interest the 

consumer owes each period and none of 

the principal, that the unpaid interest 

will be added to the consumer’s loan 

amount, and that over time this will 

increase the total amount the consumer 

is borrowing and cause the consumer to 

lose equity in the home. 

(C) Balloon payment. A statement that 

the consumer will owe a balloon 

payment, along with a statement of 

when it will be due. 

(D) Demand feature. A statement that 

the creditor may demand full repayment 

of the loan, along with a statement of 

the timing of any advance notice the 

creditor will give the consumer before 

the creditor exercises such right. 

(E) No-documentation or lowdocumentation loans. A statement that 

the consumer’s loan could have a higher 

rate or fees if the consumer does not 

document employment, income or other 

assets, along with a statement that if the 

consumer provides more 

documentation, the consumer could 

decrease the interest rate or fees. 

(F) Shared-equity or sharedappreciation. A statement that any 

future equity or appreciation in the real 

property or dwelling that secures the 

loan must be shared, along with a 

statement of the percentage of future 

equity or appreciation to which the 

creditor is entitled, and the events that 

may trigger such an obligation. 

(3) Additional information and Web 

site. The creditor shall disclose a 

statement that the consumer may obtain 

additional information about adjustablerate mortgages and a list of licensed 

housing counselors at the Web site of 

the Federal Reserve Board, and a 

reference to that Web site. 

(4) Format requirements. (i) 

Application of § 226.37. Except as 

otherwise provided by this paragraph 

(b)(4), the format requirements in 

§ 226.37 apply to loan program 

disclosures made under this section. 

(ii) Prominent location. The 

disclosures required by paragraphs 

(b)(1) through (b)(3) of this section shall 

be grouped together and placed in a 

prominent location. 

(iii) Disclosure of heading. The 

disclosure of the heading required by 

paragraph (b) of this section shall be 

more conspicuous than, and shall 

precede, the other disclosures required 

by paragraph (b) and shall be located 

outside of the tables required by 

paragraph (b)(4)(iv). The creditor may 

make the heading disclosure using the 

name of the creditor and the name of the 

loan program. 

(iv) Form of disclosures; tabular 

format. The creditor shall provide the 

disclosures required by paragraphs 

(b)(1) and (b)(2) of this section in the 

form of two tables with headings, 

content, and format substantially similar 

to Form H–4(B) in Appendix H to this 

part. The table shall contain only the 

information required or permitted by 

paragraphs (b)(1) and (b)(2). The table 

containing the disclosures required by 

paragraph (b)(1) shall precede the table 

containing the disclosures required by 

paragraph (b)(2). 

(v) Question and answer format. The 

creditor shall provide the disclosures 

required by paragraph (b)(2) of this 

section grouped together and presented 

in the format of question and answer, in 

a manner substantially similar to Form 

H–4(B) in Appendix H to this part. 

(vi) Highlighting. Each affirmative 

answer for a feature required to be 

disclosed under paragraph (b)(2) shall 

be disclosed in bold text and in all 

capitalized letters. Any negative answer 

shall be in nonbold text. 

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45cflReserved.fi[Information provided in 

accordance with variable-rate subsequent disclosure 

regulations of other Federal agencies may be 

substituted for the disclosure required by paragraph 

(c) of this section.] 

(vii) Order of key questions 

disclosure. The key questions disclosure 

shall be provided, as applicable, in the 

following order: rate increases under 

§ 226.19(b)(2)(i)(A), payment increases 

under § 226.19(b)(2)(i)(B), interest-only 

payments under § 226.19(b)(2)(ii)(A), 

negative amortization under 

§ 226.19(b)(2)(ii)(B), balloon payment 

under § 226.19(b)(2)(ii)(C), prepayment 

penalty under § 226.19(b)(2)(i)(C), 

demand feature under 

§ 226.19(b)(2)(ii)(D), no-documentation 

or low-documentation loans under 

§ 226.19(b)(2)(ii)(E), shared-equity or 

shared-appreciation under 

§ 226.19(b)(2)(ii)(F). 

(viii) Disclosure of additional 

information and Web site. The 

disclosure and Web site information 

required by paragraph (b)(3) of this 

section shall be located outside and 

beneath the tables required by 

paragraph (b)(4)(iv). 

(c) Publications for transactions 

secured by real property or a dwelling. 

In a closed-end consumer credit 

transaction secured by real property or 

a dwelling, the creditor shall provide 

the following Board publications: 

(1) The publication entitled ‘‘Key 

Questions to Ask about Your Mortgage,’’ 

as published by the Board. 

(2) The publication entitled ‘‘Fixed vs. 

Adjustable Rate Mortgages,’’ as 

published by the Board. 

(d) Timing of disclosures. (1) General. 

Except as otherwise provided by this 

paragraph (d), the creditor shall provide 

the disclosures and publications 

required by paragraphs (b) and (c) of 

this section at the time an application 

form is provided to the consumer or 

before the consumer pays a nonrefundable fee, including a fee for 

obtaining the consumer’s credit history, 

whichever is earlier.fi 

[(c)]fl(2)fi Electronic disclosures. 

For an application that is accessed by 

the consumer in electronic form, the 

disclosures and publications required 

by paragraph (b) fland (c)fi of this 

section may be provided to the 

consumer in electronic form on or with 

the application. 

fl(i) Except as provided in paragraph 

(d)(2)(ii), if a consumer accesses an 

ARM loan application electronically, 

the creditor shall provide the 

disclosures and publications required 

under paragraphs (b) and (c) of this 

section in electronic form. 

(ii) If a consumer who is physically 

present in the creditor’s office accesses 

a loan application electronically, the 

creditor may provide disclosures and 

publications required under paragraphs 

(b) and (c) of this section in either 

electronic or paper form. 

(3) Applications made by telephone or 

through intermediary. If the creditor 

receives the consumer’s application 

through an intermediary agent or broker 

or by telephone, the creditor satisfies 

the requirements of paragraph (b) or 

paragraph (c) of this section if the 

creditor delivers the disclosures and 

publications or places them in the mail 

not later than three business days after 

the creditor receives the consumer’s 

application. 

(4) Adjustable-rate feature added after 

application. If the consumer first 

expresses interest in an adjustable-rate 

mortgage transaction after an 

application form has been provided or 

accessed or the consumer has paid a 

non-refundable fee, the creditor shall 

provide to the consumer the disclosures 

required by paragraph (b) of this section 

within three business days after the 

creditor is informed of such interest by 

the consumer or by an intermediary 

broker or agent. 

(5) Terms not usually offered. If the 

consumer expresses an interest in 

negotiating loan terms that are not 

generally offered, the creditor need not 

provide the disclosures required by 

paragraph (b) of this section before an 

application form is provided but shall 

provide such disclosures as soon as 

reasonably possible after the terms to be 

disclosed have been determined and not 

later than the time the consumer pays a 

non-refundable fee. In all cases the 

creditor shall provide the disclosures 

required by paragraph (c) of this section 

at the time an application form is 

provided or before the consumer pays a 

non-refundable fee, including a fee for 

obtaining a consumer’s credit history, 

whichever is earlier. 

(6) Additional loan program 

disclosures. If, after an application form 

is provided or the consumer pays a nonrefundable fee, a consumer expresses an 

interest in an adjustable-mortgage loan 

program for which the creditor has not 

provided the disclosures required by 

paragraph (b) of this section, the 

creditor shall provide such disclosures 

within a reasonable time after the 

consumer expresses such interest. fi 

7. Section 226.20 is revised to read as 

follows: 

§ 226.20 Subsequent disclosure 

requirements. 

(a) Refinancings. A refinancing occurs 

when an existing obligation that was 

subject to this subpart is satisfied and 

replaced by a new obligation 

undertaken by the same consumer. A 

refinancing is a new transaction 

requiring new disclosures to the 

consumer. The new finance charge shall 

include any unearned portion of the old 

finance charge that is not credited to the 

existing obligation. The following shall 

not be treated as a refinancing: 

(1) A renewal of a single payment 

obligation with no change in the 

original terms. 

(2) A reduction in the annual 

percentage rate with a corresponding 

change in the payment schedule. 

(3) An agreement involving a court 

proceeding. 

(4) A change in the payment schedule 

or a change in collateral requirements as 

a result of the consumer’s default or 

delinquency, unless the rate is 

increased, or the new amount financed 

exceeds the unpaid balance plus earned 

finance charge and premiums for 

continuation of insurance of the types 

described in § 226.4(d). 

(5) The renewal of optional insurance 

purchased by the consumer and added 

to an existing transaction, if disclosures 

relating to the initial purchase were 

provided as required by this subpart. 

(b) Assumptions. An assumption 

occurs when a creditor expressly agrees 

in writing with a subsequent consumer 

to accept that consumer as a primary 

obligor on an existing [residential 

mortgage transaction]flclosed-end 

credit transaction secured by real 

property or a dwellingfi. Before the 

assumption occurs, the creditor shall 

make new disclosures to the subsequent 

consumer, based on the remaining 

obligation. If the finance charge 

originally imposed on the existing 

obligation was an add-on or discount 

finance charge, the creditor need only 

disclose: 

(1) The unpaid balance of the 

obligation assumed. 

(2) The total charges imposed by the 

creditor in connection with the 

assumption. 

(3) The information required to be 

disclosed under [§ 226.18(k), (l), (m), 

and (n)] fl§ 226.38 (a)(5), (f)(2), (h), 

(j)(2), (j)(3), and (j)(4)fi. 

(4) The annual percentage rate 

originally imposed on the obligation. 

(5) The [payment schedule under 

§ 226.18(g)] flinterest rate and payment 

summary under § 226.38(c)fi and the 

total [of] payments under [§ 226.18(h)], 

fl§ 226.38(e)(5)fi based on the 

remaining obligation. 

(c) [Variable-rate adjustments.] 

flRate adjustments.fi45c An 

adjustment to the interest rate with or 

without a corresponding adjustment to 

the payment in [a variable-rate]flan 

adjustable-ratefi mortgage subject to 

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43330 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

§ 226.19(b) is an event requiring new 

disclosures to the consumer. flAn 

adjustment to the interest rate with a 

corresponding adjustment to the 

payment due to the conversion of an 

adjustable-rate mortgage subject to 

§ 226.19(b) to a fixed-rate mortgage also 

is an event requiring new disclosures to 

the consumer.fi[At least once each year 

during which an interest rate 

adjustment is implemented without an 

accompanying payment change, and at 

least 25, but no more than 120, calendar 

days before a payment at a new level is 

due, the following disclosures, as 

applicable, must be delivered or placed 

in the mail: 

(1) The current and prior interest 

rates. 

(2) The index values upon which the 

current and prior interest rates are 

based. 

(3) The extent to which the creditor 

has foregone any increase in the interest 

rate. 

(4) The contractual effects of the 

adjustment, including the payment due 

after the adjustment is made, and a 

statement of the loan balance. 

(5) The payment, if different from that 

referred to in paragraph (c)(4) of this 

section, that would be required to fully 

amortize the loan at the new interest 

rate over the remainder of the loan 

term.] 

fl(1) Timing of disclosures. (i) 

Payment change. If an interest rate 

adjustment is accompanied by a 

payment change, the creditor shall 

deliver or place in the mail the 

disclosures required by paragraph (c)(2) 

of this section at least 60, but no more 

than 120, calendar days before a 

payment at a new level is due. 

(ii) No payment change. At least once 

each year during which an interest rate 

adjustment is implemented without an 

accompanying payment change, the 

creditor shall deliver or place in the 

mail the disclosures required by 

paragraph (c)(3) of this section. 

(2) Content of payment change 

disclosures. The creditor must provide 

the following information on the notice 

provided pursuant to paragraph (c)(1)(i) 

of this section: 

(i) A statement that changes are being 

made to the interest rate, the date such 

change is effective, and a statement that 

more detailed information is available 

in the loan agreement(s). 

(ii) A table containing the following 

disclosures— 

(A) The current and new interest 

rates. 

(B) If payments on the loan may be 

interest-only or negatively amortizing, 

the amount of the current and new 

payment allocated to pay principal, 

interest, and taxes and insurance in 

escrow, as applicable. The current 

payment allocation disclosed shall be 

based on the payment allocation in the 

last payment period during which the 

current interest rate applies. The new 

payment allocation disclosed shall be 

based on the payment allocation in the 

first payment period during which the 

new interest rate applies. 

(C) The current and new payment and 

the due date for the new payment. 

(iii) A description of the change in the 

index or formula and any application of 

previously foregone interest. 

(iv) The extent to which the creditor 

has foregone any increase in the interest 

rate and the earliest date the creditor 

may apply foregone interest to future 

adjustments, subject to rate caps. 

(v) Limits on interest rate or payment 

increases at each adjustment, if any, and 

the maximum interest rate or payment 

over the life of the loan. 

(vi) A statement of whether or not part 

of the new payment will be allocated to 

pay the loan principal and a statement 

of the payment required to fully 

amortize the loan at the new interest 

rate over the remainder of the loan term 

or to fully amortize the loan without 

extending the loan term, if different 

from the new payment disclosed 

pursuant to paragraph (c)(2)(ii)(C) of this 

section. 

(vii) A statement of the loan balance 

as of the date the interest rate change 

will become effective. 

(3) Content of annual interest rate 

notice. The creditor shall provide the 

following information on the annual 

notice provided pursuant to paragraph 

(c)(1)(ii) of this section, as applicable: 

(i) The specific time period covered 

by the disclosure, and a statement that 

the interest rate on the loan has changed 

during the past year without changing 

required payments. 

(ii) The highest and lowest interest 

rates that applied during the period 

specified under paragraph (c)(3)(i) of 

this section. 

(iii) Any foregone increase in the 

interest rate or application of previously 

foregone interest. 

(iv) The maximum interest rate that 

may apply over the life of the loan. 

(v) A statement of the loan balance as 

of the last day of the time period 

required to be disclosed by paragraph 

(c)(3)(i) of this section. 

(4) Additional information. In 

addition to the disclosures provided 

under paragraph (c)(2) or (c)(3) of this 

section, the creditor shall provide the 

following information: 

(i) If the creditor may impose a 

penalty if the obligation is prepaid in 

full, a statement of the circumstances 

under which and period in which the 

creditor may impose the penalty and the 

amount of the maximum penalty 

possible during the period between the 

date the creditor delivers or mails the 

disclosures required by this paragraph 

(c) and the last day the creditor may 

impose the penalty. 

(ii) A telephone number the consumer 

may call to obtain additional 

information about the consumer’s loan. 

(iii) A telephone number and Internet 

Web site for housing counseling 

resources maintained by the Department 

of Housing and Urban Development. 

(5) Format of disclosures. (i) The 

disclosures required by this paragraph 

(c) shall be provided in the form of 

tables with headings, content and 

format substantially similar to Form 

H¥4(G) in Appendix H to this part, 

where an interest rate adjustment is 

accompanied by a payment change, or 

Form H¥4(K) in Appendix H to this 

part, where a creditor provides an 

annual notice of interest rate 

adjustments without an accompanying 

payment change. The disclosures 

required by paragraph (c)(2) or (c)(3) of 

this section shall be grouped together 

with the disclosures required by 

paragraph (c)(4) of this section, and 

shall be in a prominent location. 

(ii) The disclosures required by 

paragraph (c)(2)(i) or paragraph (c)(3)(i) 

of this section shall precede the other 

disclosures required by paragraph (c)(2) 

or (c)(3). The disclosures required by 

paragraph (c)(4) shall be located directly 

beneath the disclosures required by 

paragraph (c)(2) or (c)(3). 

(iii) The disclosures required by 

paragraph (c)(2)(ii) shall be in the form 

of a table with headings, content, and 

format substantially similar to Form H– 

4(G) in Appendix H to this part. The 

disclosures required by paragraphs 

(c)(2)(iii) through (c)(2)(vii) of this 

section shall be located directly below 

the table required by paragraph (c)(2)(ii). 

(d) Periodic statement. (1) Timing and 

content of disclosures. If a mortgage 

transaction secured by real property or 

a dwelling provides a consumer with 

multiple payment options that include a 

payment that results in negative 

amortization, for each period after 

consummation and not later than fifteen 

days before payment is due, subject to 

paragraph (c) of this section, the creditor 

shall mail or deliver to the consumer a 

periodic statement that discloses the 

following information, as applicable: 

(i) Payment. Based on the interest rate 

in effect at the time the disclosure is 

made, the payment amount required 

to— 

(A) Pay off the loan balance in full by 

the end of the term through regular 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43331 

periodic payments without a balloon 

payment, with a statement that the 

payment is ‘‘recommended to reduce 

loan balance,’’ using that term; 

(B) Prevent negative amortization, if 

the legal obligation explicitly permits 

the consumer to elect to pay interest 

only without paying principal; and 

(C) Pay the minimum amount 

required under the legal obligation. 

(ii) Effects. A statement of the interest 

and principal, if any, covered by the 

payment amounts disclosed under 

paragraph (d)(1)(i) of this section, a 

statement describing the effects of 

making such payments, and the earliest 

date payments at a higher level may be 

due. 

(iii) Unpaid interest. The amount that 

will be added to the loan balance each 

period due to unpaid interest. 

(2) Format of disclosures. (i) Form of 

a table. The disclosures required by 

paragraph (d)(1) of this section shall be 

in the form of a table with headings, 

content and format substantially similar 

to Form H–4(L) in Appendix H to this 

part. 

(ii) Location of disclosures. The 

disclosures required by this paragraph 

(d) shall be placed in a prominent 

location, except that if the disclosures 

are made concurrently with the 

disclosures required by paragraph (c) of 

this section, the disclosures required by 

paragraph (c) shall precede the 

disclosures required by this paragraph 

(d). 

(iii) Segregation of disclosures. The 

table described in paragraph (d)(2)(i) of 

this section shall contain only the 

information required by paragraph 

(d)(1). Other information may be 

presented with the table, provided such 

information appears outside the 

required table. 

(e) Creditor-placed property 

insurance. (1) ‘‘Creditor-placed property 

insurance’’ means property insurance 

coverage obtained by the creditor when 

the property insurance required by the 

credit agreement has lapsed. 

(2) A creditor may not charge a 

consumer for obtaining property 

insurance on property securing a credit 

transaction, unless: 

(i) The creditor has made a reasonable 

determination that the required property 

insurance has lapsed; 

(ii) The creditor has mailed or 

delivered a written notice to the 

consumer with the disclosures set forth 

in paragraph (e)(3) of this section at 

least 45 days before a charge is imposed 

on the consumer for creditor-placed 

property insurance; and 

(iii) During the 45-day notice period, 

the consumer has not provided the 

creditor with evidence of adequate 

property insurance. 

(3) The creditor must provide the 

following information, clearly and 

conspicuously, on the notice required in 

paragraph (e)(2)(ii) of this section: 

(i) The creditor’s name and contact 

information, the loan number, and the 

address or description of the property 

securing the credit transaction; 

(ii) That the consumer is obligated to 

maintain property insurance on the 

property securing the credit transaction; 

(iii) That the required property 

insurance has lapsed; 

(iv) That the creditor is authorized to 

obtain the property insurance on the 

consumer’s behalf; 

(v) The date the creditor can charge 

the consumer for the cost of creditorplaced property insurance; 

(vi) How the consumer may provide 

evidence of property insurance; 

(vii) The cost of creditor-placed 

property insurance stated as an annual 

premium, and that this premium is 

likely significantly higher than a 

premium for property insurance 

purchased by the consumer; and 

(viii) That creditor-placed property 

insurance may not provide as much 

coverage as homeowner’s insurance. 

(4) Within 15 days after a creditor 

charges the consumer for creditorplaced property insurance, the creditor 

must mail or deliver to the consumer a 

copy of the individual policy, certificate 

or other evidence of the creditor-placed 

property insurance.fi 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

8. Section 226.32 is amended by 

revising paragraphs (b)(1), (c)(1), and 

(c)(5), to read as follows: 

§ 226.32 Requirements for certain closedend home mortgages. 

* * * * * 

(b) * * * 

(1) For purposes of paragraph (a)(1)(ii) 

of this section, points and fees means 

flall items included in the finance 

charge, pursuant to § 226.4, except 

interest or the time-price differential.fi 

[:] 

(i) All items required to be disclosed 

under § 226.4(a) and 226.4(b), except 

interest or the time-price differential; 

(ii) All compensation paid to 

mortgage brokers; 

(iii) All items listed in § 226.4(c)(7) 

(other than amounts held for future 

payment of taxes) unless the charge is 

reasonable, the creditor receives no 

direct or indirect compensation in 

connection with the charge, and the 

charge is not paid to an affiliate of the 

creditor; and 

(iv) Premiums or other charges for 

credit life, accident, health, or loss-ofincome insurance, or debt-cancellation 

coverage (whether or not the debtcancellation coverage is insurance 

under applicable law) that provides for 

cancellation of all or part of the 

consumer’s liability in the event of the 

loss of life, health, or income or in the 

case of accident, written in connection 

with the credit transaction.] 

* * * * * 

(c) * * * 

(1) Notices. The following statement 

flin bold text and minimum 10-point 

fontfi: [‘‘You are not required to 

complete this agreement merely because 

you have received these disclosures or 

have signed a loan application. If you 

obtain this loan, the lender will have a 

mortgage on your home. You could lose 

your home, and any money you have 

put into it, if you do not meet your 

obligations under the loan.’’]fl‘‘If you 

are unable to make the payments on this 

loan, you could lose your home. You 

have no obligation to accept this loan. 

Your signature below only confirms that 

you have received this form.’’fi 

* * * * * 

(5) Amount borrowed. For a mortgage 

refinancing, the total amount the 

consumer will borrow, as reflected by 

the [face] amount of the note flor other 

loan agreementfi; and where the 

amount borrowed includes premiums or 

other charges for optional credit 

insurance or debt-cancellation flor debt 

suspensionfi coverage, that fact shall be 

stated, grouped together with the 

disclosure of the amount borrowed. The 

disclosure of the amount borrowed shall 

be treated as accurate if it is not more 

than $100 above or below the amount 

required to be disclosed. 

* * * * * 

9. Section 226.36, as added on July 

30, 2008 (73 FR 44604), is amended by: 

A. Revising the section heading, 

B. Revising paragraph (a), 

C. Revising paragraphs (b)(1) 

introductory text, (b)(1)(i)(A) through 

(D), (b)(1)(ii)(A) and (D), and (b)(2), 

D. Revising the introductory text of 

paragraph (c)(1), 

E. Redesignating paragraph (d) as 

paragraph (f), and 

F. Adding new paragraphs (d) and (e). 

The additions and revisions read as 

follows: 

§ 226.36 Prohibited acts or practices in 

connection with credit secured by flreal 

property or a dwellingfi [a consumer’s 

principal dwelling]. 

(a) flLoan originator andfi mortgage 

broker defined. fl(1) Loan originator. 

For purposes of this section, the term 

‘‘loan originator’’ means with respect to 

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a particular transaction, a personfi [For 

purposes of this section ‘‘mortgage 

broker’’ means a person, other than an 

employee of a creditor,] who for 

compensation or other monetary gain, or 

in expectation of compensation or other 

monetary gain, arranges, negotiates, or 

otherwise obtains an extension of 

consumer credit for another person. 

[The term includes a person meeting 

this definition, even if the consumer 

credit obligation is initially payable to 

such person, unless the person 

provides] flThe term ‘‘loan originator’’ 

includes employees of the creditor. The 

term includes the creditor if the creditor 

does not providefi the funds for the 

transaction at consummation out of the 

flcreditor’sfi [person’s] own resources, 

out of deposits held by the flcreditorfi 

[person], or by drawing on a bona fide 

warehouse line of credit. 

fl(2) Mortgage broker. For purposes 

of this section, a mortgage broker with 

respect to a particular transaction is any 

loan originator that is not an employee 

of the creditor.fi 

(b) Misrepresentation of value of 

consumer’s dwelling—(1) Coercion of 

appraiser. In connection with a 

consumer credit transaction secured by 

flreal property orfi a [consumer’s 

principal] dwelling, no creditor or 

mortgage broker, and no affiliate of a 

creditor or mortgage broker, shall 

directly or indirectly coerce, influence, 

or otherwise encourage an appraiser to 

misstate or misrepresent the value of 

such dwelling. 

(i) * * * 

(A) Implying to an appraiser that 

current or future retention of the 

appraiser depends on the amount at 

which the appraiser values a 

[consumer’s principal] dwelling; 

(B) Excluding an appraiser from 

consideration for future engagement 

because the appraiser reports a value of 

a [consumer’s principal] dwelling that 

does not meet or exceed a minimum 

threshold; 

(C) Telling an appraiser a minimum 

reported value of a [consumer’s 

principal] dwelling that is needed to 

approve the loan; 

(D) Failing to compensate an 

appraiser because the appraiser does not 

value a [consumer’s principal] dwelling 

at or above a certain amount; and 

* * * * * 

(ii) * * * 

(A) Asking an appraiser to consider 

additional information about a 

[consumer’s principal] dwelling or 

about comparable properties; 

* * * * * 

(D) Obtaining multiple appraisals of a 

[consumer’s principal] dwelling, so long 

as the creditor adheres to a policy of 

selecting the most reliable appraisal, 

rather than the appraisal that states the 

highest value; 

* * * * * 

(2) When extension of credit 

prohibited. In connection with a 

consumer credit transaction secured by 

flreal property orfi a [consumer’s 

principal] dwelling, a creditor who 

knows, at or before loan consummation, 

of a violation of paragraph (b)(1) of this 

section in connection with an appraisal 

shall not extend credit based on such 

appraisal unless the creditor documents 

that it has acted with reasonable 

diligence to determine that the appraisal 

does not materially misstate or 

misrepresent the value of such dwelling. 

* * * * * 

(c) Servicing practices. (1) In 

connection with a consumer credit 

transaction secured by flreal property 

orfi a [consumer’s principal] dwelling, 

no servicer shall— 

* * * * * 

ALTERNATIVE 1—PARAGRAPH (d). 

fl(d) Prohibited payments to loan 

originators. (1) Payments based on 

transaction terms and conditions. In 

connection with a consumer credit 

transaction secured by real property or 

a dwelling, no loan originator shall 

receive and no person shall pay to a 

loan originator, directly or indirectly, 

compensation in an amount that is 

based on any of the transaction’s terms 

or conditions. For purposes of this 

paragraph, the principal amount of 

credit extended is deemed to be a 

transaction term. This paragraph (d)(1) 

shall not apply to any transaction in 

which paragraph (d)(2) of this section 

applies. 

(2) Payments by persons other than 

consumer. If a loan originator receives 

compensation directly from the 

consumer in a transaction secured by 

real property or a dwelling: 

(i) The loan originator shall not 

receive compensation, directly or 

indirectly, from any person other than 

the consumer in connection with the 

transaction; and 

(ii) No person who knows or has 

reason to know of the consumer-paid 

compensation to the loan originator, 

other than the consumer, shall pay any 

compensation to the loan originator, 

directly or indirectly, in connection 

with the transaction. 

(3) Affiliates. For purposes of 

paragraph (d) of this section, affiliated 

entities shall be treated as a single 

‘‘person.’’fi 

ALTERNATIVE 2—PARAGRAPH (d). 

fl(d) Prohibited payments to loan 

originators. (1) Payments based on 

terms and conditions. In connection 

with a consumer credit transaction 

secured by real property or a dwelling, 

no loan originator shall receive and no 

person shall pay to a loan originator, 

directly or indirectly, compensation in 

an amount that is based on any of the 

transaction’s terms or conditions. For 

purposes of this paragraph the principal 

amount of credit extended is not 

deemed to be a transaction term or 

condition. This paragraph (d)(1) shall 

not apply to any transaction in which 

paragraph (d)(2) applies. 

(2) Payments by persons other than 

consumer. If a loan originator receives 

compensation directly from the 

consumer in a transaction secured by 

real property or a dwelling: 

(i) The loan originator shall not 

receive compensation, directly or 

indirectly, from any person other than 

the consumer in connection with the 

transaction; and 

(ii) No person who knows or has 

reason to know of the consumer-paid 

compensation to the loan originator, 

other than the consumer, shall pay any 

compensation to the loan originator, 

directly or indirectly, in connection 

with the transaction. 

(3) Affiliates. For purposes of 

paragraph (d) of this section, affiliated 

entities shall be treated as a single 

‘‘person.’’fi 

OPTIONAL PROPOSAL— 

PARAGRAPH (e). 

fl(e) Prohibition on steering. (1) 

General. In connection with a credit 

transaction secured by real property or 

a dwelling, a loan originator shall not 

direct or ‘‘steer’’ a consumer to 

consummate a transaction based on the 

fact that the originator will receive 

greater compensation from the creditor 

in that transaction than in other 

transactions the originator offered or 

could have offered to the consumer, 

unless the transaction is in the 

consumer’s interest. 

(2) Permissible transactions. A 

transaction does not violate paragraph 

(e)(1) of this section if the loan was 

chosen by the consumer from at least 

three loan options for each type of 

transaction in which the consumer 

expressed an interest, and the 

conditions specified in paragraph (e)(3) 

of this section are met. For purposes of 

paragraph (e) of this section, the phrase 

‘‘type of transaction’’ refers to whether 

a loan has: 

(i) An annual percentage rate that 

cannot increase after consummation, or 

(ii) An annual percentage rate that 

may increase after consummation. 

(3) Loan options presented. A 

transaction satisfies paragraph (e)(2) of 

this section only if the loan originator 

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presents the loan options required by 

that paragraph and all of the following 

conditions are met: 

(i) The loan originator obtains loan 

options from a significant number of the 

creditors with which the originator 

regularly does business and, for each 

type of transaction in which the 

consumer expressed an interest the 

originator must present and permit the 

consumer to choose from at least three 

loans that include: 

(A) The loan with the lowest interest 

rate; 

(B) The loan with the second lowest 

interest rate; and 

(C) The loan with the lowest total 

dollar amount for origination points or 

fees and discount points, as offered by 

the creditors. 

(ii) The loan originator must have a 

good faith belief that the options 

presented to the consumer pursuant to 

paragraph (e)(3)(i) of this section are 

loans for which the consumer likely 

qualifies. 

(iii) For each type of transaction, if the 

originator presents to the consumer 

more than three loans, the originator 

must highlight the loans that satisfy the 

criteria specified in paragraph (e)(3)(i) of 

this section.fi 

fl(f)fi [(d)] This section does not 

apply to a home equity line of credit 

subject to § 226.5b. 

10. A new § 226.37 is added to 

Subpart E to read as follows: 

fl§ 226.37 Special disclosure 

requirements for closed-end mortgages. 

(a) Form of disclosures—(1) General. 

The creditor shall make the disclosures 

required by §§ 226.19, 226.20(c), 

226.20(d) and 226.38 clearly and 

conspicuously in writing, in a form that 

the consumer may keep. 

(2) Grouped and segregated. The 

disclosures required by § 226.19, as 

applicable, § 226.20(c), § 226.20(d), or 

§ 226.38 shall be grouped together and 

segregated from everything else, except 

as provided in paragraph (b) of this 

section, and shall not contain any 

information not directly related to the 

disclosures required under §§ 226.19, 

226.20(c), 226.20(d), or 226.38, except: 

(i) The disclosures may include the 

date of the transaction and the 

consumer’s name, address, and account 

number; and 

(ii) The following disclosures may be 

made together with or separately from 

other required disclosures under 

§ 226.38: the tax deductibility disclosure 

under § 226.38(f)(4); and insurance, debt 

cancellation, or debt suspension 

disclosure under § 226.38(h). 

(b) Separate disclosures. The 

following disclosures must be provided 

separately from other required 

disclosures under § 226.38: itemization 

of amount financed under § 226.38(j)(1); 

rebate under § 226.38(j)(2); late payment 

under § 226.38(j)(3); property insurance 

under § 226.38(j)(4); contract reference 

under § 226.38(j)(5); and assumption 

under § 226.38(j)(6). 

(c) Terminology. (1) Terminology used 

in providing the disclosures required by 

§§ 226.19, 226.20(c), 226.20(d) and 

226.38 shall be consistent. 

(2) The term annual percentage rate, 

when required to be disclosed under 

§ 226.38(b)(1) together with a 

corresponding percentage rate, shall be 

more conspicuous than any other 

required disclosure, disclosed in at least 

a 16-point font, and be placed in a 

prominent location and in close 

proximity to a scaled graph in 

accordance with the requirements under 

§ 226.38(b)(2). 

(d) Specific formats. (1) The 

disclosures required by § 226.38(a)(1) 

through (5) shall be provided in 

accordance with the requirements of 

§ 226.38(a), and precede all other 

disclosures, except the identification 

required by § 226.38(g) and the 

disclosures permitted under paragraph 

(a)(2)(i) of this section; 

(2) The disclosures required by 

§ 226.38(b)(2) shall be provided in the 

form of a graph with shading, scaling 

and content in accordance with the 

requirements of § 228.38(b)(2), placed in 

a prominent location and in close 

proximity to the disclosures required by 

§§ 226.38(b)(1), 226.38(b)(3) and 

226.38(b)(4); 

(3) The disclosures required by 

§ 226.38(c), as applicable, shall be 

provided in a tabular format in 

accordance with the requirements of 

§ 226.38(c), and placed in a prominent 

location; 

(4) The disclosure required by 

§ 226.38(c)(2)(iii) shall be outlined in a 

box and placed directly beneath the 

table required by § 226.38(c)(1) in 

accordance with the requirements of 

§ 226.38(c)(2)(iii); 

(5) The disclosures required by 

§ 226.38(d) shall be provided in a 

question and answer format in a tabular 

format in accordance with the 

requirements of § 226.38(d), and shall 

not precede the disclosures required by 

§ 226.38(a) through (c). 

(6) The disclosures required by 

§ 226.38(e) shall be provided in a 

tabular format in accordance with the 

requirements of § 226.38(e), and precede 

any information not directly related to 

the disclosures required by § 226.38. 

(7) The disclosures required by 

§ 226.38(f) shall be provided in 

accordance with the requirements of 

§ 226.38(f), and precede the disclosures 

required by § 226.38(j). 

(8) The loan program disclosures 

required by § 226.19(b) for an 

adjustable-rate mortgage shall be 

provided in a tabular format in 

accordance with the requirements of 

§ 226.19(b). 

(9) The disclosures required by 

§ 226.20(c)(2)–(4) for an adjustable-rate 

adjustment notice shall be provided in 

a tabular format in accordance with the 

requirements of § 226.20(c)(2)–(5). 

(10) The disclosures required by 

§ 226.20(d)(1) for loans with negative 

amortization shall be provided in a 

tabular format in accordance with the 

requirements of § 226.20(d). 

(e) Electronic disclosures. The 

disclosures required by § 226.38 may be 

provided to the consumer in electronic 

form in accordance with the 

requirements under § 226.17(a)(1).fi 

11. A new § 226.38 is added to 

Subpart E to read as follows: 

fl§ 226.38 Content of disclosures for 

closed-end mortgages. 

In connection with a closed-end 

transaction secured by real property or 

a dwelling, the creditor shall disclose 

the following information: 

(a) Loan summary. A separate section, 

labeled ‘‘Loan Summary.’’ 

(1) Loan amount. The principal 

amount the consumer will borrow as 

reflected in the loan contract. 

(2) Loan term. The period of time to 

repay the obligation in full. 

(3) Loan type and features. The loan 

types and loan features described in this 

section. 

(i) Loan type. The loan type, as 

applicable: 

(A) Adjustable-rate mortgage. If the 

annual percentage rate may increase 

after consummation, the creditor shall 

disclose that the loan is an ‘‘adjustablerate mortgage,’’ using that term. 

(B) Step-rate mortgage. If the interest 

rate will change after consummation, 

and the rates and periods in which they 

will apply are known, the creditor shall 

disclose that the loan is a ‘‘step-rate 

mortgage,’’ using that term. 

(C) Fixed-rate mortgage. If the 

transaction is not an adjustable-rate 

mortgage or a step-rate mortgage, the 

creditor shall disclose that the loan is a 

‘‘fixed-rate mortgage,’’ using that term. 

(ii) Loan features. No more than two 

loan features, as applicable: 

(A) Step-payments. If, under the terms 

of the legal obligation, the regular 

periodic payments will gradually 

increase by a set amount at 

predetermined times, the creditor shall 

disclose that the loan has a ‘‘steppayment’’ feature, using that term; and 

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(B) Payment option. If, under the 

terms of the legal obligation, the 

consumer may choose to make one or 

more regular periodic payments that 

may cause the loan balance to increase, 

the creditor shall disclose that the loan 

has a ‘‘payment option’’ feature, using 

that term; 

(C) Negative amortization. If, under 

the terms of the legal obligation, the 

regular periodic payments will cause 

the loan balance to increase and the 

loan is not a loan described in 

paragraphs (a)(3)(ii)(B) or (a)(3)(ii)(D) of 

this section, the creditor shall disclose 

that the loan has a ‘‘negative 

amortization’’ feature, using that term; 

or 

(D) Interest-only payments. If, under 

the terms of the legal obligation, one or 

more regular periodic payments may be 

applied to interest accrued only and not 

to loan principal, and the loan is not a 

loan described in paragraphs 

(a)(3)(ii)(A) or (a)(3)(ii)(B) of this 

section, the creditor shall disclose that 

the loan has an ‘‘interest-only payment’’ 

feature, using that term. 

(4) Total settlement charges. The 

‘‘total settlement charges,’’ using that 

term, as disclosed under Regulation X, 

12 CFR part 3500. As applicable, a 

statement of the amount of the charges 

already included in the loan amount 

and a statement that the total does not 

include a down payment, with a 

reference to the Good Faith Estimate or 

HUD–1 for details. 

(5) Prepayment penalty. If the 

obligation includes a finance charge 

computed from time to time by 

application of a rate to the unpaid 

principal balance and permits the 

creditor to impose a penalty if the 

obligation is prepaid in full, a statement 

indicating the amount of the maximum 

penalty and the circumstances and 

period in which the creditor may 

impose the penalty. 

(6) Form of disclosures; tabular 

format. The disclosures required by 

paragraphs (a)(1) through (5) of this 

section shall be in the form of a table, 

with headings, content and format 

substantially similar to Forms H–19(A), 

H–19(B), or H–19(C) in Appendix H to 

this part. The table shall contain only 

the information required or permitted 

by paragraphs (a)(1) through (5). 

(b) Annual percentage rate. The 

disclosures specified in paragraph 

(b)(1)–(4) of this section shall be 

grouped together with headings, content 

and format substantially similar to 

Forms H–19(A), H–19(B), or H–19(C) in 

Appendix H to this part. 

(1) The ‘‘annual percentage rate,’’ 

using that term, and the following 

description: ‘‘overall cost of this loan 

including interest and settlement 

charges.’’ 

(2) A graph depicting the annual 

percentage rate (APR) disclosed under 

paragraph (b)(1) of this section and how 

it relates to a range of rates including 

the average prime offer rate as defined 

in § 226.35(a)(2) for the week in which 

the disclosure required under this 

section is provided, and the higherpriced mortgage loan threshold as 

defined in § 226.35(a)(1). 

(i) The graph shall consist of a 

horizontal line or axis, with a shaded 

bar extending above and below the line. 

The horizontal axis shall be used to 

depict a range of APRs and the shaded 

bar shall use lighter shading on the left 

and darker shading on the right to 

distinguish between the rates on the 

graph that are below and above the APR 

representing the higher-priced mortgage 

loan threshold. 

(ii) The lighter shaded area shall 

comprise the first two-thirds of the 

graph to represent the rates that are 

below the higher-priced mortgage loan 

threshold. On the horizontal axis, a 

range of APRs shall be plotted in the 

lighter shaded area, starting with the 

average prime offer rate depicted as the 

lowest APR on the left, and increasing 

in increments of .50 percentage points, 

up to the APR that is the higher-priced 

mortgage loan threshold. The average 

prime offer rate shall be plotted as the 

lowest APR on the horizontal axis and 

shall be labeled as ‘‘Average Best APR’’ 

or ‘‘Avg. Best APR.’’ 

(iii) The darker shaded area to the 

right side of the APR representing the 

higher-priced mortgage loan threshold 

shall comprise the last third of the 

graph, shall contain the words ‘‘high 

cost zone’’ and the APR that is 4 

percentage points higher than the 

higher-priced mortgage threshold shall 

be plotted as the highest APR on the 

horizontal axis. Ellipses shall separate 

the APR representing the higher-priced 

mortgage threshold and the highest APR 

on the graph. 

(iv) The graph shall include the APR 

disclosed under paragraph (b)(1) of this 

section and: 

(A) Identify its location on the 

horizontal axis, which shall be labeled 

‘‘this loan: __% APR,’’ or 

(B) If the APR disclosed under 

paragraph (b)(1) exceeds the highest 

APR on the axis, identify its location 

beyond the rightmost edge of the shaded 

graph, or 

(C) If the APR disclosed under 

paragraph (b)(1) is below the average 

prime offer rate, identify its location 

beyond the leftmost edge of the shaded 

graph. 

(v) The lighter and darker shaded 

areas shall each extend past the lowest 

and highest APRs depicted on the axis, 

with a left pointing arrow to the left of 

lowest APR and a right-pointing arrow 

to the right of the highest APR. 

(3) A statement of the average prime 

offer rate as defined in § 226.35(a)(2), 

and the higher-priced mortgage loan 

threshold, as defined in § 226.35(a)(1), 

current as of the week the disclosure is 

produced. 

(4) The average per-period savings 

from a 1 percentage point reduction in 

the APR, which shall be calculated as 

follows: 

(i) Reduce the interest rate by 1 

percentage point and compute the total 

of payments that would result from the 

reduced interest rate; 

(ii) Compute the difference between 

the total of payments in paragraph 

(b)(4)(i) of this section and the total of 

payments for the loan disclosed under 

§ 226.38(e)(5)(i), and divide the 

difference by the total number of 

payments required to pay the loan off by 

its maturity. 

(5) Exemptions. The following 

transactions are exempt from the 

disclosures required under paragraphs 

(b)(2) and (b)(3) of this section: 

(i) A transaction to finance the initial 

construction of a dwelling; 

(ii) A temporary or ‘‘bridge’’ loan with 

a term of twelve months or less, such as 

a loan to purchase a new dwelling 

where the consumer plans to sell a 

current dwelling within twelve months; 

and 

(iii) A reverse-mortgage transaction 

subject to § 226.33. 

(c) Interest rate and payment 

summary. The creditor shall disclose 

the following information about the 

interest rate and periodic payments: 

(1) The information in paragraphs 

(c)(2)–(4) of this section shall be in the 

form of a table, with no more than five 

columns, with headings, content and 

format substantially similar to Forms H– 

19(A), H–19(B), or H–19(C) in Appendix 

H to this part. The table shall contain 

only the information required in 

paragraphs (c)(2)–(4). 

(2) Interest rates—(i) Amortizing 

loans. (A) For fixed-rate mortgages, the 

interest rate at consummation. 

(B) For an adjustable-rate mortgage or 

a step-rate mortgage— 

(1) The interest rate at consummation 

and the period of time until the first 

interest rate adjustment, labeled as the 

‘‘introductory rate and monthly 

payment’’; 

(2) The maximum possible interest 

rate at the first scheduled interest rate 

adjustment and the date on which the 

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adjustment will occur, labeled as 

‘‘maximum at first adjustment’’; and 

(3) The maximum possible interest 

rate at any time and the earliest date on 

which that rate may apply, labeled as 

‘‘maximum ever.’’ 

(C) If the loan provides for payment 

increases in paragraph (c)(3)(i)(B) of this 

section, the interest rate in effect at the 

time the first payment increase is 

scheduled to occur and the date on 

which the increase will occur. 

(ii) Negative amortization loans. The 

creditor shall disclose— 

(A) The interest rate at consummation 

and if it will adjust after consummation, 

the length of time until it will adjust 

and the label ‘‘introductory’’; 

(B) The maximum possible interest 

rate that could apply when the 

consumer must begin making fully 

amortizing payments under the terms of 

the legal obligation; 

(C) If the minimum required payment 

will increase before the consumer must 

begin making fully amortizing 

payments, the maximum possible 

interest rate that would be in effect at 

the first payment increase and the date 

the increase is scheduled to occur; and 

(D) If a second payment increase in 

the minimum required payment may 

occur before the consumer must begin 

making fully amortizing payments, the 

maximum possible interest rate that 

would in effect at the second payment 

increase and the date the increase is 

scheduled to occur. 

(iii) Introductory rate disclosure for 

amortizing adjustable-rate mortgage. If 

the interest rate at consummation is less 

than the fully-indexed rate— 

(A) The interest rate that applies at 

consummation and the period of time 

the interest rate applies; 

(B) A statement that even if market 

rates do not change, the interest rate 

will increase at the first adjustment and 

the date of such rate adjustment; and 

(C) The fully-indexed rate. 

(3) Payments for amortizing loans—(i) 

Principal and interest payments. If all 

regular periodic payments will be 

applied to the interest accrued and the 

principal, for each interest rate 

disclosed under paragraph (c)(2)(i) of 

this section— 

(A) The corresponding regular 

periodic payment of principal and 

interest, labeled as ‘‘principal and 

interest;’’ 

(B) If the regular periodic payment 

may increase without regard to an 

interest rate adjustment, the payment 

that corresponds to the first increase 

and the earliest date on which the 

increase could occur; 

(C) That an escrow account is 

required, if applicable, and an estimate 

of the amount of taxes and insurance, 

including any mortgage insurance; 

(D) The sum of the amounts disclosed 

under paragraph (c)(3)(i)(A)–(C) of this 

section, with a description such as 

‘‘total estimated monthly payment.’’ 

(ii) Interest-only payments. If the loan 

is an interest-only loan, for each interest 

rate disclosed under paragraph (c)(2)(i) 

of this section, the corresponding 

payment and— 

(A) If the payment will be applied to 

only the interest accrued, the amount 

applied to interest and an indication 

that none of the payment is being 

applied to principal; 

(B) If the payment will be applied to 

interest accrued and principal, the 

earliest date that payment will be 

required and the payment amount 

itemized by the amount applied to 

interest accrued and the amount applied 

to principal; 

(C) The escrow information in 

paragraph (c)(3)(i)(C) of this section; and 

(D) The sum of all amounts required 

to be disclosed under paragraph 

(c)(3)(i)(A)–(C) of this section, with a 

description such as ‘‘total estimated 

monthly payment.’’ 

(4) Payments for negative 

amortization loans. (i) The minimum 

payment— 

(A) Required until the first payment 

increase or interest rate increase; 

(B) That would be due at the first 

payment increase and the second, if 

any, in paragraphs (c)(2)(ii)(C) and (D) of 

this section; and 

(C) A statement that the minimum 

payment covers only some interest, does 

not cover any principal, and will cause 

the loan amount to increase. 

(ii) The fully amortizing payment 

amount at the earliest time when such 

a payment must be made; and, if 

applicable, 

(iii) In addition to the payments in 

paragraphs (c)(4)(i) and (ii) of this 

section, for each interest rate required 

under paragraph (c)(2)(ii) of this section, 

the amount of the fully amortizing 

payment, labeled as the ‘‘full payment 

option,’’ and a statement that payments 

cover all principal and interest. 

(5) Balloon payments. (i) Except as 

provided in paragraph (c)(5)(ii) of this 

section, if the transaction will require a 

balloon payment, defined as a payment 

that is more than two times a regular 

periodic payment, the balloon payment 

must be disclosed separately from other 

regular periodic payments disclosed 

under this paragraph (c), in a manner 

substantially similar to Model Clause 

H–20 in Appendix H to this part. 

(ii) If the balloon payment is 

scheduled to occur at the same time as 

another required payment in paragraph 

(c)(3) or (c)(4) of this section, then the 

balloon payment must be disclosed in 

the table. 

(6) Special disclosures for loans with 

negative amortization. The following 

information, in close proximity to the 

table required in paragraph (c)(1) of this 

section, with headings, content and 

format substantially similar to Form H– 

19(C) in Appendix H to this part: 

(i) The maximum possible interest 

rate, the period of time in which the 

interest rate could reach its maximum, 

the amount of estimated taxes and 

insurance included in each payment 

disclosed, and a statement that the loan 

offers payment options, two of which 

are shown. 

(ii) The dollar amount of the increase 

in the loan’s principal balance if the 

consumer makes only the minimum 

required payments for the maximum 

possible time, and the earliest date on 

which the consumer must make a fully 

amortizing payment, assuming that the 

interest rate reaches its maximum at the 

earliest possible time. 

(7) Definitions. For the purposes of 

this paragraph (c): 

(i) The terms ‘‘adjustable-rate 

mortgage,’’ ‘‘step-rate mortgage,’’ ‘‘fixedrate mortgage,’’ and ‘‘interest-only’’ 

shall have the meaning given to them in 

paragraphs (a)(3)(i) and (a)(3)(ii)(D) of 

this section; 

(ii) The term ‘‘amortizing loan’’ means 

a loan in which the regular periodic 

payments cannot cause the principal 

balance to increase under the terms of 

the legal obligation; the term ‘‘negative 

amortization’’ means a loan in which 

the regular periodic payments may or 

will cause the principal balance to 

increase under the terms of the legal 

obligation; and 

(iii) The term ‘‘fully indexed rate’’ 

means the interest rate calculated using 

the index value and margin at the time 

of consummation. 

(d) Key questions about risk. The 

creditor shall disclose the information 

required in paragraphs (d)(1) and (d)(2) 

of this section, grouped together under 

the heading ‘‘Key Questions About 

Risk,’’ using that term: 

(1) Required disclosures. The creditor 

shall disclose the following 

information— 

(i) Rate increases. A statement 

indicating whether or not the interest 

rate on the loan may increase. If the 

interest rate on the loan may increase, 

a statement indicating the frequency 

with which the interest rate may 

increase and the date on which the first 

interest rate increase may occur. 

(ii) Payment increases. A statement 

indicating whether or not the periodic 

payment on the loan may increase. If the 

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periodic payment on the loan may 

increase, a statement indicating the date 

on which the first payment increase 

may occur. For a payment option loan, 

if the periodic payment on the loan may 

increase, statements indicating the dates 

on which the full and minimum 

payments may increase. 

(iii) Prepayment penalty. If the 

obligation includes a finance charge 

computed from time to time by 

application of a rate to the unpaid 

principal balance, a statement 

indicating whether or not a penalty will 

be imposed if the obligation is prepaid 

in full. If the creditor may impose a 

prepayment penalty, a statement of the 

circumstances under which and period 

in which the creditor may impose the 

penalty and the amount of the 

maximum penalty. 

(2) Additional disclosures. The 

creditor shall disclose the following 

information, as applicable— 

(i) Interest-only payments. A 

statement that periodic payments will 

be applied only toward interest on the 

loan, along with a statement of any 

limitation on the number of periodic 

payments that will be applied only 

toward interest on the loan, that such 

payments will cover the interest owed 

each month, but none of the principal, 

and that making these periodic 

payments means the loan amount will 

stay the same and the consumer will not 

have paid any of the loan amount. For 

payment-option loans, a statement that 

the loan gives the consumer the choice 

to make periodic payments that cover 

the interest owed each month, but none 

of the principal, and that making these 

periodic payments means the loan 

amount will stay the same and the 

consumer will not have paid any of the 

loan amount. 

(ii) Negative amortization. A 

statement that the loan balance may 

increase even if the consumer makes the 

periodic payments, along with a 

statement that the minimum payment 

covers only a part of the interest the 

consumer owes each period and none of 

the principal, that the unpaid interest 

will be added to the consumer’s loan 

amount, and that over time this will 

increase the total amount the consumer 

is borrowing and cause the consumer to 

lose equity in the home. 

(iii) Balloon payment. A statement 

that the consumer will owe a balloon 

payment, along with a statement of the 

amount that will be due and the date on 

which it will be due. 

(iv) Demand feature. A statement that 

the creditor may demand full repayment 

of the loan, along with a statement of 

the timing of any advance notice the 

creditor will give the consumer before 

the creditor exercises such right. 

(v) No-documentation or lowdocumentation loans. A statement that 

the consumer’s loan will have a higher 

rate or fees because the consumer did 

not document employment, income or 

other assets, along with a statement that 

if the consumer provides more 

documentation, the consumer could 

decrease the interest rate or fees. 

(vi) Shared-equity or sharedappreciation. A statement that any 

future equity or appreciation in the real 

property or dwelling that secures the 

loan must be shared, along with a 

statement of the percentage of equity or 

appreciation to which the creditor is 

entitled, and the events that may trigger 

such obligation. 

(3) Format requirements. (i) Form of 

disclosures; tabular format. The creditor 

shall provide the disclosures required 

by paragraphs (d)(1) and (2) of this 

section, as applicable, in the form of a 

table with headings, content and format 

substantially similar to Forms H–19(A), 

H–19(B), or H–19(C) in Appendix H to 

this part. The table shall contain only 

the information required or permitted 

by paragraphs (d)(1) and (2). 

(ii) Question and answer format. The 

creditor shall provide the disclosures 

required by paragraphs (d)(1) through 

(d)(2) of this section grouped together 

and presented in the format of question 

and answer, in a manner substantially 

similar to Forms H–19(A), H–19(B), or 

H–19(C) in Appendix H to this part. 

(iii) Highlighting. Each affirmative 

answer for a feature required to be 

disclosed under paragraphs (d)(1) and 

(2) of this section shall be disclosed in 

bold text and in all capitalized letters. 

Any negative answer shall be in 

nonbold text. 

(iv) Order. The disclosures shall be 

provided, as applicable, in the following 

order: rate increases under 

§ 226.38(d)(1)(i), payment increases 

under § 226.38(d)(1)(ii), interest-only 

payments under § 226.38(d)(2)(i), 

negative amortization under 

§ 226.38(d)(2)(ii), balloon payment 

under § 226.38(d)(2)(iii), prepayment 

penalty under § 226.38(d)(1)(iii), 

demand feature under § 226.38(d)(2)(iv), 

no-documentation or lowdocumentation loans under 

§ 226.38(d)(2)(v), and shared-equity or 

shared-appreciation under 

§ 226.38(d)(2)(vi). 

(e) Information about payments. A 

creditor shall disclose the following 

information, grouped together under the 

heading ‘‘More Information About Your 

Payments’’: 

(1) Rate calculation. For an 

adjustable-rate mortgage, a statement 

labeled ‘‘Rate Calculation’’ that 

describes the method used to calculate 

the interest rate and the frequency of 

interest rate adjustments. If the interest 

rate that applies at consummation is not 

based on the index and margin that will 

be used to make later interest rate 

adjustments, the statement must include 

the time period when the initial interest 

rate expires. 

(2) Rate and payment change limits. 

(i) For an adjustable-rate mortgage, any 

limitations on the increase in the 

interest rate labeled in bold type ‘‘Rate 

Change Limits,’’ together with a 

statement of the maximum rate that may 

apply pursuant to such limitations 

during the transaction’s term to 

maturity. 

(ii) If the regular periodic payment 

required under the terms of the legal 

obligation may cause the principal 

balance to increase, any limitations on 

the increase in the minimum payment 

amount and an identification of the 

circumstances under which the 

minimum required payment may recast 

to a fully amortizing payment labeled, 

in bold type, ‘‘Payment Change Limits.’’ 

(3) Escrow. If applicable, a statement, 

labeled in bold type ‘‘Escrow,’’ that 

explains that an escrow account is 

required for property taxes and 

insurance, that the escrow payment is 

an estimate that can change at any time, 

and that the consumer should consult 

the good faith estimate of settlement 

costs and HUD–1 settlement statement 

for more details. If no escrow is 

required, a statement of that fact and 

that the consumer will have to pay 

property taxes, homeowners’, and other 

insurance directly. 

(4) Mortgage insurance. If applicable, 

a statement, labeled in bold type, 

‘‘Private Mortgage Insurance,’’ that 

private mortgage insurance is required 

and, if applicable, whether such 

insurance is included in any escrow 

account. If other mortgage insurance is 

required, for example, for a transaction 

insured by a government entity, the 

statement shall be labeled, in bold type, 

‘‘Mortgage Insurance.’’ 

(5) Total payments. A creditor shall 

disclose the following information, 

grouped together under the subheading 

‘‘Total Payments,’’ using that term: 

(i) Total payments. The total 

payments amount, calculated based on 

the number and amount of scheduled 

payments in accordance with the 

requirements of § 226.18(g), together 

with a statement that the total payments 

is calculated on the assumption that 

market rates do not change, if 

applicable, and that the consumer 

makes all payments as scheduled. The 

statement must also specify the total 

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number of payments and whether the 

total payments amount includes 

estimated escrow. 

(ii) Interest and settlement charges. 

The interest and settlement charges, 

using that term, calculated as the 

finance charge in accordance with the 

requirements of § 226.4 and expressed 

as a dollar figure, together with a brief 

statement that the interest and 

settlement charges amount represents 

part of the total payments amount. The 

disclosed interest and settlement 

charges, and other disclosures affected 

by the disclosed interest and settlement 

charges (including the amount financed 

and annual percentage rate), shall be 

treated as accurate if the amount 

disclosed as the interest and settlement 

charges— 

(A) Is understated by no more than 

$100; 

(B) Is greater than the amount 

required to be disclosed. 

(iii) Amount financed. The amount 

financed, using that term and expressed 

as a dollar figure, together with a brief 

statement that the interest and 

settlement charges and the amount 

financed are used to calculate the 

annual percentage rate. The amount 

financed is calculated by subtracting all 

prepaid finance charges from the loan 

amount required to be disclosed under 

§ 226.38(a)(1). 

(6) Form of disclosures; tabular 

format. The creditor must provide the 

disclosures required by paragraphs 

(e)(1) through (5) of this section in the 

form of a table, with headings, content, 

and format substantially similar to 

Forms H–19(A), H–19(B), or H–19(C) in 

Appendix H to this part. The table shall 

contain only the information required or 

permitted by paragraphs (e)(1) through 

(e)(5). 

(f) Additional disclosures. The 

creditor shall disclose the following 

information, grouped together: 

(1) No obligation statement. A 

statement that the consumer has no 

obligation to accept the loan. If the 

creditor provides space for a consumer’s 

signature, a statement that a signature 

by the consumer only confirms receipt 

of the disclosure statement. 

(2) Security interest. A statement that 

the consumer could lose the home if he 

or she is unable to make payments on 

the loan. 

(3) No guarantee to refinance 

statement. A statement that there is no 

guarantee the consumer can refinance 

the transaction to lower the interest rate 

or monthly payments. 

(4) Tax deductibility. For a transaction 

secured by a dwelling, if the extension 

of credit may exceed the fair market 

value of the dwelling, the creditor shall 

disclose that: 

(i) The interest on the portion of the 

credit extension that is greater than the 

fair market value of the dwelling may 

not be tax deductible for Federal income 

tax purposes; and 

(ii) The consumer should consult a 

tax adviser for further information 

regarding the deductibility of interest 

and charges. 

(5) Additional information and Web 

site. A statement that if the consumer 

does not understand any disclosure 

required by this section the consumer 

should ask questions, a statement that 

the consumer may obtain additional 

information at the Web site of the 

Federal Reserve Board, and a reference 

to that Web site. 

(6) Format—(i) Location. The 

statements required by paragraph (f)(1) 

of this section must be disclosed 

together. The disclosure required by 

paragraph (f)(2) of this section must be 

made together with the disclosure 

paragraph (f)(3) of this section. The 

statements required by paragraph (f)(5) 

of this section must be made together. 

(ii) Highlighting. The first statement 

required to be disclosed by paragraphs 

(f)(1) and (f)(5) of this section, and the 

statement required to be disclosed by 

paragraph (f)(2), must be disclosed in 

bold text. 

(iii) Form of disclosures. The creditor 

must provide the disclosures required 

by paragraphs (f)(1) through (5) of this 

section in a manner substantially 

similar to Forms H–19(A), H–19(B), or 

H–19(C) in Appendix H to this part. 

(g) Identification of creditor and loan 

originator—(1) Creditor. The identity of 

the creditor making the disclosures. 

(2) Loan originator. The loan 

originator’s unique identifier, as defined 

by the Secure and Fair Enforcement for 

Mortgage Licensing Act of 2008 Sections 

1503(3) and (12), 12 U.S.C. 5102(3) and 

(12). 

(h) Credit insurance and debt 

cancellation and debt suspension 

coverage. The disclosures specified in 

paragraphs (h)(1)–(10) of this section, 

which shall be grouped together and 

substantially similar in headings, 

content and format to Model Clauses H– 

17(A) and H–17(C) in Appendix H to 

this part. 

(1)(i) If the product is optional, the 

term ‘‘OPTIONAL COSTS,’’ in 

capitalized and bold letters, along with 

the name of the program, in bold letters; 

or 

(ii) If the product is required, the 

name of the program, in bold letters. 

(2) If the product is optional, the term 

‘‘STOP,’’ in capitalized and bold letters, 

along with a statement that the 

consumer does not have to buy the 

product to get the loan. The term ‘‘not’’ 

shall be in bold text and underlined. 

(3) A statement that if the consumer 

already has insurance, then the policy 

or coverage may not provide the 

consumer with additional benefits. 

(4) A statement that other types of 

insurance may give the consumer 

similar benefits and are often less 

expensive. 

(5) (i) If the eligibility restrictions are 

limited to age and/or employment, a 

statement that based on the creditor’s 

review of the consumer’s age and/or 

employment status at this time, the 

consumer would be eligible to receive 

benefits. 

(ii) If there are other eligibility 

restrictions in addition to age and/or 

employment, a statement that based on 

the creditor’s review of the consumer’s 

age and/or employment status at this 

time, the consumer may be eligible to 

receive benefits. 

(6) If there are other eligibility 

restrictions in addition to age and/or 

employment, such as pre-existing health 

conditions, a statement that the 

consumer may not qualify to receive any 

benefits because of other eligibility 

restrictions. 

(7) If the product is a debt suspension 

agreement, a statement that the 

obligation to pay loan principal and 

interest is only suspended, and that 

interest will continue to accrue during 

the period of suspension. 

(8) A statement that the consumer 

may obtain additional information about 

the product at the Web site of the 

Federal Reserve Board, and reference to 

that Web site. 

(9)(i) If the product is optional, a 

statement of the consumer’s request to 

purchase or enroll in the optional 

product and a statement of the cost of 

the product expressed as a dollar 

amount per month or per year, as 

applicable, together with the loan 

amount and the term of the product in 

years; or 

(ii) If the product is required, a 

statement that the product is required, 

along with a statement of the cost of the 

product expressed as a dollar amount 

per month or per year, as applicable, 

together with the loan amount and the 

term of the product in years. 

(iii) The cost, month or year, loan 

amount, and term of the product shall 

be underlined. 

(10) A designation for the signature of 

the consumer and the date of the 

signing. 

(i) Required deposit. If the creditor 

requires the consumer to maintain a 

deposit as a condition of the specific 

transaction, a statement that the annual 

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43338 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

percentage rate does not reflect the 

effect of the required deposit. A 

required deposit need not include: 

(1) An escrow account for items such 

as taxes, insurance or repairs; or 

(2) A deposit that earns not less than 

5 percent per year. 

(j) Separate disclosures. The following 

information must be provided 

separately from the other information 

required to be disclosed under this 

section. 

(1) Itemization of amount financed. 

The creditor shall provide one of the 

following disclosures: 

(i) A separate written itemization of 

the amount financed, including: 

(A) The amount of any proceeds 

distributed directly to the consumer. 

(B) The amount credited to the 

consumer’s account with the creditor. 

(C) Any amounts paid to other 

persons by the creditor on the 

consumer’s behalf. The creditor shall 

identify those persons, except that the 

following payees may be described 

using general terms and need not be 

further identified: Public officials or 

government agencies, credit reporting 

agencies, appraisers, and insurance 

companies. 

(D) The prepaid finance charge. 

(ii) A statement that the consumer has 

the right to receive a written itemization 

of the amount financed, together with a 

space for the consumer to indicate 

whether it is desired. If the consumer 

requests it, the creditor shall provide an 

itemization that satisfies paragraph 

(j)(1)(i) of this section at the same time 

as the other disclosures required by this 

section. 

(iii) A good faith estimate of 

settlement costs provided under the 

Real Estate Settlement Procedures Act, 

12 U.S.C. 2601 et seq. (RESPA), in 

connection with disclosures under this 

section delivered within three business 

days of application pursuant to 

§ 226.19(a)(1), or the HUD–1 settlement 

statement provided under RESPA, in 

connection with disclosures under this 

section delivered three business days 

before consummation pursuant to 

§ 226.19(a)(2). The alternative provided 

by this paragraph (j)(1)(iii) is available 

whether or not those disclosures are 

required by RESPA, but the HUD–1 

settlement statement satisfies this 

requirement only if it is provided to the 

consumer at the time required by 

§ 226.19(a)(2). 

(2) Rebate. If the obligation includes 

a finance charge other than one 

computed from time to time by 

application of a rate to the unpaid 

principal balance, a statement 

indicating whether or not the consumer 

is entitled to a rebate of any finance 

charge if the obligation is prepaid in 

full. 

(3) Late payment. Any dollar or 

percentage charge that may be imposed 

before maturity due to a late payment, 

other than a deferral or extension 

charge. 

(4) Property insurance. A statement 

that the consumer may obtain property 

insurance from any insurer that is 

acceptable to the creditor. 

(5) Contract reference. A statement 

that the consumer should refer to the 

appropriate contract document for 

information about nonpayment, default, 

the right to accelerate the maturity of 

the obligation, and prepayment rebates 

and penalties. At the creditor’s option, 

the statement may also include a 

reference to the contract for further 

information about security interests and 

about the creditor’s policy regarding 

assumption of the obligation. 

(6) Assumption policy. A statement 

whether or not a subsequent purchaser 

of the real property or dwelling from the 

consumer may be permitted to assume 

the remaining obligation on its original 

terms. 

12. Appendix G to Part 226, as 

amended on January 29, 2009 (74 FR 

5422) is amended by: 

A. Adding entries for G–16(C) and G– 

16(D) to the table of contents at the 

beginning of the appendix; and 

B. Adding new Model Clause G–16(C) 

and new Sample G–16(D) in numerical 

order. 

Appendix G to Part 226—Open-End 

Model Forms and Clauses 

* * * * * 

flG–16(C) Credit Insurance, Debt 

Cancellation or Debt Suspension Model 

Clause (§ 226.4(d)(1) and (d)(3)) 

G–16(D) Credit Insurance, Debt Cancellation 

or Debt Suspension Sample (§ 226.4(d)(1) and 

(d)(3))fi 

* * * * * 

flG–16(C) Credit Insurance, Debt 

Cancellation or Debt Suspension Model 

Clause 

OPTIONAL COSTS 

(Name of Program) 

STOP. You do not have to buy this product 

to get this loan. 

• If you have insurance already, this policy 

may not provide you with any additional 

benefits. 

• Other types of insurance can give you 

similar benefits and are often less expensive. 

• Based on our review of your age and/or 

employment status at this time, you 

[would][may] be eligible to receive benefits. 

• [However, you may not qualify to receive 

any benefits because of other eligibility 

restrictions.] 

To learn more about [credit insurance][debt 

cancellation coverage][debt suspension 

coverage], go to (Board’s Web site). 

b Yes, I want to purchase optional (name 

of program) at an additional cost of (cost) per 

(month or year) for a loan of (loan amount) 

with a [policy/coverage] term of (term in 

years) years. 

lllllllllllllllllllll

Signature of Borrower(s) 

lllllllllllllllllllll

Date 

G–16(D) Credit Insurance, Debt Cancellation 

or Debt Suspension Sample 

OPTIONAL COSTS 

Credit Life Insurance 

STOP. You do not have to buy this product 

to get this loan. 

• If you have insurance already, this policy 

may not provide you with any additional 

benefits. 

• Other types of insurance can give you 

similar benefits and are often less expensive. 

• Based on our review of your age and/or 

employment status at this time, you may be 

eligible to receive benefits. 

• However, you may not qualify to receive 

any benefits because of other eligibility 

restrictions. 

To learn more about credit insurance, go to 

http://www.xxx.gov. 

b Yes, I want to purchase optional credit 

life insurance at an additional cost of $72 per 

month for a loan of $100,000 with a policy 

term of 10 years. 

lllllllllllllllllllll

Signature of Borrower(s) 

lllllllllllllllllllll

Datefi 

13. Appendix H to Part 226, as amended 

on January 29, 2009 (74 FR 5441) is amended 

by: 

A. Revising the table of contents at the 

beginning of the appendix; 

B. Republishing H–4(A); 

C. Removing H–4(B), H–4(C) and H–4(D); 

D. Republishing H–5; 

E. Removing and reserving H–6; 

F. Republishing H–7; 

G. Removing and reserving H–13 through 

H–15; 

H. Revising H–16; and 

I. Adding new H–4(B) through H–4(L), H– 

17(C) and H–17(D), and H–18 through H–23 

in numerical order. 

Appendix H to Part 226—Closed-End 

Model Forms and Clauses 

* * * * * 

H–4(A)—Variable-Rate Model Clauses 

(§ 226.18(f)[(1)]) 

H–4(B)—[Variable-Rate Model Clauses 

(§ 226.18(f)(2)]flAdjustable-Rate Loan 

Program Model Form (§ 226.19(b))fi 

H–4(C)—[Variable-Rate Model Clauses 

(§ 226.19(b))]flAdjustable-Rate Loan 

Program Model Clauses (§ 226.19(b))fi 

H–4(D)—[Variable-Rate Model Clauses 

(§ 226.20(c))]flAdjustable-Rate Loan 

Program Sample (Hybrid ARM) 

(§ 226.19(b))fi 

flH–4(E)—Adjustable-Rate Loan Program 

Sample (Interest Only ARM) (§ 226.19(b)) 

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H–4(F)—Adjustable-Rate Loan Program 

Sample (Payment Option ARM) 

(§ 226.19(b)) 

H–4(G)—Adjustable-Rate Adjustment Notice 

Model Form (§ 226.20(c)) 

H–4(H)—Adjustable-Rate Adjustment Notice 

Model Clauses (§ 226.20(c)) 

H–4(I)—Adjustable-Rate Adjustment Notice 

Sample (Interest Only ARM) (§ 226.20(c)) 

H–4(J)—Adjustable-Rate Adjustment Notice 

Sample (Hybrid ARM) (§ 226.20(c)) 

H–4(K)—Adjustable-Rate Annual Notice 

Model Form (§ 226.20(c)) 

H–4(L)—Negative Amortization Monthly 

Disclosure Model Form (§ 226.20(d))fi 

* * * * * 

H–6—[Assumption Policy Model Clause 

(§ 226.18(q))]flReservedfi 

* * * * * 

H–13—[Mortgage with Demand Feature 

Sample]flReservedfi 

H–14—[Variable-Rate Mortgage Sample 

(§ 226.19(b))]flReservedfi 

H–15—[Graduated-Payment Mortgage 

Sample]flReservedfi 

H–16—[Mortgage Sample 

(§ 226.32)]flSection 32 Loan Model 

Clauses (§ 226.32(c))fi 

* * * * * 

flH–17(C)—Credit Insurance, Debt 

Cancellation or Debt Suspension Model 

Clause (§ 226.4(d)(1), (d)(3) and 

§ 226.38(h)) 

H–17(D)—Credit Insurance, Debt 

Cancellation or Debt Suspension Sample 

(§ 226.4(d)(1), (d)(3), and § 226.38(h)) 

H–18—Creditor-Placed Property Insurance 

Model Clause (§ 226.20(e)) 

H–19(A)—Fixed Rate Mortgage Model Form 

(§ 226.38) 

H–19(B)—Adjustable-Rate Mortgage Model 

Form (§ 226.38) 

H–19(C)—Mortgage with Negative 

Amortization Model Form (§ 226.38) 

H–19(D)—Fixed Rate Mortgage with Balloon 

Payment Sample (§ 226.38) 

H–19(E)—Fixed Rate Mortgage with Interest 

Only Sample (§ 226.38) 

H–19(F)—Step-Payment Mortgage Sample 

(§ 226.38) 

H–19(G)—Hybrid Adjustable-Rate Mortgage 

Sample (§ 226.38) 

H–19(H)—Adjustable-Rate Mortgage with 

Interest Only Sample (§ 226.38) 

H–19(I)—Adjustable-Rate Mortgage with 

Payment Options Sample (§ 226.38) 

H–20—Balloon Payment Model Clause 

(§ 226.38(c)(5)) 

H–21—Introductory Rate Model Clause 

(§ 226.38(c)(2)(iii)) 

H–22—Key Questions About Risk Model 

Clauses (§ 226.38(d)) 

H–23—Separate Disclosure Model Clauses 

(§ 226.38(j)(2)–(6))fi 

* * * * * 

H–4(A)—Variable Rate Model Clauses 

The annual percentage rate may increase 

during the term of this transaction if: 

[the prime interest rate of (creditor) 

increases.] 

[the balance in your deposit account falls 

below $llll.] 

[you terminate your employment with 

(employer).] 

[The interest rate will not increase 

abovell%.] 

[The maximum interest rate increase at one 

time will bell%.] 

[The rate will not increase more than once 

every (time period).] 

Any increase will take the form of: 

[higher payment amounts.] 

[more payments of the same amount.] 

[a larger amount due at maturity.] 

Example based on the specific transaction 

[If the interest rate increases byll% in 

(time period), 

[your regular payments will increase to 

$llll.] 

[you will have to makelladditional 

payments.] 

[your final payment will increase to 

$llll.]] 

Example based on a typical transaction 

[If your loan were for $llllatll% for 

(term) and the rate increased toll% in 

(time period), 

[your regular payments would increase by 

$llll.] 

[you would have to makelladditional 

payments.] 

[your final payment would increase by 

$llll.]] 

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H–4(C)—Adjustable-Rate Loan Program 

Model Clauses 

Interest Rate and Payment 

(a) Limits on rate or payment changes 

[If a rate cap prevents us from adding part 

of an interest rate, we can add that increase 

at a later adjustment date.] 

(b) Conversion feature 

[Conversion Feature 

You have the option to convert your loan 

to a fixed rate loan for (length of time). If you 

convert your loan to a fixed rate loan, the 

[rate] [payment] may not increase more than 

(frequency)[ or ll% overall]. [You may 

have a higher interest rate when you convert 

to a fixed rate loan.] 

[You may have to pay fees when you 

convert to a fixed rate loan.]] 

(c) Preferred rate 

[Preferred Rate 

The interest rate is a preferred rate that 

could [increase] [decrease] byll% if 

(description of event).] [You could pay fees 

if [one or more] (description of event(s)) 

occur(s).] 


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H–4(H) Adjustable-Rate Adjustment Notice 

Model Clauses 

Disclosure of New Monthly Payment 

[Your new payment covers all of the 

interest that you owe this month, but none 

of the principal, and therefore will not 

reduce your loan balance. The payment 

needed to fully pay off your loan by the end 

of the loan term at the new interest rate is 

$llll.] 

[Your new payment covers only part of the 

interest that you owe this month, and 

therefore unpaid interest will be added to 

your loan balance. The payment needed to 

fully pay off your loan by the end of the loan 

term at the new interest rate is $llll.] 

[Your new payment covers only part of the 

interest that you owe this month, and 

therefore the term of your loan will increase. 

The payment needed to fully pay off your 

loan by the end of the previous loan term at 

the new interest rate is $llll.] 


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* * * * * 


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* * * * * 

H–5—Demand Feature Model Clauses 

This obligation [is payable on 

demand.][has a demand feature.] 

[All disclosures are based on an assumed 

maturity of one year.] 

H–6—[Assumption Policy Model 

Clause]flReservedfi 

[Assumption: Someone buying your house 

[may, subject to conditions, be allowed 

to][cannot] assume the remainder of the 

mortgage on the original terms.] 

H–7—Required Deposit Model Clause 

The annual percentage rate does not take 

into account your required deposit. 

* * * * * 

H–13—[Mortgage With Demand Feature 

Sample]flReservedfi 

H–14—[Variable-Rate Mortgage 

Sample]flReservedfi 

H–15—[Graduated-Payment Mortgage 

Sample]flReservedfi 

H–16—[Mortgage Sample]flSection 32 Loan 

Model Clausesfi 

[You are not required to complete this 

agreement merely because you have received 

these disclosures or have signed a loan 

application. 

If you obtain this loan, the lender will have 

a mortgage on your home. 

YOU COULD LOSE YOUR HOME, AND 

ANY MONEY YOU HAVE PUT INTO IT, IF 

YOU DO NOT MEET YOUR OBLIGATIONS 

UNDER THE LOAN.] 

flIF YOU ARE UNABLE TO MAKE THE 

PAYMENTS ON THIS LOAN, YOU COULD 

LOSE YOUR HOME. 

You have no obligation to accept this loan. 

Your signature below only confirms that you 

have received this form.fi 

You are borrowing $llll (optional 

credit insurance is b is not b included in 

this amount). 

The annual percentage rate on your loan 

will be:llll%. 

Your regular (frequency) payment will be: 

$llll. 

[At the end of your loan, will still owe use: 

$ (balloon payment).] 

[Your interest rate may increase. Increase 

in the interest rate could increase your 

payment. The highest amount your payment 

could increase is to $llll.] 

* * * * * 

flH–17(C)—Credit Insurance, Debt 

Cancellation or Debt Suspension Model 

Clause 

[OPTIONAL COSTS] 

(Name of Program) 

[STOP. You do not have to buy this product 

to get this loan.] 

• If you have insurance already, this policy 

may not provide you with any additional 

benefits. 

• Other types of insurance can give you 

similar benefits and are often less expensive. 

• Based on our review of your age and/or 

employment status at this time, you 

[would][may] be eligible to receive benefits. 

• [However, you may not qualify to receive 

any benefits because of other eligibility 

restrictions.] 

To learn more about [credit insurance][debt 

cancellation coverage][debt suspension 

coverage], go to (Web site of the Federal 

Reserve Board). 

b [Yes, I want to purchase optional (name 

of program) at an additional cost of (cost) per 

(month or year) for a loan of (loan amount) 

with a (policy/coverage) term of (term in 

years) years.] 

[(Name of program) is required and costs 

(cost) per (month or year) for a loan of (loan 

amount) with a [policy/coverage] term of 

(term in years) years.] 

lllllllllllllllllllll

Signature of Borrower(s) 

lllllllllllllllllllll

Date 

H–17(D)—Credit Insurance, Debt 

Cancellation or Debt Suspension Sample 

OPTIONAL COSTS 

Credit Life Insurance 

STOP. You do not have to buy this product 

to get this loan. 

• If you have insurance already, this policy 

may not provide you with any additional 

benefits. 

• Other types of insurance can give you 

similar benefits and are often less expensive. 

• Based on our review of your age and/or 

employment status at this time, you may be 

eligible to receive benefits. 

• However, you may not qualify to receive 

any benefits because of other eligibility 

restrictions. 

To learn more about credit insurance, go to 

www.xxx.gov. 

b Yes, I want to purchase optional credit life 

insurance at an additional cost of $72 per 

month for a loan of $100,000 with a policy 

term of 10 years. 

lllllllllllllllllllll

Signature of Borrower(s) 

lllllllllllllllllllll

Date 

H–18—Creditor-Placed Property Insurance 

Model Clause 

(Creditor name and contact information) 

Re: (loan number) and (property address/ 

description) 

Under our agreement, you must maintain 

adequate insurance coverage on the property. 

Our records show that your insurance policy 

has expired or been cancelled, and we do not 

have evidence that you have obtained new 

insurance coverage. Under our agreement, we 

can buy property insurance on your behalf 

and charge you for the cost as early as (date). 

Therefore, we request that you provide us 

with proof of insurance by (description of 

procedure for providing proof of insurance). 

Please consider the following facts about 

the insurance policy that we buy: 

• The cost of this insurance policy is 

$llll per year and is probably 

significantly higher than the cost of 

insurance you can buy through your own 

insurance agent. 

• This insurance policy may not provide 

as much coverage as an insurance policy you 

buy through your own insurance agent]. 

If you have any questions, please contact 

us at (contact information). 

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BILLING CODE 6210–01–C 


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H–20—Balloon Payment Model Clause 

[Final Balloon Payment due (date): 

$llll] 

H–21—Introductory Rate Model Clause 

[Introductory Rate Notice 

You have a discounted introductory rate of 

llll% that ends after (period). 

In the (date), even if market rates do not 

change, this rate will increase toll%.] 

H–22—Key Questions About Risk Model 

Clauses 

(a) Interest only feature 

[Will any of my monthly payments be 

interest-only?] 

[YES. Your (frequency) payments for the first 

(period) of the loan][This loan gives you the 

choice to make (frequency) payments that] 

cover the interest you owe each month, but 

none of the principal. Making these 

(frequency) payments means your loan 

amount will stay the same and you will be 

no closer to having it paid off.] 

(b) Negative amortization feature 

[Even if I make my monthly payments, could 

my loan balance increase?] 

[YES. Your minimum payment covers only 

part of the interest you owe each (period) and 

none of the principal. The unpaid interest 

will be added to your loan amount, which 

over time will increase the total amount you 

are borrowing and cause you to lose equity 

in your home.] 

(c) Balloon payment feature 

[Will I owe a balloon payment?] 

[YES. You will owe a balloon payment of 

$llll, due in (date of payment).] 

(d) Demand feature 

[Can my lender demand full repayment at 

any time?] 

[YES. We can demand that you pay off the 

full amount of your loan. We will give you 

at least (period) notice.] 

(e) No-documentation or low-documentation 

feature 

[Will my loan have a higher rate or fees 

because I did not document my employment, 

income or other assets?] 

[YES. If you provide more documentation, 

you could decrease your interest rate or fees.] 

(f) Shared-equity or shared-appreciation 

feature 

[Do I have to share any equity I gain?] 

[YES. We are entitled to ll% of any gain 

you make when you sell or refinance this 

property.] 

H–23—Separate Disclosure Model Clauses 

(a) Rebate 

[If you pay off or refinance your loan, or 

sell this property early, you will receive a 

refund of some of the interest and fees you 

have paid on your loan.] 

(b) Late Payment 

[If you make a payment more than (number 

of days) days late, you may be charged a 

penalty equal to [$llll][ll%].] 

(c) Property Insurance 

[You may get property insurance from any 

insurer that is acceptable to us.] 

(d) Contract Reference 

Read your loan contract to find out what 

happens if you stop making payments, 

default, or pay off or refinance the loan early. 

(e) Assumption Policy 

[If you sell your home after you take out 

this loan, we may permit the new buyer to 

take over the payments on your mortgage.]fi 

14. In Supplement I to Part 226, as 

amended on July 30, 2008 (73 FR 44604), and 

on January 29, 2009 (74 FR 5450): 

A. Under Section 226.2—Definitions and 

Rules of Construction, 2(a)(24) Residential 

mortgage transaction, paragraphs 1, 2, and 

5(ii) and 5(iii) are revised. 

B. Section 226.4—Finance Charge, Section 

226.17—General Disclosure Requirements, 

Section 226.18—Content of Disclosures, 

Section 226.19—Certain Mortgage and 

Variable-Rate Transactions, and Section 

226.20—Subsequent Disclosure 

Requirements are revised. 

C. Under Section 226.24—Advertising, 

24(c) Advertisement of rate of finance charge, 

paragraph 4 is revised. 

D. Under Section 226.25—Record 

Retention, 25(a) General rule, new paragraph 

5 is added. 

E. Under Section 226.30—Limitation on 

Rates, paragraph 1 is revised. 

F. Under Section 226.32—Requirements for 

Certain Closed-End Home Mortgages, 32(b) 

Definitions is removed, 32(c) Disclosures, 

paragraph 1 is removed, and 32(c)(5) Amount 

borrowed, paragraph 1 is revised. 

G. Under Section 226.35—Prohibited Acts 

or Practices in Connection With HigherPriced Mortgage Loans, 35(a) Higher-priced 

mortgage loans, Paragraph 35(a)(2), 

paragraph 4 is revised and new paragraph 5 

is added. 

H. Under Section 226.36—Prohibited Acts 

or Practices in Connection with Credit 

Secured by a Consumer’s Principal Dwelling, 

the heading is revised, 36(a) Mortgage broker 

defined, the heading is revised, paragraph 1 

is revised, and new paragraph 2 is added, 

36(b) Misrepresentation of value of 

consumer’s principal dwelling, the heading is 

revised, and new 36(d) Prohibited payments 

to loan originators and 36(e) Prohibition on 

steering are added. 

I. New Section 226.37—Special Disclosure 

Requirements for Closed-End Mortgages and 

Section 226.38—Content of Disclosures for 

Closed-End Mortgages are added. 

J. Under Appendices G and H—Open-End 

and Closed-End Model Forms and Clauses, 

paragraphs 1 and 2 are revised. 

K. Appendix H—Closed-End Model Forms 

and Clauses is revised. 

Supplement I to Part 226—Official Staff 

Interpretations 

* * * * * 

SUBPART A—GENERAL 

* * * * * 

Section 226.2—Definitions and Rules of 

Construction 

* * * * * 

2(a)(24) Residential mortgage 

transaction. 

1. Relation to other sections. This 

term is important in [five]flthreefi 

provisions in the regulation: 

i. Section 226.4(c)(7)—exclusions 

from the finance charge 

ii. Section 226.15(f)—exemption from 

the right of rescission 

[Section 226.18(q)—whether or not 

the obligation is assumable] 

[Section 226.20(b)—disclosure 

requirements for assumptions] 

iii. Section 226.23(f)—exemption from 

the right of rescission 

2. Lien status. The definition is not 

limited to first-lien transactions. [For 

example, a consumer might assume a 

paid-down first mortgage (or borrow 

part of the purchase price) and borrow 

the balance of the purchase price from 

a creditor who takes a second mortgage. 

The second mortgage transaction is a 

‘‘residential mortgage transaction’’ if the 

dwelling purchased is the consumer’s 

principal residence.] 

* * * * * 

5. Acquisition. * * * 

ii. Examples of new transactions 

involving a previously acquired 

dwelling include the financing of a 

balloon payment due under a land sale 

contract and an extension of credit 

made to a joint owner of property to buy 

out the other joint owner’s interest. [In 

these instances, disclosures are not 

required under § 226.18(q (assumability 

policies). However, the]flThefi 

rescission rules of §§ 226.15 and 226.23 

do apply to these new transactions. 

[iii. In other cases, the disclosure and 

rescission rules do not apply. For 

example, where a buyer enters into a 

written agreement with the creditor 

holding the seller’s mortgage, allowing 

the buyer to assume the mortgage, if the 

buyer had previously purchased the 

property and agreed with the seller to 

make the mortgage payments, 

§ 226.20(b) does not apply (assumptions 

involving residential mortgages).] 

* * * * * 

§ 226.4—Finance Charge. 

4(a) Definition. 

1. Charges in comparable cash 

transactions. Charges imposed 

uniformly in cash and credit 

transactions are not finance charges. In 

determining whether an item is a 

finance charge, the creditor should 

compare the credit transaction in 

question with a similar cash transaction. 

A creditor financing the sale of property 

or services may compare charges with 

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those payable in a similar cash 

transaction by the seller of the property 

or service. 

i. For example, the following items 

are not finance charges: 

A. Taxes, license fees, or registration 

fees paid by both cash and credit 

customers. 

B. Discounts that are available to cash 

and credit customers, such as quantity 

discounts. 

C. Discounts available to a particular 

group of consumers because they meet 

certain criteria, such as being members 

of an organization or having accounts at 

a particular financial institution. This is 

the case even if an individual must pay 

cash to obtain the discount, provided 

that credit customers who are members 

of the group and do not qualify for the 

discount pay no more than the 

nonmember cash customers. 

D. Charges for a service policy, auto 

club membership, or policy of insurance 

against latent defects offered to or 

required of both cash and credit 

customers for the same price. 

ii. In contrast, the following items are 

finance charges: 

A. Inspection and handling fees for 

the staged disbursement of constructionloan proceeds. 

B. Fees for preparing a Truth in 

Lending disclosure statement, if 

permitted by law (for example, the Real 

Estate Settlement Procedures Act 

prohibits such charges in certain 

transactions secured by real property). 

C. Charges for a required maintenance 

or service contract imposed only in a 

credit transaction. 

iii. If the charge in a credit transaction 

exceeds the charge imposed in a 

comparable cash transaction, only the 

difference is a finance charge. For 

example: 

A. If an escrow agent is used in both 

cash and credit sales of real estate and 

the agent’s charge is $100 in a cash 

transaction and $150 in a credit 

transaction, only $50 is a finance 

charge. 

2. Costs of doing business. Charges 

absorbed by the creditor as a cost of 

doing business are not finance charges, 

even though the creditor may take such 

costs into consideration in determining 

the interest rate to be charged or the 

cash price of the property or service 

sold. However, if the creditor separately 

imposes a charge on the consumer to 

cover certain costs, the charge is a 

finance charge if it otherwise meets the 

definition. For example: 

i. A discount imposed on a credit 

obligation when it is assigned by a 

seller-creditor to another party is not a 

finance charge as long as the discount 

is not separately imposed on the 

consumer. (See § 226.4(b)(6).) 

ii. A tax imposed by a State or other 

governmental body on a creditor is not 

a finance charge if the creditor absorbs 

the tax as a cost of doing business and 

does not separately impose the tax on 

the consumer. (For additional 

discussion of the treatment of taxes, see 

other commentary to § 226.4(a).) 

3. Forfeitures of interest. If the 

creditor reduces the interest rate it pays 

or stops paying interest on the 

consumer’s deposit account or any 

portion of it for the term of a credit 

transaction (including, for example, an 

overdraft on a checking account or a 

loan secured by a certificate of deposit), 

the interest lost is a finance charge. (See 

the commentary to § 226.4(c)(6).) For 

example: 

i. A consumer borrows $5,000 for 90 

days and secures it with a $10,000 

certificate of deposit paying 15% 

interest. The creditor charges the 

consumer an interest rate of 6% on the 

loan and stops paying interest on $5,000 

of the $10,000 certificate for the term of 

the loan. The interest lost is a finance 

charge and must be reflected in the 

annual percentage rate on the loan. 

ii. However, the consumer must be 

entitled to the interest that is not paid 

in order for the lost interest to be a 

finance charge. For example: 

A. A consumer wishes to buy from a 

financial institution a $10,000 certificate 

of deposit paying 15% interest but has 

only $4,000. The financial institution 

offers to lend the consumer $6,000 at an 

interest rate of 6% but will pay the 15% 

interest only on the amount of the 

consumer’s deposit, $4,000. The 

creditor’s failure to pay interest on the 

$6,000 does not result in an additional 

finance charge on the extension of 

credit, provided the consumer is 

entitled by the deposit agreement with 

the financial institution to interest only 

on the amount of the consumer’s 

deposit. 

B. A consumer enters into a combined 

time deposit/credit agreement with a 

financial institution that establishes a 

time deposit account and an open-end 

line of credit. The line of credit may be 

used to borrow against the funds in the 

time deposit. The agreement provides 

for an interest rate on any credit 

extension of, for example, 1%. In 

addition, the agreement states that the 

creditor will pay 0% interest on the 

amount of the time deposit that 

corresponds to the amount of the credit 

extension(s). The interest that is not 

paid on the time deposit by the financial 

institution is not a finance charge (and 

therefore does not affect the annual 

percentage rate computation). 

4. Treatment of transaction fees on 

credit card plans. Any transaction 

charge imposed on a cardholder by a 

card issuer is a finance charge, 

regardless of whether the issuer imposes 

the same, greater, or lesser charge on 

withdrawals of funds from an asset 

account such as a checking or savings 

account. For example: 

i. Any charge imposed on a credit 

cardholder by a card issuer for the use 

of an automated teller machine (ATM) 

to obtain a cash advance (whether in a 

proprietary, shared, interchange, or 

other system) is a finance charge 

regardless of whether the card issuer 

imposes a charge on its debit 

cardholders for using the ATM to 

withdraw cash from a consumer asset 

account, such as a checking or savings 

account. 

ii. Any charge imposed on a credit 

cardholder for making a purchase or 

obtaining a cash advance outside the 

United States, with a foreign merchant, 

or in a foreign currency is a finance 

charge, regardless of whether a charge is 

imposed on debit cardholders for such 

transactions. The following principles 

apply in determining what is a foreign 

transaction fee and the amount of the 

fee: 

A. Included are fees imposed when 

transactions are made in a foreign 

currency and converted to U.S. dollars; 

fees imposed when transactions are 

made in U.S. dollars outside the U.S.; 

and fees imposed when transactions are 

made (whether in a foreign currency or 

in U.S. dollars) with a foreign merchant, 

such as via a merchant’s Web site. For 

example, a consumer may use a credit 

card to make a purchase in Bermuda, in 

U.S. dollars, and the card issuer may 

impose a fee because the transaction 

took place outside the United States. 

B. Included are fees imposed by the 

card issuer and fees imposed by a third 

party that performs the conversion, such 

as a credit card network or the card 

issuer’s corporate parent. (For example, 

in a transaction processed through a 

credit card network, the network may 

impose a 1 percent charge and the cardissuing bank may impose an additional 

2 percent charge, for a total of a 3 

percentage point foreign transaction fee 

being imposed on the consumer.) 

C. Fees imposed by a third party are 

included only if they are directly passed 

on to the consumer. For example, if a 

credit card network imposes a 1 percent 

fee on the card issuer, but the card 

issuer absorbs the fee as a cost of doing 

business (and only passes it on to 

consumers in the general sense that the 

interest and fees are imposed on all its 

customers to recover its costs), then the 

fee is not a foreign transaction fee and 

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need not be disclosed. In another 

example, if the credit card network 

imposes a 1 percent fee for a foreign 

transaction on the card issuer, and the 

card issuer imposes this same fee on the 

consumer who engaged in the foreign 

transaction, then the fee is a foreign 

transaction fee and a finance charge. 

D. A card issuer is not required to 

disclose a fee imposed by a merchant. 

For example, if the merchant itself 

performs the currency conversion and 

adds a fee, this fee need not be disclosed 

by the card issuer. Under § 226.9(d), a 

card issuer is not obligated to disclose 

finance charges imposed by a party 

honoring a credit card, such as a 

merchant, although the merchant is 

required to disclose such a finance 

charge if the merchant is subject to the 

Truth in Lending Act and Regulation Z. 

E. The foreign transaction fee is 

determined by first calculating the 

dollar amount of the transaction by 

using a currency conversion rate outside 

the card issuer’s and third party’s 

control. Any amount in excess of that 

dollar amount is a foreign transaction 

fee. Conversion rates outside the card 

issuer’s and third party’s control 

include, for example, a rate selected 

from the range of rates available in the 

wholesale currency exchange markets, 

an average of the highest and lowest 

rates available in such markets, or a 

government-mandated or governmentmanaged exchange rate (or a rate 

selected from a range of such rates). 

F. The rate used for a particular 

transaction need not be the same rate 

that the card issuer (or third party) itself 

obtains in its currency conversion 

operations. In addition, the rate used for 

a particular transaction need not be the 

rate in effect on the date of the 

transaction (purchase or cash advance). 

5. Taxes. 

i. Generally, a tax imposed by a State 

or other governmental body solely on a 

creditor is a finance charge if the 

creditor separately imposes the charge 

on the consumer. 

ii. In contrast, a tax is not a finance 

charge (even if it is collected by the 

creditor) if applicable law imposes the 

tax: 

A. Solely on the consumer; 

B. On the creditor and the consumer 

jointly; 

C. On the credit transaction, without 

indicating which party is liable for the 

tax; or 

D. On the creditor, if applicable law 

directs or authorizes the creditor to pass 

the tax on to the consumer. (For 

purposes of this section, if applicable 

law is silent as to passing on the tax, the 

law is deemed not to authorize passing 

it on.) 

iii. For example, a stamp tax, property 

tax, intangible tax, or any other State or 

local tax imposed on the consumer, or 

on the credit transaction, is not a 

finance charge even if the tax is 

collected by the creditor. 

iv. In addition, a tax is not a finance 

charge if it is excluded from the finance 

charge by another provision of the 

regulation or commentary (for example, 

if the tax is imposed uniformly in cash 

and credit transactions). 

fl6. Transactions with no seller. In a 

transaction where there is no seller, 

such as a refinancing of an existing 

extension of credit described in 

§ 226.20(a), there is no comparable cash 

transaction. Thus, the exclusion from 

the finance charge of charges of a type 

payable in a comparable cash 

transaction does not apply to such 

transactions.fi 

4(a)(1) Charges by third parties. 

1. Choosing the provider of a required 

service. An example of a third-party 

charge included in the finance charge is 

the cost of required mortgage insurance, 

even if the consumer is allowed to 

choose the insurer. 

2. Annuities associated with reverse 

mortgages. Some creditors offer 

annuities in connection with a reversemortgage transaction. The amount of the 

premium is a finance charge if the 

creditor requires the purchase of the 

annuity incident to the credit. Examples 

include the following: 

i. The credit documents reflect the 

purchase of an annuity from a specific 

provider or providers. 

ii. The creditor assesses an additional 

charge on consumers who do not 

purchase an annuity from a specific 

provider. 

iii. The annuity is intended to replace 

in whole or in part the creditor’s 

payments to the consumer either 

immediately or at some future date. 

4(a)(2) Special rule; closing agent 

charges. 

1. General. This rule applies to 

charges by a third party serving as the 

closing agent for the particular loan. An 

example of a closing agent charge 

included in the finance charge is a 

courier fee where the creditor requires 

the use of a courier. 

2. Required closing agent. If the 

creditor requires the use of a closing 

agent, fees charged by the closing agent 

are included in the finance charge only 

if the creditor requires the particular 

service, requires the imposition of the 

charge, or retains a portion of the 

charge. Fees charged by a third-party 

closing agent may be otherwise 

excluded from the finance charge under 

§ 226.4. For example, a fee that would 

be paid in a comparable cash 

transaction may be excluded under 

§ 226.4(a). A charge for conducting or 

attending a closing is a finance charge 

and may be excluded only if the charge 

is included in and is incidental to a 

lump-sum fee excluded under 

§ 226.4(c)(7). 

fl3. Closed-end mortgage 

transactions. Comments 4(a)(2)–1 and 

4(a)(2)–2 do not apply to closed-end 

transactions secured by real property or 

a dwelling, pursuant to § 226.4(g).fi 

4(a)(3) Special rule; mortgage broker 

fees. 

1. General. A fee charged by a 

mortgage broker is excluded from the 

finance charge if it is the type of fee that 

is also excluded when charged by the 

creditor. For example, to exclude an 

application fee from the finance charge 

under § 226.4(c)(1), a mortgage broker 

must charge the fee to all applicants for 

credit, whether or not credit is 

extended. 

2. Coverage. This rule applies to 

charges paid by consumers to a 

mortgage broker in connection with a 

consumer credit transaction secured by 

real property or a dwelling. 

3. Compensation by lender. The rule 

requires all mortgage broker fees to be 

included in the finance charge. 

Creditors sometimes compensate 

mortgage brokers under a separate 

arrangement with those parties. 

Creditors may draw on amounts paid by 

the consumer, such as points or closing 

costs, to fund their payment to the 

broker. Compensation paid by a creditor 

to a mortgage broker under an 

agreement is not included as a separate 

component of a consumer’s total finance 

charge (although this compensation may 

be reflected in the finance charge if it 

comes from amounts paid by the 

consumer to the creditor that are finance 

charges, such as points and interest). 

4(b) Examples of finance charges. 

1. Relationship to other provisions. 

Charges or fees shown as examples of 

finance charges in § 226.4(b) may be 

excludable under § 226.4(c), (d), or (e). 

For example[: 

i. Premiums]fl, premiumsfi for 

credit life insurance, shown as an 

example of a finance charge under 

§ 226.4(b)(7), may be excluded if the 

requirements of § 226.4(d)(1) are met. 

flThey may not be excluded, however, 

in transactions subject to § 226.4(g).fi 

[ii. Appraisal fees mentioned in 

§ 226.4(b)(4) are excluded for real 

property or residential mortgage 

transactions under § 226.4(c)(7).] 

Paragraph 4(b)(2). 

1. Checking account charges. A 

checking or transaction account charge 

imposed in connection with a credit 

feature is a finance charge under 

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§ 226.4(b)(2) to the extent the charge 

exceeds the charge for a similar account 

without a credit feature. If a charge for 

an account with a credit feature does 

not exceed the charge for an account 

without a credit feature, the charge is 

not a finance charge under § 226.4(b)(2). 

To illustrate: 

i. A $5 service charge is imposed on 

an account with an overdraft line of 

credit (where the institution has agreed 

in writing to pay an overdraft), while a 

$3 service charge is imposed on an 

account without a credit feature; the $2 

difference is a finance charge. (If the 

difference is not related to account 

activity, however, it may be excludable 

as a participation fee. See the 

commentary to § 226.4(c)(4). 

ii. A $5 service charge is imposed for 

each item that results in an overdraft on 

an account with an overdraft line of 

credit, while a $25 service charge is 

imposed for paying or returning each 

item on a similar account without a 

credit feature; the $5 charge is not a 

finance charge. 

Paragraph 4(b)(3). 

1. Assumption fees. The assumption 

fees mentioned in § 226.4(b)(3) are 

finance charges only when the 

assumption occurs and the fee is 

imposed on the new buyer. The 

assumption fee is a finance charge in the 

new buyer’s transaction. 

Paragraph 4(b)(5). 

1. Credit loss insurance. Common 

examples of the insurance against credit 

loss mentioned in § 226.4(b)(5) are 

mortgage guaranty insurance, holder in 

due course insurance, and repossession 

insurance. Such premiums must be 

included in the finance charge only for 

the period that the creditor requires the 

insurance to be maintained. 

2. Residual value insurance. Where a 

creditor requires a consumer to 

maintain residual value insurance or 

where the creditor is a beneficiary of a 

residual value insurance policy written 

in connection with an extension of 

credit (as is the case in some forms of 

automobile balloon-payment financing, 

for example), the premiums for the 

insurance must be included in the 

finance charge for the period that the 

insurance is to be maintained. If a 

creditor pays for residual value 

insurance and absorbs the payment as a 

cost of doing business, such costs are 

not considered finance charges. (See 

comment 4(a)–2.) 

Paragraphs 4(b)(7) and (b)(8). 

1. Pre-existing insurance policy. The 

insurance discussed in § 226.4(b)(7) and 

(b)(8) does not include an insurance 

policy (such as a life or an automobile 

collision insurance policy) that is 

already owned by the consumer, even if 

the policy is assigned to or otherwise 

made payable to the creditor to satisfy 

an insurance requirement. Such a policy 

is not ‘‘written in connection with’’ the 

transaction, as long as the insurance was 

not purchased for use in that credit 

extension, since it was previously 

owned by the consumer. 

2. Insurance written in connection 

with a transaction. Credit insurance 

sold before or after an open-end [(not 

home-secured)] plan is opened is 

considered ‘‘written in connection with 

a credit transaction.’’ Insurance sold 

after consummation in closed-end credit 

transactions [or after the opening of a 

home-equity plan subject to the 

requirements of § 226.5b] is not 

considered ‘‘written in connection 

with’’ the credit transaction if the 

insurance is written because of the 

consumer’s default (for example, by 

failing to obtain or maintain required 

property insurance) or because the 

consumer requests insurance after 

consummation [or the opening of a 

home-equity plan subject to the 

requirements of § 226.5b] (although 

credit-sale disclosures may be required 

for the insurance sold after 

consummation if it is financed). 

3. Substitution of life insurance. The 

premium for a life insurance policy 

purchased and assigned to satisfy a 

credit life insurance requirement must 

be included in the finance charge, but 

only to the extent of the cost of the 

credit life insurance if purchased from 

the creditor or the actual cost of the 

policy (if that is less than the cost of the 

insurance available from the creditor). If 

the creditor does not offer the required 

insurance, the premium to be included 

in the finance charge is the cost of a 

policy of insurance of the type, amount, 

and term required by the creditor. 

4. Other insurance. Fees for required 

insurance not of the types described in 

§ 226.4(b)(7) and (b)(8) are finance 

charges and are not excludable. For 

example: 

i. The premium for a hospitalization 

insurance policy, if it is required to be 

purchased only in a credit transaction, 

is a finance charge. 

Paragraph 4(b)(9). 

1. Discounts for payment by other 

than credit. The discounts to induce 

payment by other than credit mentioned 

in § 226.4(b)(9) include, for example, the 

following situation: 

i. The seller of land offers individual 

tracts for $10,000 each. If the purchaser 

pays cash, the price is $9,000, but if the 

purchaser finances the tract with the 

seller the price is $10,000. The $1,000 

difference is a finance charge for those 

who buy the tracts on credit. 

2. Exception for cash discounts. 

i. Creditors may exclude from the 

finance charge discounts offered to 

consumers for using cash or another 

means of payment instead of using a 

credit card or an open-end plan. The 

discount may be in whatever amount 

the seller desires, either as a percentage 

of the regular price (as defined in 

section 103(z) of the act, as amended) or 

a dollar amount. Pursuant to section 

167(b) of the act, this provision applies 

only to transactions involving an openend credit plan or a credit card (whether 

open-end or closed-end credit is 

extended on the card). The merchant 

must offer the discount to prospective 

buyers whether or not they are 

cardholders or members of the open-end 

credit plan. The merchant may, 

however, make other distinctions. For 

example: 

A. The merchant may limit the 

discount to payment by cash and not 

offer it for payment by check or by use 

of a debit card. 

B. The merchant may establish a 

discount plan that allows a 15% 

discount for payment by cash, a 10% 

discount for payment by check, and a 

5% discount for payment by a particular 

credit card. None of these discounts is 

a finance charge. 

ii. Pursuant to section 171(c) of the 

act, discounts excluded from the finance 

charge under this paragraph are also 

excluded from treatment as a finance 

charge or other charge for credit under 

any State usury or disclosure laws. 

3. Determination of the regular price. 

i. The regular price is critical in 

determining whether the difference 

between the price charged to cash 

customers and credit customers is a 

discount or a surcharge, as these terms 

are defined in amended section 103 of 

the act. The regular price is defined in 

section 103 of the act as ‘‘* * * the tag 

or posted price charged for the property 

or service if a single price is tagged or 

posted, or the price charged for the 

property or service when payment is 

made by use of an open-end credit plan 

or a credit card if either (1) no price is 

tagged or posted, or (2) two prices are 

tagged or posted * * *.’’ 

ii. For example, in the sale of motor 

vehicle fuel, the tagged or posted price 

is the price displayed at the pump. As 

a result, the higher price (the open-end 

credit or credit card price) must be 

displayed at the pump, either alone or 

along with the cash price. Service 

station operators may designate separate 

pumps or separate islands as being for 

either cash or credit purchases and 

display only the appropriate prices at 

the various pumps. If a pump is capable 

of displaying on its meter either a cash 

or a credit price depending upon the 

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consumer’s means of payment, both the 

cash price and the credit price must be 

displayed at the pump. A service station 

operator may display the cash price of 

fuel by itself on a curb sign, as long as 

the sign clearly indicates that the price 

is limited to cash purchases. 

4(b)(10) Debt cancellation and debt 

suspension fees. 

1. Definition. Debt cancellation 

coverage provides for payment or 

satisfaction of all or part of a debt when 

a specified event occurs. The term ‘‘debt 

cancellation coverage’’ includes 

guaranteed automobile protection, or 

‘‘GAP,’’ agreements, which pay or 

satisfy the remaining debt after property 

insurance benefits are exhausted. Debt 

suspension coverage provides for 

suspension of the obligation to make 

one or more payments on the date(s) 

otherwise required by the credit 

agreement, when a specified event 

occurs. The term ‘‘debt suspension’’ 

does not include loan payment deferral 

arrangements in which the triggering 

event is the bank’s unilateral decision to 

allow a deferral of payment and the 

borrower’s unilateral election to do so, 

such as by skipping or reducing one or 

more payments (‘‘skip payments’’). 

2. Coverage written in connection with 

a transaction. Coverage sold after 

consummation in closed-end credit 

transactions [or after the opening of a 

home-equity plan subject to the 

requirements of § 226.5b] is not ‘‘written 

in connection with’’ the credit 

transaction if the coverage is written 

because the consumer requests coverage 

after consummation [or the opening of 

a home-equity plan subject to the 

requirements of § 226.5b] (although 

credit-sale disclosures may be required 

for the coverage sold after 

consummation if it is financed). 

Coverage sold before or after an openend [(not home-secured)] plan is opened 

is considered ‘‘written in connection 

with a credit transaction.’’ 

4(c) Charges excluded from the 

finance charge. 

Paragraph 4(c)(1). 

1. Application fees. An application 

fee that is excluded from the finance 

charge is a charge to recover the costs 

associated with processing applications 

for credit. The fee may cover the costs 

of services such as credit reports, credit 

investigations, and appraisals. The 

creditor is free to impose the fee in only 

certain of its loan programs, such as 

flautomobilefi [mortgage] loans. 

However, if the fee is to be excluded 

from the finance charge under 

§ 226.4(c)(1), it must be charged to all 

applicants, not just to applicants who 

are approved or who actually receive 

credit. 

Paragraph 4(c)(2). 

1. Late-payment charges. 

i. Late-payment charges can be 

excluded from the finance charge under 

§ 226.4(c)(2) whether or not the person 

imposing the charge continues to extend 

credit on the account or continues to 

provide property or services to the 

consumer. In determining whether a 

charge is for actual unanticipated late 

payment on a 30-day account, for 

example, factors to be considered 

include: 

A. The terms of the account. For 

example, is the consumer required by 

the account terms to pay the account 

balance in full each month? If not, the 

charge may be a finance charge. 

B. The practices of the creditor in 

handling the accounts. For example, 

regardless of the terms of the account, 

does the creditor allow consumers to 

pay the accounts over a period of time 

without demanding payment in full or 

taking other action to collect? If no effort 

is made to collect the full amount due, 

the charge may be a finance charge. 

ii. Section 226.4(c)(2) applies to latepayment charges imposed for failure to 

make payments as agreed, as well as 

failure to pay an account in full when 

due. 

2. Other excluded charges. Charges 

for ‘‘delinquency, default, or a similar 

occurrence’’ include, for example, 

charges for reinstatement of credit 

privileges or for submitting as payment 

a check that is later returned unpaid. 

Paragraph 4(c)(3). 

1. Assessing interest on an overdraft 

balance. A charge on an overdraft 

balance computed by applying a rate of 

interest to the amount of the overdraft 

is not a finance charge, even though the 

consumer agrees to the charge in the 

account agreement, unless the financial 

institution agrees in writing that it will 

pay such items. 

Paragraph 4(c)(4). 

1. Participation fees—periodic basis. 

The participation fees described in 

§ 226.4(c)(4) do not necessarily have to 

be formal membership fees, nor are they 

limited to credit card plans. The 

provision applies to any credit plan in 

which payment of a fee is a condition 

of access to the plan itself, but it does 

not apply to fees imposed separately on 

individual closed-end transactions. The 

fee may be charged on a monthly, 

annual, or other periodic basis; a onetime, nonrecurring fee imposed at the 

time an account is opened is not a fee 

that is charged on a periodic basis, and 

may not be treated as a participation fee. 

2. Participation fees—exclusions. 

Minimum monthly charges, charges for 

nonuse of a credit card, and other 

charges based on either account activity 

or the amount of credit available under 

the plan are not excluded from the 

finance charge by § 226.4(c)(4). Thus, for 

example, a fee that is charged and then 

refunded to the consumer based on the 

extent to which the consumer uses the 

credit available would be a finance 

charge. (See the commentary to 

§ 226.4(b)(2). Also, see comment 14(c)– 

2 for treatment of certain types of fees 

excluded in determining the annual 

percentage rate for the periodic 

statement.) 

Paragraph 4(c)(5). 

1. Seller’s points. The seller’s points 

mentioned in § 226.4(c)(5) include any 

charges imposed by the creditor upon 

the non-creditor seller of property for 

providing credit to the buyer or for 

providing credit on certain terms. These 

charges are excluded from the finance 

charge even if they are passed on to the 

buyer, for example, in the form of a 

higher sales price. Seller’s points are 

frequently involved in real estate 

transactions guaranteed or insured by 

governmental agencies. A commitment 

fee paid by a non-creditor seller (such 

as a real estate developer) to the creditor 

should be treated as seller’s points. 

Buyer’s points (that is, points charged to 

the buyer by the creditor), however, are 

finance charges. 

2. Other seller-paid amounts. 

Mortgage insurance premiums and other 

finance charges are sometimes paid at or 

before consummation or settlement on 

the borrower’s behalf by a non-creditor 

seller. The creditor should treat the 

payment made by the seller as seller’s 

points and exclude it from the finance 

charge if, based on the seller’s payment, 

the consumer is not legally bound to the 

creditor for the charge. A creditor who 

gives disclosures before the payment 

has been made should base them on the 

best information reasonably available. 

Paragraph 4(c)(6). 

1. Lost interest. Certain federal and 

State laws mandate a percentage 

differential between the interest rate 

paid on a deposit and the rate charged 

on a loan secured by that deposit. In 

some situations, because of usury limits 

the creditor must reduce the interest 

rate paid on the deposit and, as a result, 

the consumer loses some of the interest 

that would otherwise have been earned. 

Under § 226.4(c)(6), such ‘‘lost interest’’ 

need not be included in the finance 

charge. This rule applies only to an 

interest reduction imposed because a 

rate differential is required by law and 

a usury limit precludes compliance by 

any other means. If the creditor imposes 

a differential that exceeds that required, 

only the lost interest attributable to the 

excess amount is a finance charge. (See 

the commentary to § 226.4(a).) 

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43372 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

Paragraph 4(c)(7). 

1. [Real estate or residential mortgage 

transaction] flOpen-end real-propertysecured creditficharges. The list of 

charges in § 226.4(c)(7) applies flto 

open-end credit plans secured by real 

property and open-end residential 

mortgage transactionsfi [both to 

residential mortgage transactions (which 

may include, for example, the purchase 

of a mobile home) and to other 

transactions secured by real estate.] The 

fees are excluded from the finance 

charge even if the services for which the 

fees are imposed are performed by the 

creditor’s employees rather than by a 

third party. In addition, the cost of 

verifying or confirming information 

connected to the item is also excluded. 

For example, credit-report fees cover not 

only the cost of the report but also the 

cost of verifying information in the 

report. In all cases, charges excluded 

under § 226.4(c)(7) must be bona fide 

and reasonable. 

2. Lump-sum charges. If a lump sum 

charged for several services includes a 

charge that is not excludable, a portion 

of the total should be allocated to that 

service and included in the finance 

charge. However, a lump sum charged 

for conducting or attending a closing 

(for example, by a lawyer or a title 

company) is excluded from the finance 

charge if the charge is primarily for 

services related to items listed in 

§ 226.4(c)(7) (for example, reviewing or 

completing documents), even if other 

incidental services such as explaining 

various documents or disbursing funds 

for the parties are performed. The entire 

charge is excluded even if a fee for the 

incidental services would be a finance 

charge if it were imposed separately. 

3. Charges assessed during the loan 

term. flChargesfi [Real estate or 

residential mortgage transaction 

charges] excluded under § 226.4(c)(7) 

are those charges imposed solely in 

connection with the initial decision to 

grant credit. This would include, for 

example, a fee to search for tax liens on 

the property or to determine if flood 

insurance is required. The exclusion 

does not apply to fees for services to be 

performed periodically during the loan 

term, regardless of when the fee is 

collected. For example, a fee for one or 

more determinations during the loan 

term of the current tax-lien status or 

flood-insurance requirements is a 

finance charge, regardless of whether 

the fee is imposed at closing, or when 

the service is performed. If a creditor is 

uncertain about what portion of a fee to 

be paid at consummation or loan closing 

is related to the initial decision to grant 

credit, the entire fee may be treated as 

a finance charge. 

4(d) Insurance and debt cancellation 

and debt suspension coverage. 

1. General. Section 226.4(d) permits 

insurance premiums and charges and 

debt cancellation and debt suspension 

charges to be excluded from the finance 

charge. The required disclosures must 

be made in writing, except as provided 

in § 226.4(d)(4). The rules on location of 

insurance and debt cancellation and 

debt suspension disclosures for closedend transactions are in § 226.17(a). For 

purposes of § 226.4(d), all references to 

insurance also include debt cancellation 

and debt suspension coverage unless the 

context indicates otherwise. 

2. Timing of disclosures. If disclosures 

are given early, for example under 

§ 226.17(f)[or § 226.19(a)], the creditor 

must redisclose if the actual premium is 

different at the time of consummation. 

If insurance disclosures are not given at 

the time of early disclosure and 

insurance is in fact written in 

connection with the transaction, the 

disclosures under § 226.4(d) must be 

made in order to exclude the premiums 

from the finance charge. 

3. Premium rate increases. The 

creditor should disclose the premium 

amount based on the rates currently in 

effect and need not designate it as an 

estimate even if the premium rates may 

increase. An increase in insurance rates 

after consummation of a closed-end 

credit transaction or during the life of an 

open-end credit plan does not require 

redisclosure in order to exclude the 

additional premium from treatment as a 

finance charge. 

4. Unit-cost disclosures. 

i. Open-end credit. The premium or 

fee for insurance or debt cancellation or 

debt suspension for the initial term of 

coverage may be disclosed on a unitcost basis in open-end credit 

transactions. The cost per unit should 

be based on the initial term of coverage, 

unless one of the options under 

comment 4(d)–12 is available. 

ii. Closed-end credit. One of the 

transactions for which unit-cost 

disclosures (such as 50 cents per year 

for each $100 of the amount financed) 

may be used in place of the total 

insurance premium involves a 

particular kind of insurance plan. For 

example, a consumer with a current 

indebtedness of $8,000 is covered by a 

plan of credit life insurance coverage 

with a maximum of $10,000. The 

consumer requests an additional $4,000 

loan to be covered by the same 

insurance plan. Since the $4,000 loan 

exceeds, in part, the maximum amount 

of indebtedness that can be covered by 

the plan, the creditor may properly give 

the insurance-cost disclosures on the 

$4,000 loan on a unit-cost basis. 

5. Required credit life insurance; debt 

cancellation or suspension coverage. 

Credit life, accident, health, or loss-ofincome insurance, and debt cancellation 

and suspension coverage described in 

§ 226.4(b)(10), must be voluntary in 

order for the premium or charges to be 

excluded from the finance charge. 

Whether the insurance or coverage is in 

fact required or optional is a factual 

question. If the insurance or coverage is 

required, the premiums must be 

included in the finance charge, whether 

the insurance or coverage is purchased 

from the creditor or from a third party. 

If the consumer is required to elect one 

of several options—such as to purchase 

credit life insurance, or to assign an 

existing life insurance policy, or to 

pledge security such as a certificate of 

deposit—and the consumer purchases 

the credit life insurance policy, the 

premium must be included in the 

finance charge. (If the consumer assigns 

a preexisting policy or pledges security 

instead, no premium is included in the 

finance charge. The security interest 

would be disclosed under § 226.6(a)(4), 

§ 226.6(b)(5)(ii), or § 226.18(m). See the 

commentary to § 226.4(b)(7) and (b)(8).) 

6. Other types of voluntary insurance. 

Insurance is not credit life, accident, 

health, or loss-of-income insurance if 

the creditor or the credit account of the 

consumer is not the beneficiary of the 

insurance coverage. If the premium for 

such insurance is not imposed by the 

creditor as an incident to or a condition 

of credit, it is not covered by § 226.4. 

7. Signatures. If the creditor offers a 

number of insurance options under 

§ 226.4(d), the creditor may provide a 

means for the consumer to sign or initial 

for each option, or it may provide for a 

single authorizing signature or initial 

with the options selected designated by 

some other means, such as a check 

mark. The insurance authorization may 

be signed or initialed by any consumer, 

as defined in § 226.2(a)(11), or by an 

authorized user on a credit card 

account. 

8. Property insurance. To exclude 

property insurance premiums or charges 

from the finance charge, the creditor 

must allow the consumer to choose the 

insurer and disclose that fact. This 

disclosure must be made whether or not 

the property insurance is available from 

or through the creditor. The requirement 

that an option be given does not require 

that the insurance be readily available 

from other sources. The premium or 

charge must be disclosed only if the 

consumer elects to purchase the 

insurance from flor throughfi the 

creditor; in such a case, the creditor 

must also disclose the term of the 

property insurance coverage if it is less 

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than the term of the obligation. 

flInsurance is available ‘‘from or 

through a creditor’’ if it is available from 

the creditor’s affiliate, as defined under 

the Bank Holding Company Act, 12 

U.S.C. 1841(k).fi 

9. Single-interest insurance. Blanket 

and specific single-interest coverage are 

treated the same for purposes of the 

regulation. A charge for either type of 

single-interest insurance may be 

excluded from the finance charge if: 

i. The insurer waives any right of 

subrogation. 

ii. The other requirements of 

§ 226.4(d)(2) are met. This includes, of 

course, giving the consumer the option 

of obtaining the insurance from a person 

of the consumer’s choice. The creditor 

need not ascertain whether the 

consumer is able to purchase the 

insurance from someone else. 

10. Single-interest insurance defined. 

The term single-interest insurance as 

used in the regulation refers only to the 

types of coverage traditionally included 

in the term vendor’s single-interest 

insurance (or VSI), that is, protection of 

tangible property against normal 

property damage, concealment, 

confiscation, conversion, embezzlement, 

and skip. Some comprehensive 

insurance policies may include a variety 

of additional coverages, such as 

repossession insurance and holder-indue-course insurance. These types of 

coverage do not constitute singleinterest insurance for purposes of the 

regulation, and premiums for them do 

not qualify for exclusion from the 

finance charge under § 226.4(d). If a 

policy that is primarily VSI also 

provides coverages that are not VSI or 

other property insurance, a portion of 

the premiums must be allocated to the 

non-excludable coverages and included 

in the finance charge. However, such 

allocation is not required if the total 

premium in fact attributable to all of the 

non-VSI coverages included in the 

policy is $1.00 or less (or $5.00 or less 

in the case of a multiyear policy). 

11. Initial term. 

i. The initial term of insurance or debt 

cancellation or debt suspension 

coverage determines the period for 

which a premium amount must be 

disclosed, unless one of the options 

discussed under comment 4(d)–12 is 

available. For purposes of § 226.4(d), the 

initial term is the period for which the 

insurer or creditor is obligated to 

provide coverage, even though the 

consumer may be allowed to cancel the 

coverage or coverage may end due to 

nonpayment before that term expires. 

ii. For example: 

A. The initial term of a property 

insurance policy on an automobile that 

is written for one year is one year even 

though premiums are paid monthly and 

the term of the credit transaction is four 

years. 

B. The initial term of an insurance 

policy is the full term of the credit 

transaction if the consumer pays or 

finances a single premium in advance. 

12. Initial term; alternative. 

i. General. A creditor has the option 

of providing cost disclosures on the 

basis of one year of insurance or debt 

cancellation or debt suspension 

coverage instead of a longer initial term 

(provided the premium or fee is clearly 

labeled as being for one year) if: 

A. The initial term is indefinite or not 

clear, or 

B. The consumer has agreed to pay a 

premium or fee that is assessed 

periodically but the consumer is under 

no obligation to continue the coverage, 

whether or not the consumer has made 

an initial payment. 

ii. Open-end plans. For open-end 

plans, a creditor also has the option of 

providing unit-cost disclosure on the 

basis of a period that is less than one 

year if the consumer has agreed to pay 

a premium or fee that is assessed 

periodically, for example monthly, but 

the consumer is under no obligation to 

continue the coverage. 

iii. Examples. To illustrate: 

A. A credit life insurance policy 

providing coverage for a flseven-year 

automobilefi [30-year mortgage] loan 

has an initial term of flsevenfi [30] 

years, even though premiums are paid 

monthly and the consumer is not 

required to continue the coverage. 

Disclosures may be based on the initial 

term, but the creditor also has the 

option of making disclosures on the 

basis of coverage for an assumed initial 

term of one year. 

13. Loss-of-income insurance. The 

loss-of-income insurance mentioned in 

§ 226.4(d) includes involuntary 

unemployment insurance, which 

provides that some or all of the 

consumer’s payments will be made if 

the consumer becomes unemployed 

involuntarily. 

fl14. Age or employment eligibility 

criteria. A premium or charge for credit 

life, accident, health, or loss-of-income 

insurance, or debt cancellation or debt 

suspension coverage is voluntary and 

can be excluded from the finance charge 

only if the consumer meets the 

product’s age or employment eligibility 

criteria at the time of enrollment. To 

exclude such a premium or charge from 

the finance charge, the creditor must 

determine at the time of enrollment that 

the consumer is eligible for the product 

under the product’s age or employment 

eligibility restrictions. The creditor may 

use reasonably reliable evidence of the 

consumer’s age or employment status to 

satisfy this condition. Reasonably 

reliable evidence of a consumer’s age 

would include using the date of birth on 

the consumer’s credit application, on 

the driver’s license or other governmentissued identification, or on the credit 

report. Reasonably reliable evidence of 

a consumer’s employment status would 

include the consumer’s information on 

a credit application, an Internal 

Revenue Service Form W-2, tax returns, 

payroll receipts, or other evidence such 

as a letter or e-mail from the consumer 

or the consumer’s employer. If the 

consumer does not meet the product’s 

age or employment eligibility criteria at 

the time of enrollment, then the 

premium or charge is not voluntary. In 

such circumstances, the premium or 

charge is a finance charge. If the creditor 

offers a bundled product (such as credit 

life insurance combined with credit 

involuntary unemployment insurance) 

and the consumer is not eligible for all 

of the bundled products, then the 

creditor must either: (1) treat the entire 

premium or charge for the bundled 

product as a finance charge, or (2) offer 

the consumer the option of selecting 

only the products for which the 

consumer is eligible and exclude the 

premium or charge from the finance 

charge if the consumer chooses an 

optional product for which the 

consumer meets the age or employment 

eligibility criteria at the time of 

enrollment.fi 

4(d)(3) Voluntary debt cancellation or 

debt suspension fees. 

1. General. Fees charged for the 

specialized form of debt cancellation 

agreement known as guaranteed 

automobile protection (‘‘GAP’’) 

agreements must be disclosed according 

to § 226.4(d)(3) rather than according to 

§ 226.4(d)(2) for property insurance. 

2. Disclosures. Creditors can comply 

with § 226.4(d)(3) by providing a 

disclosure that refers to debt 

cancellation or debt suspension 

coverage whether or not the coverage is 

considered insurance. Creditors may use 

the model credit insurance disclosures 

only if the debt cancellation or debt 

suspension coverage constitutes 

insurance under State law. (See Model 

Clauses and Samples at G–16 and H–17 

in Appendix G and Appendix H to part 

226 for guidance on how to provide the 

disclosure required by § 226.4(d)(3)(iii) 

for debt suspension products.) 

3. Multiple events. If debt cancellation 

or debt suspension coverage for two or 

more events is provided at a single 

charge, the entire charge may be 

excluded from the finance charge if at 

least one of the events is accident or loss 

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43374 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

of life, health, or income and the 

conditions specified in § 226.4(d)(3) or, 

as applicable, § 226.4(d)(4), are satisfied. 

4. Disclosures in programs combining 

debt cancellation and debt suspension 

features. If the consumer’s debt can be 

cancelled under certain circumstances, 

the disclosure may be modified to 

reflect that fact. The disclosure could, 

for example, state (in addition to the 

language required by § 226.4(d)(3)(iii)) 

that ‘‘In some circumstances, my debt 

may be cancelled.’’ However, the 

disclosure would not be permitted to 

list the specific events that would result 

in debt cancellation. 

4(d)(4) Telephone purchases. 

1. Affirmative request. A creditor 

would not satisfy the requirement to 

obtain a consumer’s affirmative request 

if the ‘‘request’’ was a response to a 

script that uses leading questions or 

negative consent. A question asking 

whether the consumer wishes to enroll 

in the credit insurance or debt 

cancellation or suspension plan and 

seeking a yes-or-no response (such as 

‘‘Do you want to enroll in this optional 

debt cancellation plan?’’) would not be 

considered leading. 

4(e) Certain security interest charges. 

1. Examples. 

i. Excludable charges. Sums must be 

actually paid to public officials to be 

excluded from the finance charge under 

§ 226.4(e)(1) and (e)(3). Examples are 

charges or other fees required for filing 

or recording security agreements, 

mortgages fl(for open-end credit; but 

see § 226.4(g) regarding closed-end 

mortgage credit)fi, continuation 

statements, termination statements, and 

similar documents, as well as intangible 

property or other taxes even when the 

charges or fees are imposed by the state 

solely on the creditor and charged to the 

consumer (if the tax must be paid to 

record a security agreement). (See 

comment 4(a)–5 regarding the treatment 

of taxes, generally.) 

ii. Charges not excludable. If the 

obligation is between the creditor and a 

third party (an assignee, for example), 

charges or other fees for filing or 

recording security agreements, 

mortgages, continuation statements, 

termination statements, and similar 

documents relating to that obligation are 

not excludable from the finance charge 

under this section. 

2. Itemization. The various charges 

described in § 226.4(e)(1) and (e)(3) may 

be totaled and disclosed as an aggregate 

sum, or they may be itemized by the 

specific fees and taxes imposed. If an 

aggregate sum is disclosed, a general 

term such as security interest fees or 

filing fees may be used. 

3. Notary fees. In order for a notary fee 

to be excluded under § 226.4(e)(1), all of 

the following conditions must be met: 

i. The document to be notarized is one 

used to perfect, release, or continue a 

security interest. 

ii. The document is required by law 

to be notarized. 

iii. A notary is considered a public 

official under applicable law. 

iv. The amount of the fee is set or 

authorized by law. 

4. Non-filing insurance. The exclusion 

in § 226.4(e)(2) is available only if nonfiling insurance is purchased. If the 

creditor collects and simply retains a fee 

as a sort of ‘‘self-insurance’’ against nonfiling, it may not be excluded from the 

finance charge. If the non-filing 

insurance premium exceeds the amount 

of the fees excludable from the finance 

charge under § 226.4(e)(1), only the 

excess is a finance charge. For example: 

i. The fee for perfecting a security 

interest is $5.00 and the fee for releasing 

the security interest is $3.00. The 

creditor charges $10.00 for non-filing 

insurance. Only $8.00 of the $10.00 is 

excludable from the finance charge. 

4(f) Prohibited offsets. 

1. Earnings on deposits or 

investments. The rule that the creditor 

shall not deduct any earnings by the 

consumer on deposits or investments 

applies whether or not the creditor has 

a security interest in the property. 

fl4(g) Special rule; mortgage 

transactions. 

1. Applicability of commentary to 

mortgages. The staff commentary under 

§§ 226.4(a)(2) and 226.4(c) through (e) 

(other than that under §§ 226.4(c)(2), 

226.4(c)(5), and 226.4(d)(2)) does not 

apply to closed-end transactions 

secured by real property or a dwelling. 

The staff commentary under §§ 226.4(a) 

(other than paragraph (2) of that 

section), 226.4(c)(2), 226.4(c)(5), and 

226.4(d)(2), however, does apply to such 

transactions. 

2. Third-party charges. Charges 

imposed by third parties are finance 

charges if they fit the general definition 

under § 226.4(a). Thus, if a third-party 

charge is payable directly or indirectly 

by the consumer and imposed directly 

or indirectly by the creditor as an 

incident to the extension of credit, it is 

a finance charge unless it would be 

payable in a comparable cash 

transaction. For example, appraisal and 

credit report fees are finance charges 

because they meet the definition in 

§ 226.4(a). This test generally does not 

depend on whether the creditor requires 

the service for which the charge is 

imposed. In addition, charges imposed 

by closing agents required by the 

creditor, whether their own or those of 

third parties they retain, generally are 

finance charges unless otherwise 

excluded. (Note that § 226.4(a)(2) does 

not apply to closed-end transactions 

secured by real property or a dwelling, 

pursuant to § 226.4(g).) Insurance 

premiums generally are finance charges, 

whether imposed by a closing agent or 

another insurer, although premiums for 

property insurance are excluded if 

§ 226.4(d)(2) is satisfied. Premiums for 

credit insurance (or fees for debt 

cancellation or debt suspension 

agreements) and premiums for lender’s 

coverage under a title insurance policy 

are finance charges because they are 

imposed as an incident to the extension 

of credit. In contrast, premiums for 

owner’s title insurance coverage are not 

finance charges because they are not 

imposed as an incident to the extension 

of credit. 

3. Charges in comparable cash 

transactions. While the exclusions in 

§ 226.4(c) through (e), other than 

§§ 226.4(c)(5) and 226.4(d)(2) are 

inapplicable to closed-end transactions 

secured by real property or a dwelling, 

charges in connection with such 

transactions that are payable in a 

comparable cash transaction are not 

finance charges. See comment 4(a)-1. 

For example, property taxes and fees or 

taxes imposed to record the deed 

evidencing transfer from the seller to the 

buyer of title to the property securing 

the transaction are not finance charges 

because they would be paid even if no 

credit were extended to finance the 

purchase. In contrast, fees or taxes 

imposed to record the mortgage, deed of 

trust, or other security instrument 

evidencing the creditor’s security 

interest in the property securing the 

transaction are finance charges because 

they would not be incurred were it not 

for the extension of credit. 

* * * * * 

Subpart C—Closed-End Credit 

§ 226.17—General Disclosure 

Requirements. 

17(a) Form of Disclosures 

Paragraph 17(a)(1) 

1. Clear and conspicuous. This 

standard requires that disclosures be in 

a reasonably understandable form. For 

example, while the regulation requires 

no mathematical progression or format, 

the disclosures must be presented in a 

way that does not obscure the 

relationship of the terms to each other. 

In addition, although no minimum type 

size is mandated, the disclosures must 

be legible, whether typewritten, 

handwritten, or printed by computer. 

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2. Segregation of disclosures. The 

disclosures may be grouped together 

and segregated from other information 

in a variety of ways. For example, the 

disclosures may appear on a separate 

sheet of paper or may be set off from 

other information on the contract or 

other documents: 

[•]fli.fi By outlining them in a box 

[•]flii.fi By bold print dividing lines 

[•]fliii.fi By a different color 

background 

[•]fliv.fi By a different type style 

[(The general segregation requirement 

described in this subparagraph does not 

apply to the disclosures required under 

§§ 226.19(b) and 226.20(c) although the 

disclosures must be clear and 

conspicuous.)] 

3. Location. The regulation imposes 

no specific location requirements on the 

segregated disclosures. For example: 

[•]fli.fi They may appear on a 

disclosure statement separate from all 

other material. 

[•]flii.fi They may be placed on the 

same document with the credit contract 

or other information, so long as they are 

segregated from that information. 

[•]fliii.fi They may be shown on the 

front or back of a document. 

[•]fliv.fi They need not begin at the 

top of a page. 

[•]flv.fi They may be continued 

from one page to another. 

4. Content of segregated disclosures. 

Footnotes 37 and 38 contain exceptions 

to the requirement that the disclosures 

under § 226.18 be segregated from 

material that is not directly related to 

those disclosures. Footnote 37 lists the 

items that may be added to the 

segregated disclosures, even though not 

directly related to those disclosures. 

Footnote 38 lists the items required 

under § 226.18 that may be deleted from 

the segregated disclosures and appear 

elsewhere. Any one or more of these 

additions or deletions may be combined 

and appear either together with or 

separate from the segregated 

disclosures. The itemization of the 

amount financed under § 226.18(c), 

however, must be separate from the 

other segregated disclosures under 

§ 226.18. If a creditor chooses to include 

the security interest charges required to 

be itemized under § 226.4(e) and 

§ 226.18(o) in the amount financed 

itemization, it need not list these 

charges elsewhere. 

5. Directly Related. flExcept in a 

transaction secured by real property or 

a dwelling, tfi[T]he segregated 

disclosures may, at the creditor’s option, 

include any information that is directly 

related to those disclosures. fl(See the 

commentary to § 226.37(a)(2) for a 

discussion of directly related 

information for transactions secured by 

real property or a dwelling.)fi The 

following is directly related information 

flfor a transaction not secured by real 

property or a dwellingfi: 

i. A description of a grace period after 

which a late payment charge will be 

imposed. For example, the disclosure 

given under § 226.18(l) may state that a 

late charge will apply to ‘‘any payment 

received more than 15 days after the due 

date.’’ 

ii. A statement that the transaction is 

not secured. For example, the creditor 

may add a category labelled 

‘‘unsecured’’ or ‘‘not secured’’ to the 

security interest disclosures given under 

§ 226.18(m). 

iii. The basis for any estimates used 

in making disclosures. For example, if 

the maturity date of a loan depends 

solely on the occurrence of a future 

event, the creditor may indicate that the 

disclosures assume that event will occur 

at a certain time. 

iv. The conditions under which a 

demand feature may be exercised. For 

example, in a loan subject to demand 

after five years, the disclosures may 

state that the loan will become payable 

on demand in five years. 

v. An explanation of the use of 

pronouns or other references to the 

parties to the transaction. For example, 

the disclosures may state, ‘‘‘You’ refers 

to the customer and ‘we’ refers to the 

creditor.’’ 

vi. Instructions to the creditor or its 

employees on the use of a multiplepurpose form. For example, the 

disclosures may state, ‘‘Check box if 

applicable.’’ 

vii. A statement that the borrower 

may pay a minimum finance charge 

upon prepayment in a simple-interest 

transaction. For example, when State 

law prohibits penalties, but would allow 

a minimum finance charge in the event 

of prepayment, the creditor may make 

the § 226.18(k)(1) disclosure by stating, 

‘‘You may be charged a minimum 

finance charge.’’ 

viii. A brief reference to negative 

amortization in variable-rate 

transactions. For example, in the 

variable-rate disclosures, the creditor 

may include a short statement such as 

‘‘Unpaid interest will be added to 

principal.’’ (See the commentary to 

§ 226.18(f)[(1)(iii)]fl(3)fi.) 

ix. A brief caption identifying the 

disclosures. For example, the 

disclosures may bear a general title such 

as ‘‘Federal Truth in Lending 

Disclosures’’ or a descriptive title such 

as ‘‘Real Estate Loan Disclosures.’’ 

x. A statement that a due-on-sale 

clause or other conditions on 

assumption are contained in the loan 

document. For example, the disclosure 

given under § 226.18(q) may state, 

‘‘Someone buying your home may, 

subject to conditions in the due-on-sale 

clause contained in the loan document, 

assume the remainder of the mortgage 

on the original terms.’’ 

xi. If a State or Federal law prohibits 

prepayment penalties and excludes the 

charging of interest after prepayment 

from coverage as a penalty, a statement 

that the borrower may have to pay 

interest for some period after 

prepayment in full. The disclosure may 

state, for example, ‘‘If you prepay your 

loan on other than the regular 

installment date, you may be assessed 

interest charges until the end of the 

month.’’ 

xii. More than one hypothetical 

example under 

§ 226.18(f)[(1)(iv)]fl(4)fi in 

transactions with more than one 

variable-rate feature. For example, in a 

variable-rate transaction with an option 

permitting consumers to convert to a 

fixed-rate transaction, the disclosures 

may include an example illustrating the 

effects of an increase resulting from 

conversion in addition to the example 

illustrating an increase resulting from 

changes in the index. 

xiii. flReserved.fi[The disclosures 

set forth under section 226.18(f)(1) for 

variable-rate transactions subject to 

section 226.18(f)(2).] 

xiv. fl[Reserved]fi[A statement 

whether or not a subsequent purchase of 

the property securing an obligation may 

be permitted to assume the remaining 

obligation on its original terms.] 

xv. A late-payment fee disclosure 

under § 226.18(l) on a single payment 

loan. 

xvi. The notice set forth in 

[§ 226.19(a)(4)]fl§ 226.38(f)(1)fi, in a 

closed-end transaction not subject to 

§ 226.19(a)(1)(i). In a mortgage 

transaction subject to § 19(a)(1)(i), the 

creditor must disclose the notice 

contained in 

[§ 226.19(a)(4)]fl§ 226.38(f)(1)fi 

grouped together with the disclosures 

made under [§ 226.18. See comment 

19(a)(4)–1.]fl§ 226.38.fi 

6. Multiple-purpose forms. flExcept 

for transactions secured by real property 

or a dwelling, tfi[T]he creditor may 

design a disclosure statement that can 

be used for more than one type of 

transaction, so long as the required 

disclosures for individual transactions 

are clear and conspicuous. (See the 

Commentary to appendices G and H for 

a discussion of the treatment of 

disclosures that do not apply to specific 

transactions.) Any disclosure listed in 

§ 226.18 (except the itemization of the 

amount financed under § 226.18(c)) may 

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43376 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

be included on a standard disclosure 

statement even though not all of the 

creditor’s transactions include those 

features. For example, the statement 

may include: 

[•]fli.fi The variable rate disclosure 

under § 226.18(f). 

[•]flii.fi The demand feature 

disclosure under § 226.18(i). 

[•]fliii.fi A reference to the 

possibility of a security interest arising 

from a spreader clause, under 

§ 226.18(m). 

[• The assumption policy disclosure 

under § 226.18(q).] 

[•]fliv.fi The required deposit 

disclosure under § 226.18(r). 

7. Balloon payment financing with 

leasing characteristics. In certain credit 

sale or loan transactions, a consumer 

may reduce the dollar amount of the 

payments to be made during the course 

of the transaction by agreeing to make, 

at the end of the loan term, a large final 

payment based on the expected residual 

value of the property. The consumer 

may have a number of options with 

respect to the final payment, including, 

among other things, retaining the 

property and making the final payment, 

refinancing the final payment, or 

transferring the property to the creditor 

in lieu of the final payment. Such 

transactions may have some of the 

characteristics of lease transactions 

subject to Regulation M, but are 

considered credit transactions where the 

consumer assumes the indicia of 

ownership, including the risks, burdens 

and benefits of ownership upon 

consummation. These transactions are 

governed by the disclosure requirements 

of this regulation instead of Regulation 

M. Creditors should not include in the 

segregated Truth in Lending disclosures 

additional information. Thus, 

disclosures should show the large final 

payment in the payment schedule and 

should not, for example, reflect the 

other options available to the consumer 

at maturity. flFor extensions of credit 

secured by real property or a dwelling, 

the large final payment in the payment 

schedule should be disclosed in 

accordance with the requirements under 

section 226.38(c), as applicable.fi 

Paragraph 17(a)(2). 

1. When disclosures must be more 

conspicuous. The following rules apply 

to the requirement that the terms annual 

percentage rate and finance charge be 

shown more conspicuously: 

[•]fli.fi The terms must be more 

conspicuous only in relation to the 

other required disclosures under 

§ 226.18. For example, when the 

disclosures are included on the contract 

document, those 2 terms need not be 

more conspicuous as compared to the 

heading on the contract document or 

information required by State law. 

[•]flii.fi The terms need not be more 

conspicuous except as part of the 

finance charge and annual percentage 

rate disclosures under § 226.18(d) and 

(e), although they may, at the creditor’s 

option, be highlighted wherever used in 

the required disclosures. For example, 

the terms may, but need not, be 

highlighted when used in disclosing a 

prepayment penalty under § 226.18(k) 

or a required deposit under § 226.18(r). 

[•]fliii.fi The creditor’s identity 

under § 226.18(a) may, but need not, be 

more prominently displayed than the 

finance charge and annual percentage 

rate. 

[•]fliv.fi The terms need not be more 

conspicuous than figures (including, for 

example, numbers, percentages, and 

dollar signs) 

2. Making disclosures more 

conspicuous. The terms finance charge 

and annual percentage rate may be 

made more conspicuous in any way that 

highlights them in relation to the other 

required disclosures. For example, they 

may be: 

[•]fli.fi Capitalized when other 

disclosures are printed in capital and 

lower case. 

[•]flii.fi Printed in larger type, bold 

print or different type face. 

[•]fliii.fi Printed in a contrasting 

color. 

[•]fliv.fi Underlined. 

[•]flv.fi Set off with asterisks. 

17(b) Time of disclosures. 

1. Consummation. As a general rule, 

disclosures must be made before 

‘‘consummation’’ of the transaction. The 

disclosures flfor transactions not 

secured by real property or a dwellingfi 

need not be given by any particular time 

before consummation[, except in certain 

mortgage transactions and variable-rate 

transactions secured by the consumer’s 

principal dwelling with a term greater 

than one year under § 226.19.]fl Preconsummation disclosures for 

transactions secured by real property or 

a dwelling must be provided in 

accordance with the timing 

requirements in § 226.19.fi (See the 

commentary to § 226.2(a)(13) regarding 

the definition of consummation.) 

2. Converting open-end to closed-end 

credit. Except for home equity plans 

subject to § 226.5b in which the 

agreement provides for a repayment 

phase, if an open-end credit account is 

converted to a closed-end transaction 

under a written agreement with the 

consumer, the creditor must provide a 

set of closed-end credit disclosures 

before consummation of the closed-end 

transaction. (flSee the commentary to 

§ 226.19(a) for a discussion of disclosure 

timing requirements for closed-end 

transactions secured by real property or 

a dwelling.fi See the commentary to 

§ 226.19(b) for the timing rules for 

additional disclosures required upon 

the conversion to [a variable-rate 

transaction secured by a consumer’s 

principal dwelling with a term greater 

than one year]flan adjustable-rate 

transaction secured by real property or 

a dwellingfi.) If consummation of the 

closed-end transaction occurs at the 

same time as the consumer enters into 

the open-end agreement, the closed-end 

credit disclosures may be given at the 

time of conversion. If disclosures are 

delayed until conversion and the 

closed-end transaction has a variablerate feature, disclosures should be based 

on the rate in effect at the time of 

conversion. (See the commentary to 

§ 226.5 regarding conversion of closedend to open-end credit.) 

3. Disclosures provided on credit 

contracts. Creditors must give the 

required disclosures to the consumer in 

writing, in a form that the consumer 

may keep, before consummation of the 

transaction. See § 226.17(a)(1) and (b). 

Sometimes the disclosures are placed on 

the same document with the credit 

contract. Creditors are not required to 

give the consumer two separate copies 

of the document before consummation, 

one for the consumer to keep and a 

second copy for the consumer to 

execute. The disclosure requirement is 

satisfied if the creditor gives a copy of 

the document containing the 

unexecuted credit contract and 

disclosures to the consumer to read and 

sign; and the consumer receives a copy 

to keep at the time the consumer 

becomes obligated. It is not sufficient for 

the creditor merely to show the 

consumer the document containing the 

disclosures before the consumer signs 

and becomes obligated. The consumer 

must be free to take possession of and 

review the document in its entirety 

before signing. 

i. Example. To illustrate: 

A. A creditor gives a consumer a 

multiple-copy form containing a credit 

agreement and TILA disclosures. The 

consumer reviews and signs the form 

and returns it to the creditor, who 

separates the copies and gives one copy 

to the consumer to keep. The creditor 

has satisfied the disclosure requirement. 

17(c) Basis of disclosures and use of 

estimates. 

[Paragraph ]17(c)(1)flLegal 

obligationfi. 

1. [Legal obligation.]flGeneral.fi The 

disclosures shall reflect the credit terms 

to which the parties are legally bound 

as of the outset of the transaction. In the 

case of disclosures required under 

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§ 226.20(c), the disclosures shall reflect 

the credit terms to which the parties are 

legally bound when the disclosures are 

provided. The legal obligation is 

determined by applicable State law or 

other law. flThe disclosures should be 

based on the assumption that the 

consumer will abide by the terms of the 

legal obligation throughout the term of 

the transaction. For example, the 

disclosures should be based on the 

assumption that the consumer makes 

payments on time and in full. In the 

case of an adjustable-rate mortgage 

described in § 226.38(a)(3)(i)(A), the 

creditor shall make the disclosure 

required by § 226.38(c) based on the 

assumption that the interest rate 

increases as fast as it can, taking into 

account any limitations on increases 

under the legal obligation.fi (Certain 

transactions are specifically addressed 

in this commentary. See, for example, 

the discussion of buydown transactions 

elsewhere in the commentary to 

§ 226.17(c).) 

[•]fli.fi The fact that a term or 

contract may later be deemed 

unenforceable by a court on the basis of 

equity or other grounds does not, by 

itself, mean that disclosures based on 

that term or contract did not reflect the 

legal obligation. 

2. Modification of obligation. The 

legal obligation normally is presumed to 

be contained in the note or contract that 

evidences the agreement. But this 

presumption is rebutted if another 

agreement between the parties legally 

modifies that note or contract. If the 

parties informally agree to a 

modification of the legal obligation, the 

modification should not be reflected in 

the disclosures unless it rises to the 

level of a change in the terms of the 

legal obligation. For example: 

[•]fli.fi If the creditor offers a 

preferential rate, such as an employee 

preferred rate, the disclosures should 

reflect the terms of the legal 

obligationfl, subject to special 

disclosure rules for transactions secured 

by real property or a dwelling in 

§ 226.38(a)(3) and (c)fi. [(See the 

commentary to § 226.19(b) for an 

example of a preferred-rate transaction 

that is a variable-rate transaction.)] 

[•]flii.fi If the contract provides for 

a certain monthly payment schedule but 

payments are made on a voluntary 

payroll deduction plan or an informal 

principal-reduction agreement, the 

disclosures should reflect the schedule 

in the contract. 

[•]fliii.fi If the contract provides for 

regular monthly payments but the 

creditor informally permits the 

consumer to defer payments from time 

to time, for instance, to take account of 

holiday seasons or seasonal 

employment, the disclosures should 

reflect the regular monthly payments. 

fl3. Number of transactions. 

Creditors have flexibility in handling 

credit extensions that may be viewed as 

multiple transactions. For example: 

i. When a creditor finances the credit 

sale of a radio and a television on the 

same day, the creditor may disclose the 

sales as either 1 or 2 credit sale 

transactions. 

ii. When a creditor finances a loan 

along with a credit sale of health 

insurance, the creditor may disclose in 

one of several ways: a single credit sale 

transaction, a single loan transaction, or 

a loan and a credit sale transaction. 

iii. The separate financing of a 

downpayment in a credit sale 

transaction may, but need not, be 

disclosed as 2 transactions (a credit sale 

and a separate transaction for the 

financing of the downpayment).fi 

[3. Third-party buydown.]fl17(c)(1)(i) 

Buydowns. 

1. Third-party buydown.fi In certain 

transactions, a seller or other third party 

may pay an amount, either to the 

creditor or to the consumer, in order to 

reduce the consumer’s payments or buy 

down the interest rate for all or a 

portion of the credit term. For example, 

a consumer and a bank agree to a 

mortgage with an interest rate of 15% 

and level payments over 25 years. By a 

separate agreement, the seller of the 

property agrees to subsidize the 

consumer’s payments for the first 2 

years of the mortgage, giving the 

consumer an effective rate of 12% for 

that period. 

[•]fli.fi If the lower rate is reflected 

in the credit contract between the 

consumer and the bank, the disclosures 

must take the buydown into account. 

For example, the annual percentage rate 

must be a composite rate that takes 

account of both the lower initial rate 

and the higher subsequent rate, and if 

the loan is not secured by real property 

or a dwelling, the payment schedule 

disclosures must reflect the 2 payment 

levels. However, the amount paid by the 

seller would not be specifically reflected 

in the disclosures given by the bank, 

since that amount constitutes seller’s 

points and thus is not part of the finance 

charge. 

[•]flii.fi If the lower rate is not 

reflected in the credit contract between 

the consumer and the bank and the 

consumer is legally bound to the 15% 

rate from the outset, the disclosures 

given by the bank must not reflect the 

seller buydown in any way. For 

example, the annual percentage rate 

and, in a transaction not secured by real 

property, the payment schedule, would 

not take into account the reduction in 

the interest rate and payment level for 

the first 2 years resulting from the 

buydown. 

[4.]fl2.fi Consumer buydowns. In 

certain transactions, the consumer may 

pay an amount to the creditor to reduce 

the payments or obtain a lower interest 

rate on the transaction. Consumer 

buydowns must be reflected in the 

disclosures given for that transaction. 

To illustrate, in a mortgage transaction, 

the creditor and consumer agree to a 

note specifying a 14 percent interest 

rate. However, in a separate document, 

the consumer agrees to pay an amount 

to the creditor at consummation in 

return for a reduction in the interest rate 

to 12 percent for a portion of the 

mortgage term. The amount paid by the 

consumer may be deposited in an 

escrow account or may be retained by 

the creditor. Depending upon the 

buydown plan, the consumer’s 

prepayment of the obligation may or 

may not result in a portion of the 

amount being credited or refunded to 

the consumer. In the disclosures given 

for the mortgage, the creditor must 

reflect the terms of the buydown 

agreement. For example: 

[•]fli.fi The amount paid by the 

consumer is a prepaid finance charge 

[(]fl,fi even if deposited in an escrow 

account[)]. fl(In transactions secured by 

real property or a dwelling, ‘‘finance 

charges’’ are referred to as ‘‘interest and 

settlement charges’’ under 

§ 226.38(e)(5)(ii).)fi 

[•]flii.fi A composite annual 

percentage rate must be calculated, 

taking into account both interest rates, 

as well as the effect of the prepaid 

finance charge. 

[•]fliii.fi The payment schedule 

must reflect the multiple payment levels 

resulting from a buydownfl, in a 

transaction not secured by real property 

or a dwellingfi. 

fl3. Lender buydown.fi The rules 

regarding consumer buydowns do not 

apply to transactions known as ‘‘lender 

buydowns.’’ In lender buydowns. a 

creditor pays an amount (either into an 

account or to the party to whom the 

obligation is sold) to reduce the 

consumer’s payments or interest rate for 

all or a portion of the credit term. 

Typically, these transactions are 

structured as a buydown of the interest 

rate during an initial period of the 

transaction with a higher than usual rate 

for the remainder of the term. The 

disclosures for lender buydowns should 

be based on the terms of the legal 

obligation between the consumer and 

the creditor. See comment [17(c)(1)– 

3]fl17(c)(1)(i)–1fi for the analogous 

rules concerning third-party buydowns. 

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[5.]fl4.fi Split buydowns. In certain 

transactions, a third party (such as a 

seller) and a consumer both pay an 

amount to the creditor to reduce the 

interest rate. The creditor must include 

the portion paid by the consumer in the 

finance charge and disclose the 

corresponding multiple payment levels 

and composite annual percentage rate. 

The portion paid by the third party and 

the corresponding reduction in interest 

rate, however, should not be reflected in 

the disclosures unless the lower rate is 

reflected in the credit contract. See the 

discussion on third-party and consumer 

buydown transactions [elsewhere in the 

commentary to § 226.17(c)]flin 

comments 17(c)(1)(i)–1 and 17(c)(1)(i)– 

2, respectivelyfi. 

fl17(c)(1)(ii) Wrap-around 

financing.fi 

[6. Wraparound financing.]fl1. 

General.fi Wrap-around transactions, 

usually loans, involve the creditor’s 

wrapping the outstanding balance on an 

existing loan and advancing additional 

funds to the consumer. The pre-existing 

loan, which is wrapped, may be to the 

same consumer or to a different 

consumer. In either case, the consumer 

makes a single payment to the new 

creditor, whom makes the payments on 

the pre-existing loan to the original 

creditor. Wrap-around loans or sales are 

considered new single-advance 

transactions, with an amount financed 

equaling the sum of the new funds 

advanced by the wrap creditor and the 

remaining principal owed to the original 

creditor on the pre-existing loan. In 

disclosing the itemization of the amount 

financed, the creditor may use a label 

such as ‘‘the amount that will be paid 

to creditor X’’ to describe the remaining 

principal balance on the pre-existing 

loan. This approach to Truth in Lending 

calculations has no effect on 

calculations required by other statutes, 

such as State usury laws. 

[7.]fl2.fi Wrap-around financing 

with balloon payments. For wraparound transactions involving a large 

final payment of the new funds before 

the maturity of the pre-existing loan, the 

amount financed is the sum of the new 

funds and the remaining principal on 

the pre-existing loan. The disclosures 

should be based on the shorter term of 

the wrap loan, with a large final 

payment of both the new funds and the 

total remaining principal on the preexisting loan (although only the wrap 

loan will actually be paid off at that 

time). 

fl17(c)(1)(iii) Variable- or adjustablerate transactions.fi 

[8.]fl1.fi Basis of disclosures [in 

variable-rate transactions]. The 

disclosures for a variable-flor 

adjustable-fi rate transaction must be 

given for the full term of the transaction 

and must be based on the terms in effect 

at the time of consummation. Creditors 

flgenerallyfi should base the 

disclosures only on the initial rate and 

should not assume that this rate will 

increase fl(except as provided in 

§ 226.38(c) for transactions secured by 

real property or a dwelling)fi. For 

example, in a fla variable- or 

adjustable-ratefi loan with an initial 

flinterestfi rate of 10 percent and a 5 

percentage points rate cap, creditors 

should base the disclosures on the 

initial rate and should not assume that 

the rate will increase 5 percentage 

points. However, in a variable-rate 

transaction with a seller buydown that 

is reflected in the credit contract, a 

consumer buydown, or a discounted or 

premium rate, disclosures should be a 

composite rate based on the rate in 

effect during the initial period and the 

rate that is the basis of the variable-rate 

feature for the remainder of the term. 

(See the commentary to section 

226.17(c)fl(1)fi for a discussion of 

buydown, discounted, and premium 

transactions and the commentary to 

section 226.19(a)(2) for a discussion of 

[the] redisclosure in [certain mortgage 

transactions with a variable-rate] 

fltransactions secured by real property 

or a dwelling with an adjustable-ratefi 

feature. 

[9.]fl2.fi Use of estimates in 

variable-flor adjustable-firate 

transactions. The variable- flor 

adjustable-fi rate feature does not, by 

itself, make the disclosures estimates. 

[10.]fl3.fi Discounted and premium 

variable-flor adjustable-firate 

transactions. In some variable-flor 

adjustable-firate transactions, creditors 

may set an initial interest rate that is not 

determined by the index or formula 

used to make later interest rate 

adjustments. Typically, this initial rate 

charged to consumers is lower than the 

rate would be if it were calculated using 

the index or formula. However, in some 

cases the initial rate may be higher. In 

a discounted transaction, for example, a 

creditor may calculate interest rates 

according to a formula using the sixmonth Treasury bill rate plus a 2 

percent margin. If the Treasury bill rate 

at consummation is 10 percent, the 

creditor may forgo the 2 percent spread 

and charge only 10 percent for a limited 

time, instead of setting an initial rate of 

12 percent. 

i. When creditors use an initial 

interest rate that is not calculated using 

the index or formula for later rate 

adjustments, the disclosures should 

reflect a composite annual percentage 

rate based on the initial rate for as long 

as it is charged and, for the remainder 

of the term, the rate that would have 

been applied using the index or formula 

at the time of consummation. The 

interest rate at consummation need not 

be used if a contract provides for a delay 

in the implementation of changes in an 

index value. For example, if the contract 

specifies that interest rate changes are 

based on the index value in effect 45 

days before the flinterest ratefi change 

date, creditors may use any index value 

in effect during the 45fl-fiday period 

before consummation in calculating a 

composite annual percentage rate. 

ii. The effect of the multiple rates 

must also be reflected in the calculation 

and disclosure of the finance charge, 

total of payments, and payment 

schedule. fl(In transactions secured by 

real property or a dwelling, creditors 

disclose the ‘‘interest and settlement 

charges’’ rather than the ‘‘finance 

charge’’ and the ‘‘payment summary’’ 

rather than the ‘‘payment schedule.’’ 

See § 226.38(c) and (e)(5).fi 

iii. If a loan contains a rate or 

payment cap that would prevent the 

initial rate or payment, at the time of the 

first adjustment, from changing to the 

rate determined by the index or formula 

at consummation, the effect of that rate 

or payment cap should be reflected in 

the disclosures. 

iv. Because these transactions involve 

irregular payment amounts, an annual 

percentage rate tolerance of 14; of 1 

percent applies, in accordance with 

§ 226.22(a)(3). 

v. Examples of discounted 

[variable]fladjustablefi-rate 

transactions flsecured by real property 

or a dwellingfi include: 

A. A 30-year loan for $100,000 with 

no prepaid [finance charges]flinterest 

and settlement chargesfi and rates 

determined by the Treasury bill rate 

plus 2 percent. Rate and payment 

adjustments are made annually. 

Although the Treasury bill rate at the 

time of consummation is 10 percent, the 

creditor sets the interest rate for one 

year at 9 percent, instead of 12 percent 

according to the formula. The 

disclosures should reflect a composite 

annual percentage rate of 11.63 percent 

based on 9 percent for one year and 12 

percent for 29 years. [Reflecting those 

two rate levels, the payment schedule 

should show 12 payments of $804.62 

and 348 payments of $1,025.31.] The 

[finance charge]flinterest and 

settlement chargesfi should be 

$266,463.32 and the total of payments 

$366,463.32. 

B. Same loan as above, except with a 

2 percent rate cap on periodic 

adjustments. The disclosures should 

reflect a composite annual percentage 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43379 

rate of 11.53 percent based on 9 percent 

for the first year, 11 percent for the 

second year, and 12 percent for the 

remaining 28 years. [Reflecting those 

three rate levels, the payment schedule 

should show 12 payments of $804.62, 

12 payments of $950,09, and 336 

payments of $365,234.76.] The [finance 

charge]flinterest and settlement 

chargesfi should be $265,234.76 and 

the total of payments should be 

$365,234.76. 

C. Same loan as above, except with a 

71⁄2; percent cap on payment 

adjustments. The disclosures should 

reflect a composite annual percentage 

rate of 11.64 percent, based on 9 percent 

for one year and 12 percent for 29 years. 

[Because of the payment cap, five levels 

of payments should be reflected.] The 

[finance charge]flinterest and 

settlement chargesfi should be 

$277,040.60, and the total of payments 

$377,040.60. 

vi. A loan in which the initial interest 

rate is set according to the index or 

formula used for later adjustments but is 

not set at the value of the index or 

formula at consummation is not a 

discounted or premium variable-flor 

adjustable-firate loan. For example, if a 

creditor commits to an initial rate based 

on the formula on a date prior to 

consummation, but the index has 

moved during the period between that 

time and consummation, a creditor 

should base its disclosures on the initial 

rate. 

[11. Examples of variable-rate 

transactions.] fl4. General. In general, 

vfi[V]ariable-rate transactions include: 

[•]fli.fi Renewable balloon-payment 

instruments flwith a fixed interest 

ratefi where the creditor is both 

unconditionally obligated to renew the 

balloon-payment loan at the consumer’s 

option (or is obligated to renew subject 

to conditions within the consumer’s 

control) and has the option of increasing 

the interest rate at the time of renewal. 

fl(However, a transaction secured by 

real property or a dwelling with a 

balloon payment and a fixed interest 

rate must be disclosed as a fixed-rate 

transaction under § 226.38(a)(3) whether 

or not the transaction is renewable.)fi 

Disclosures must be based on the 

payment amortization (unless the 

specified term of the obligation with 

renewals is shorter) and on the rate in 

effect at the time of consummation of 

the transaction. (Examples of conditions 

within a consumer’s control include 

requirements that a consumer be current 

in payments or continue to reside in the 

mortgaged property. In contrast, setting 

a limit on the rate at which the creditor 

would be obligated to renew or 

reserving the right to change the credit 

standards at the time of renewal are 

examples of conditions outside a 

consumer’s control.) If, however, a 

creditor is not obligated to renew as 

described above, disclosures must be 

based on the term of the balloonpayment loan. Disclosures also must be 

based on the term of the balloonpayment loan in balloon-payment 

instruments in which the legal 

obligation provides that the loan will be 

renewed by a ‘‘refinancing’’ of the 

obligation, as that term is defined by 

§ 226.20(a). If it cannot be determined 

from the legal obligation that the loan 

will be renewed by a ‘‘refinancing,’’ 

disclosures must be based either on the 

term of the balloon-payment loan or on 

the payment amortization, depending 

on whether the creditor is 

unconditionally obligated to renew the 

loan as described above. (This 

discussion does not apply to 

construction loans subject to 

§ 226.17(c)(6).) 

[• ‘‘Shared-equity’’ or ‘‘sharedappreciation’’ mortgages that have a 

fixed rate of interest and an appreciation 

share based on the consumer’s equity in 

the mortgaged property, in a transaction 

not secured by real property or a 

dwelling. The appreciation share is 

payable in a lump sum at a specified 

time. Disclosures must be based on the 

fixed interest rate. (As discussed in the 

commentary to § 226.2, other types of 

shared-equity arrangements are not 

considered ‘‘credit’’ and are not subject 

to Regulation Z.)] 

[•]flii.fi Preferred-rate loans where 

the terms of the legal obligation provide 

that the initial underlying rate is fixed 

but will increase upon the occurrence of 

some event, such as an employee 

leaving the employ of the creditor, and 

the note reflects the preferred rate. The 

disclosures are to be based on the 

preferred rate. 

[• Graduated-payment mortgages and 

step-rate transactions without a 

variable-rate feature are not considered 

variable-rate transactions. ‘‘Sharedequity’’ or ‘‘shared-appreciation’’ 

mortgages are not considered variablerate transactions.] 

[•]fliii.fi ‘‘Price level adjusted 

mortgages’’ or other indexed mortgages 

that have a fixed rate of interest but 

provide for periodic adjustments to 

payments and the loan balance to reflect 

changes in an index measuring prices or 

inflation. Disclosures are to be based on 

the fixed interest rate. 

fl5. Not variable- or adjustable-rate 

transactions. Graduated-payment 

mortgages and step-rate transactions 

without a variable-rate feature are not 

considered variable- or adjustable-rate 

transactions.fi 

[12.]fl 6.fi Graduated-payment 

adjustable-rate mortgage. Graduated 

payment adjustable rate mortgages 

involve both [a variable]flan 

adjustablefi interest rate and scheduled 

[variations]fladjustmentsfi in payment 

amounts during the loan term. For 

example, under these plans, a series of 

graduated payments may be scheduled 

before rate adjustments affect payment 

amounts, or the initial scheduled 

payment may remain constant for a set 

period before rate adjustments affect the 

payment amount. In any case, the initial 

payment amount may be insufficient to 

cover the scheduled interest, causing 

negative amortization from the outset of 

the transaction. In these transactions, 

the disclosures should treat these 

features as follows: 

[•]fli.fi The finance charge includes 

the amount of negative amortization 

based on the assumption that the rate in 

effect at consummation remains 

unchanged. 

[•]flii.fi The amount financed does 

not include the amount of negative 

amortization. 

[•]fliii.fi As in any variable- flor 

adjustable-fi rate transaction, the 

annual percentage rate is based on the 

terms in effect at consummation. 

[• The schedule of payments 

discloses the amount of any scheduled 

initial payments followed by an 

adjusted level of payments based on the 

initial interest rate. Since some 

mortgage plans contain limits on the 

amount of the payment adjustment, the 

payment schedule in a transaction not 

secured by real property or a dwelling, 

or payment summary, in a transaction 

secured by real property or a dwelling 

may require several different levels of 

payments, even with the assumption 

that the original interest rate does not 

increase.] 

[13.]fl7.fi Growth-equity mortgages. 

flGrowth-equity mortgages, afi[A]lso 

referred to as payment-escalated 

mortgages, [these mortgage plans 

involve] scheduled payment increases 

to prematurely amortize the loan. The 

initial payment amount is determined as 

for a long-term loan with a fixed interest 

rate. Payment increases are scheduled 

periodically, based on changes in an 

index. The larger payments result in 

accelerated amortization of the loan. In 

disclosing these mortgage plans, 

creditors [may either— 

• Estimate]flmust estimatefi the 

amount of payment increases, based on 

the best information reasonably 

available[, or 

• Disclose by analogy to the variablerate disclosures in section 226.18(f)(1)]. 

(This discussion does not apply to 

growth-equity mortgages in which the 

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43380 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

amount of payment increases can be 

accurately determined at the time of 

disclosure. For these mortgages, [as for 

graduated-payment mortgages,] 

disclosures should reflect the scheduled 

increases in payments.) 

[14. Reverse mortgages.]fl17(c)(1)(iv) 

Repayment upon occurrence of future 

event.fi 

fl1. General.fi Reverse mortgages, 

also known as reverse annuity or home 

equity conversion mortgages, typically 

involve the disbursement of monthly 

advances to the consumer for a fixed 

period or until the occurrence of an 

event such as the consumer’s death. 

Repayment of the loan (generally a 

single payment of principal and accrued 

interest) may be required to be made at 

the end of the disbursements or, for 

example, upon the death of the 

consumer. fl(However, a reverse 

mortgage is covered by § 226.33 only if 

the consumer’s death is one of the 

conditions of repayment, as provided 

under § 226.33(a).)fi In disclosing these 

transactions, creditors must apply the 

following rules, as applicable: 

[•]fli.fi If the reverse mortgage has a 

specified period for disbursements but 

repayment is due only upon the 

occurrence of a future event such as the 

death of the consumer, the creditor must 

assume that disbursements will be made 

until they are scheduled to end. The 

creditor must assume repayment will 

occur when disbursements end (or 

within a period following the final 

disbursement which is not longer than 

the regular interval between 

disbursements). This assumption should 

be used even though repayment may 

occur before or after the disbursements 

are scheduled to end. In such cases, the 

creditor may include a statement such 

as ‘‘The disclosures assume that you 

will repay the loan at the time our 

payments to you end. As provided in 

your agreement, your repayment may be 

required at a different time.’’ 

[•]flii.fi If the reverse mortgage has 

neither a specified period for 

disbursements nor a specified 

repayment date and these terms will be 

determined solely by reference to future 

events including the consumer’s death, 

the creditor may assume that the 

disbursements will end upon the 

consumer’s death (estimated by using 

actuarial tables, for example) and that 

repayment will be required at the same 

time (or within a period following the 

date of the final disbursement which is 

not longer than the regular interval for 

disbursements). Alternatively, the 

creditor may base the disclosures upon 

another future event it estimates will be 

most likely to occur first. (If terms will 

be determined by reference to future 

events which do not include the 

consumer’s death, the creditor must 

base the disclosures upon the 

occurflrfience of the event estimated 

to be most likely to occur first.) 

[•]fliii.fi In making the disclosures, 

the creditor must assume that all 

disbursements and accrued interest will 

be paid by the consumer. For example, 

if the note has a nonrecourse provision 

providing that the consumer is not 

obligated for an amount greater than the 

value of the house, the creditor must 

nonetheless assume that the full amount 

to be disbursed will be repaid. In this 

case, however, the creditor may include 

a statement such as ‘‘The disclosures 

assume full repayment of the amount 

advanced plus accrued interest, 

although the amount you may be 

required to pay is limited by your 

agreement.’’ 

[•]fliv.fi Some reverse mortgages 

provide that some or all of the 

appreciation in the value of the property 

will be shared between the consumer 

and the creditor. [Such loans are 

considered variable-rate mortgages, as 

described in comment 17(c)(1)–11, and 

the appreciation feature must be 

disclosed in accordance with 

§ 226.18(f)(1). If the reverse mortgage 

has a variable interest rate, is written for 

a term greater than one year, and is 

secured by the consumer’s principal 

dwelling, the shared appreciation 

feature must be described under 

§ 226.19(b)(2)(vii).]flIf the reverse 

mortgage has an adjustable interest rate 

and is secured by real property or a 

dwelling, the creditor must disclose the 

shared-equity or shared-appreciation 

feature as required by §§ 226.19(b)(3)(iii) 

and 226.38(d)(2)(iii).fi 

[15. Morris Plan transactions. When a 

deposit account is created for the sole 

purpose of accumulating payments and 

then is applied to satisfy entirely the 

consumer’s obligation in the 

transaction, each deposit made into the 

account is considered the same as a 

payment on a loan for purposes of 

making disclosures. 

16. Number of transactions. Creditors 

have flexibility in handling credit 

extensions that may be viewed as 

multiple transactions. For example: 

• When a creditor finances the credit 

sale of a radio and a television on the 

same day, the creditor may disclose the 

sales as either 1 or 2 credit sale 

transactions. 

• When a creditor finances a loan 

along with a credit sale of health 

insurance, the creditor may disclose in 

one of several ways: a single credit sale 

transaction, a single loan transaction, or 

a loan and a credit sale transaction. 

• The separate financing of a 

downpayment in a credit sale 

transaction may, but need not, be 

disclosed as 2 transactions (a credit sale 

and a separate transaction for the 

financing of the downpayment).] 

[17. Special rules for tax refund 

anticipation loans.]fl17(c)(1)(v) Tax 

refund-anticipation loan.fi 

fl1. General.fi Tax refund loans, 

also known as refund anticipation loans 

(RALs), are transactions in which a 

creditor will lend up to the amount of 

a consumer’s expected tax refund. RAL 

agreements typically require repayment 

upon demand, but also may provide that 

repayment is required when the refund 

is made. The agreements also typically 

provide that if the amount of the refund 

is less than the payment due, the 

consumer must pay the difference. 

Repayment often is made by a 

preauthorized offset to a consumer’s 

account held with the creditor when the 

refund has been deposited by electronic 

transfer. Creditors may charge fees for 

RALs in addition to fees for filing the 

consumer’s tax return electronically. In 

RAL transactions subject to the 

regulation the following special rules 

apply: 

[•]fli.fi If, under the terms of the 

legal obligation, repayment of the loan 

is required when the refund is received 

by the consumer (such as by deposit 

into the consumer’s account), the 

disclosures should be based on the 

creditor’s estimate of the time the 

refund will be delivered even if the loan 

also contains a demand clause. The 

practice of a creditor to demand 

repayment upon delivery of refunds 

does not determine whether the legal 

obligation requires that repayment be 

made at that time; this determination 

must be made according to applicable 

State or other law. (See comment 

17(c)(5)–1 for the rules regarding 

disclosures if the loan is payable solely 

on demand or is payable either on 

demand or on an alternate maturity 

date.) 

[•]flii.fi If the consumer is required 

to repay more than the amount 

borrowed, the difference is a finance 

charge unless excluded under § 226.4. 

In addition, to the extent that any fees 

charged in connection with the loan 

(such as for filing the tax return 

electronically) exceed those fees for a 

comparable cash transaction (that is, 

filing the tax return electronically 

without a loan), the difference must be 

included in the finance charge. 

[18.]fl17(c)(1)(vi)fi Pawn 

transactions. 

fl1. General.fi When, in connection 

with an extension of credit, a consumer 

pledges or sells an item to a pawnbroker 

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creditor in return for a sum of money 

and retains the right to redeem the item 

for a greater sum (the redemption price) 

within a specified period of time, 

disclosures are required. In addition to 

other disclosure requirements that may 

be applicable under § 226.18, for 

purposes of pawn transactions: 

i. The amount financed is the initial 

sum paid to the consumer. The 

pawnbroker creditor need not provide a 

separate itemization of the amount 

financed if that entire amount is paid 

directly to the consumer and the 

disclosed description of the amount 

financed is ‘‘the amount of cash given 

directly to you’’ or a similar phrase. 

ii. The finance charge is the difference 

between the initial sum paid to the 

consumer and the redemption price 

plus any other finance charges paid in 

connection with the transaction. (See 

§ 226.4.) 

iii. The term of the transaction, for 

calculating the annual percentage rate, 

is the period of time agreed to by the 

pawnbroker creditor and the consumer. 

The term of the transaction does not 

include a grace period (including any 

statutory grace period) after the agreed 

redemption date. 

Paragraph 17(c)(2)(i). 

1. Basis for estimates. Disclosures 

may be estimated when the exact 

information is unknown at the time 

disclosures are madefl, except that 

creditors may not provide estimated 

disclosures in disclosures required by 

§ 226.19(a)(2)(ii) and (iii)fi. Information 

is unknown if it is not reasonably 

available to the creditor at the time the 

disclosures are made. The ‘‘reasonably 

available’’ standard requires that the 

creditor, acting in good faith, exercise 

due diligence in obtaining information. 

For example, the creditor must at a 

minimum utilize generally accepted 

calculation tools, but need not invest in 

the most sophisticated computer 

program to make a particular type of 

calculation. The creditor normally may 

rely on the representations of other 

parties in obtaining information. For 

example, the creditor might look to the 

consumer for the time of consummation, 

to insurance companies for the cost of 

insurance, or to realtors for taxes and 

escrow fees. The creditor may utilize 

estimates in making disclosures even 

though the creditor knows that more 

precise information will be available by 

the point of consummation. However, 

new disclosures may be required under 

§ 226.17(f) or § 226.19. 

2. Labelling estimates. Estimates must 

be designated as such in the segregated 

disclosuresfl, except that creditors may 

not provide estimated disclosures in the 

disclosures required by § 226.19(a)(2)(ii) 

and (iii)fi. Even though other 

disclosures are based on the same 

assumption on which a specific 

estimated disclosure was based, the 

creditor has some flexibility in labelling 

the estimates. Generally, only the 

particular disclosure for which the exact 

information is unknown is labelled as 

an estimate. However, when several 

disclosures are affected because of the 

unknown information, the creditor has 

the option of labelling either every 

affected disclosure or only the 

disclosure primarily affected. For 

example, when the finance charge is 

unknown because the date of 

consummation is unknown, the creditor 

must label the finance charge as an 

estimate and may also label as estimates 

the total of payments and the payment 

schedule. When many flnumericalfi 

disclosures are estimates, the creditor 

may use a general statement, such as 

‘‘all numerical disclosures except the 

late payment disclosure are estimates,’’ 

as a method to label those disclosures as 

estimates. 

3. Simple-interest transactions. If 

consumers do not make timely 

payments in a simple-interest 

transaction, some of the amounts 

calculated for Truth in Lending 

disclosures will differ from amounts 

that consumers will actually pay over 

the term of the transaction. Creditors 

may label disclosures as estimates in 

these transactions[.]flexcept as 

otherwise provided by § 226.19(a)(2). 

(See the commentary on § 226.19(a)(2) 

for a discussion of circumstances where 

creditors may not disclose estimates for 

transactions secured by real property or 

a dwelling.)fi For example, because the 

finance charge and total of payments 

may be larger than disclosed if 

consumers make late payments, 

creditors may label the finance charge 

and total of payments as estimates. On 

the other hand, creditors may choose 

not to label disclosures as estimatesfl. 

In all cases, creditorsfi [and] may base 

[all] disclosures on the assumption that 

payments will be made on time fland 

in the amounts required by the terms of 

the legal obligation,fi disregarding any 

possible [inaccuracies]fldifferencesfi 

resulting from consumers’ payment 

patterns. 

Paragraph 17(c)(2)(ii) 

1. Per diem interest. This paragraph 

applies to any numerical amount (such 

as the finance charge, annual percentage 

rate, or payment amount) that is affected 

by the amount of the per-diem interest 

charge that will be collected at 

consummation. If the amount of perdiem interest used in preparing the 

disclosures for consummation is based 

on the information known to the 

creditor at the time the disclosure 

document is prepared, the disclosures 

are considered accurate under this rule, 

and affected disclosures are also 

considered accurate, even if the 

disclosures are not labeled as estimates. 

For example, if the amount of per-diem 

interest used to prepare disclosures is 

less than the amount of per-diem 

interest charged at consummation, and 

as a result the finance charge is 

understated by $200, the disclosed 

finance charge is considered accurate 

even though the understatement is not 

within the $100 tolerance of 

§ 226.18(d)(1), and the finance charge 

was not labeled as an estimate. In this 

example, if in addition to the 

understatement related to the per-diem 

interest, a $90 fee is incorrectly omitted 

from the finance charge, causing it to be 

understated by a total of $290, the 

finance charge is considered accurate 

because the $90 fee is within the 

tolerance in § 226.18(d)(1). 

Paragraph 17(c)(3) 

1. Minor variations. Section 

226.17(c)(3) allows creditors to 

disregard certain factors in calculating 

and making disclosures. For example: 

[•]fli.fi Creditors may ignore the 

effects of collecting payments in whole 

cents. Because payments cannot be 

collected in fractional cents, it is often 

difficult to amortize exactly an 

obligation with equal payments; the 

amount of the last payment may require 

adjustment to account for the rounding 

of the other payments to whole cents. 

[•]flii.fi Creditors may base their 

disclosures on calculation tools that 

assume that all months have an equal 

number of days, even if their practice is 

to take account of the variations in 

months for purposes of collecting 

interest. For example, a creditor may 

use a calculation tool based on a 360- 

day year, when it in fact collects interest 

by applying a factor of 1/365 of the 

annual rate to 365 days. This rule does 

not, however, authorize creditors to 

ignore, for disclosure purposes, the 

effects of applying 1/360 of an annual 

rate to 365 days. 

2. Use of special rules. A creditor may 

utilize the special rules in § 226.17(c)(3) 

for purposes of calculating and making 

all disclosures for a transaction or may, 

at its option, use the special rules for 

some disclosures and not others. 

Paragraph 17(c)(4). 

1. Payment schedule irregularities. 

When one or more payments in a 

transaction differ from the others 

because of a long or short first period, 

the variations may be ignored in 

disclosing the payment schedule, 

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finance charge, annual percentage rate, 

and other terms. For example: 

[•]fli.fi A 36-month auto loan might 

be consummated on June 8 with 

payments due on July 1 and the first of 

each succeeding month. The creditor 

may base its calculations on a payment 

schedule that assumes 36 equal 

intervals and 36 equal installment 

payments, even though a precise 

computation would produce slightly 

different amounts because of the shorter 

first period. 

[•]flii.fi By contrast, in the same 

example, if the first payment were not 

scheduled until August 1, the irregular 

first period would exceed the limits in 

§ 226.17(c)(4); the creditor could not use 

the special rule and could not ignore the 

extra days in the first period in 

calculating its disclosures. 

2. Measuring odd periods. In 

determining whether a transaction may 

take advantage of the rule in 

§ 226.17(c)(4), the creditor must 

measure the variation against a regular 

period. For purposes of that rule: 

[•]fli.fi The first period is the period 

from the date on which the finance 

charge begins to be earned to the date 

of the first payment. 

[•]flii.fi The term is the period from 

the date on which the finance charge 

begins to be earned to the date of the 

final payment. 

[•]fliii.fi The regular period is the 

most common interval between 

payments in the transaction. 

In transactions involving regular 

periods that are monthly, semimonthly 

or multiples of a month, the length of 

the irregular and regular periods may be 

calculated on the basis of either the 

actual number of days or an assumed 

30-day month. In other transactions, the 

length of the periods is based on the 

actual number of days. 

3. Use of special rules. A creditor may 

utilize the special rules in § 226.17(c)(4) 

for purposes of calculating and making 

some disclosures but may elect not to do 

so for all of the disclosures. For 

example, the variations may be ignored 

in calculating and disclosing the annual 

percentage rate but taken into account 

in calculating and disclosing the finance 

charge and payment schedule. 

4. Relation to prepaid finance 

charges. Prepaid finance charges, 

including ‘‘odd-days’’ or ‘‘per-diem’’ 

interest, paid prior to or at closing may 

not be treated as the first payment on a 

loan. Thus, creditors may not disregard 

an irregularity in disclosing such 

finance charges. 

Paragraph 17(c)(5). 

1. Demand disclosures. Disclosures 

for demand obligations are based on an 

assumed 1-year term, unless an alternate 

maturity date is stated in the legal 

obligation. Whether an alternate 

maturity date is stated in the legal 

obligation is determined by applicable 

law. An alternate maturity date is not 

inferred from an informal principal 

reduction agreement or a similar 

understanding between the parties. 

However, when the note itself specifies 

a principal reduction schedule (for 

example, ‘‘payable on demand or $2,000 

plus interest quarterly’’), an alternate 

maturity is stated and the disclosures 

must reflect that date. flSee 

§§ 226.19(b)(2)(ii)(D) and 

226.38(d)(2)(iv) and associated 

commentary to determine how to 

disclose a demand feature for a 

transaction secured by real property or 

a dwelling.fi 

2. Future event as maturity date. An 

obligation whose maturity date is 

determined solely by a future event, as 

for example, a loan payable only on the 

sale of property, is not a demand 

obligation. Because no demand feature 

is contained in the obligation, demand 

disclosures under § 226.18(i) are 

inapplicable. The disclosures should be 

based on the creditor’s estimate of the 

time at which the specified event will 

occur, and flin a transaction not 

secured by real property or a dwellingfi 

may indicate the basis for the creditor’s 

estimate, as noted in the commentary to 

§ 226.17(a). 

3. Demand after stated period. Most 

demand transactions contain a demand 

feature that may be exercised at any 

point during the term, but [certain 

transactions]fla transaction mayfi 

convert to demand status only after a 

fixed period. [For example, in States 

prohibiting due-on-sale clauses, the 

Federal National Mortgage Association 

(FNMA) requires mortgages that it 

purchases to include a call option rider 

that may be exercised after 7 years. 

These mortgages are generally written as 

long-term obligations, but contain a 

demand feature that may be exercised 

only within a 30-day period at 7 years.] 

The disclosures for [these 

transactions]fla transaction that 

converts to demand status after a fixed 

periodfi should be based upon the 

legally agreed-upon maturity date. Thus, 

flfor example,fi if a mortgage 

containing [the 7-year FNMA call 

option] fla call option the creditor may 

exercise during the first 30 days of the 

eighth year after loan originationfi is 

written as a 20-year obligation, the 

disclosures should be based on the 20- 

year term, with the demand feature 

disclosed under [§ 226.18(i)]fl 

§ 226.38(d)(2)(iv)fi. 

4. Balloon mortgages. Balloon 

payment mortgages, with payments 

based on a long-term amortization 

schedule and a large final payment due 

after a shorter term, are not demand 

obligations unless a demand feature is 

specifically contained in the contract. 

For example, a mortgage with a term of 

5 years and a payment 

[schedule]flsummaryfi based on 20 

years would not be treated as a mortgage 

with a demand feature, in the absence 

of any contractual demand provisions. 

[In this type of mortgage, disclosures 

should be based on the 5-year 

term.]fl(See § 226.38(c)(3) for 

requirements for interest rate and 

payment summary disclosures for 

balloon payment mortgages.)fi 

Paragraph 17(c)(6). 

1. Series of advances. Section 

226.17(c)(6)(i) deals with a series of 

advances under an agreement to extend 

credit up to a certain amount. A creditor 

may treat all of the advances as a single 

transaction or disclose each advance as 

a separate transaction. If these advances 

are treated as 1 transaction and the 

timing and amounts of advances are 

unknown, creditors must make 

disclosures based on estimates, as 

provided in § 226.17(c)(2). If the 

advances are disclosed separately, 

disclosures must be provided before 

each advance occurs, with the 

disclosures for the first advance 

provided by consummation. 

2. Construction loans. Section 

226.17(c)(6)(ii) provides a flexible rule 

for disclosure of construction loans that 

may be permanently financed. These 

transactions have 2 distinct phases, 

similar to 2 separate transactions. The 

construction loan may be for initial 

construction or subsequent 

construction, such as rehabilitation or 

remodelling. The construction period 

usually involves several disbursements 

of funds at times and in amounts that 

are unknown at the beginning of that 

period, with the consumer paying only 

accrued interest until construction is 

completed. Unless the obligation is paid 

at that time, the loan then converts to 

permanent financing in which the loan 

amount is amortized just as in a 

standard mortgage transaction. Section 

226.17(c)(6)(ii) permits the creditor to 

give either one combined disclosure for 

both the construction financing and the 

permanent financing, or a separate set of 

disclosures for the 2 phases. This rule 

is available whether the consumer is 

initially obligated to accept construction 

financing only or is obligated to accept 

both construction and permanent 

financing from the outset. If the 

consumer is obligated on both phases 

and the creditor chooses to give 2 sets 

of disclosures, both sets must be given 

to the consumer initially, because both 

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transactions would be consummated at 

that time. (Appendix D provides a 

method of calculating the annual 

percentage rate and other disclosures for 

construction loans, which may be used, 

at the creditor’s option, in disclosing 

construction financing.) 

3. Multiple-advance construction 

loans. Section 226.17(c)(6)(i) and (ii) are 

not mutually exclusive. For example, in 

a transaction that finances the 

construction of a dwelling that may be 

permanently financed by the same 

creditor, the construction phase may 

consist of a series of advances under an 

agreement to extend credit up to a 

certain amount. In these cases, the 

creditor may disclose the construction 

phase as either 1 or more than 1 

transaction and also disclose the 

permanent financing as a separate 

transaction. 

4. Residential mortgage transaction. 

See the commentary to § 226.2(a)(24) for 

a discussion of the effect of 

§ 226.17(c)(6) on the definition of a 

residential mortgage transaction. 

5. Allocation of points. When a 

creditor utilizes the special rule in 

§ 226.17(c)(6) to disclose credit 

extensions as multiple transactions, 

buyers points or similar amounts 

imposed on the consumer must be 

allocated for purposes of calculating 

disclosures. While such amounts should 

not be taken into account more than 

once in making calculations, they may 

be allocated between the transactions in 

any manner the creditor chooses. For 

example, if a construction-permanent 

loan is subject to 5 points imposed on 

the consumer and the creditor chooses 

to disclose the 2 phases separately, the 

5 points may be allocated entirely to the 

construction loan, entirely to the 

permanent loan, or divided in any 

manner between the two. However, the 

entire 5 points may not be applied 

twice, that is, to both the construction 

and the permanent phases. 

17(d) Multiple creditors; multiple 

consumers. 

1. Multiple creditors. If a credit 

transaction involves more than one 

creditor: 

[•]fli.fi The creditors must choose 

which of them will make the 

disclosures. 

[•]flii.fi A single, complete set of 

disclosures must be provided, rather 

than partial disclosures from several 

creditors. 

[•]fliii.fi All disclosures for the 

transaction must be given, even if the 

disclosing creditor would not otherwise 

have been obligated to make a particular 

disclosure. For example, if one of the 

creditors is the seller, the total sale price 

disclosure under § 226.18(j) must be 

made, even though the disclosing 

creditor is not the seller. 

2. Multiple consumers. When two 

consumers are joint obligors with 

primary liability on an obligation, the 

disclosures may be given to either one 

of them. If one consumer is merely a 

surety or guarantor, the disclosures 

must be given to the principal debtor. In 

rescindable transactions, however, 

separate disclosures must be given to 

each consumer who has the right to 

rescind under § 226.23, although the 

disclosures required under § 226.19(b) 

need only be provided to the consumer 

who expresses an interest in a variablerate loan program. 

17(e) Effect of subsequent events. 

1. Events causing inaccuracies. 

Inaccuracies in disclosures are not 

violations if attributable to events 

occurring after the disclosures are made. 

[For example, when the consumer fails 

to fulfill a prior commitment to keep the 

collateral insured and the creditor then 

provides the coverage and charges the 

consumer for it, such a change does not 

make the original disclosures 

inaccurate.] The creditor may, however, 

be required to make new disclosures 

under § 226.17(f) or § 226.19 if the 

events occurred between disclosure and 

consummation or under § 226.20 if the 

events occurred after consummation.fl 

For example, when the consumer fails 

to fulfill a prior commitment to keep the 

collateral insured and the creditor then 

provides the coverage and charges the 

consumer for it, such a change does not 

make the original disclosures 

inaccurate. However, the creditor would 

be required to provide the notice 

required under § 226.20(e).fi 

17(f) Early disclosures. 

1. Change in rate or other terms. 

Redisclosure is required for changes that 

occur between the time disclosures are 

made and consummation if the annual 

percentage rate in the consummated 

transaction exceeds the limits 

prescribed in this section, even if the 

[initial]flpriorfi disclosures would be 

considered accurate under the 

tolerances in § 226.18(d) or fl§fi 

226.22(a). To illustrate: 

i. [General.]flNon-mortgage loan.fi 

A. If disclosures are made in a regular 

transaction flnot secured by real 

property or a dwellingfi on July 1, the 

transaction is consummated on July 15, 

and the actual annual percentage rate 

varies by more than 1⁄8 of 1 percentage 

point from the disclosed annual 

percentage rate, the creditor must either 

redisclose the changed terms or furnish 

a complete set of new disclosures before 

consummation. Redisclosure is required 

even if the disclosures made on July 1 

are based on estimates and marked as 

such. 

B. In a regular transaction flnot 

secured by real property or a 

dwellingfi, if early disclosures are 

marked as estimates and the disclosed 

annual percentage rate is within 1⁄8 of 1 

percentage point of the rate at 

consummation, the creditor need not 

redisclose the changed terms (including 

the annual percentage rate). 

[ii. Nonmortgage loan.]flC.fi If 

disclosures flfor a transaction not 

secured by real property or a dwellingfi 

are made on July 1, the transaction is 

consummated on July 15, and the 

finance charge increased by $35 but the 

disclosed annual percentage rate is 

within the permitted tolerance, the 

creditor must at least redisclose the 

changed terms that were not marked as 

estimates. (See § 226.18(d)(2) of this 

part.) 

[iii.]flii.fi Mortgage loan. At the 

time [TILA disclosures]flthe 

disclosures required by 

§ 226.19(a)(2)(ii)fi are prepared in July, 

the loan closing is scheduled for July 31 

and the creditor does not plan to collect 

per-diem interest at consummation. 

Consummation actually occurs on 

August 5, and per-diem interest for the 

remainder of August is collected as a 

prepaid finance charge. [Assuming there 

were no other changes requiring 

redisclosure, t]flTfihe creditor may 

rely on the disclosures prepared in July 

that were accurate when they were 

prepared. However, if the creditor 

prepares new disclosures in August that 

will be provided at consummation, the 

new disclosures must take into account 

the amount of the per-diem interest 

known to the creditor at that time. 

2. Variable flor adjustablefi rate. 

The addition of a variable flor 

adjustablefi rate feature to the credit 

terms, after early disclosures are given, 

requires new disclosures. fl(See 

§ 226.19(a)(2) to determine when new 

disclosures are required for transactions 

secured by real property or a 

dwelling.fi 

3. Content of new disclosures. 

flSubject to § 226.19(a), ifi[I]f 

redisclosure is required flin a 

transaction not secured by real property 

or a dwellingfi, the creditor has the 

option of either providing a complete 

set of new disclosures, or providing 

disclosures of only the terms that vary 

from those originally disclosed. flIf the 

creditor chooses to provide a complete 

set of new disclosures, the creditor may 

but need not highlight the new terms, 

provided that the disclosures comply 

with the format requirements of 

§ 226.17(a). If the creditor chooses to 

disclose only the new terms, all the new 

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43384 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

terms must be disclosed. For example, 

a different annual percentage rate will 

almost always produce a different 

finance charge, and often a new 

schedule of payments; all of these 

changes would have to be disclosed. If, 

in addition, unrelated terms such as the 

amount financed or prepayment penalty 

vary from those originally disclosed, the 

accurate terms must be disclosed. 

However, no new disclosures are 

required if the only differences involve 

estimates other than the annual 

percentage rate, and no variable rate 

feature has been added (see comment 

17(f)-2). If a transaction is secured by 

real property or a dwelling, the creditor 

must provide a complete set of new 

disclosures in all cases, however.fi (See 

the commentary to § 226.19(a)(2).) 

4. Special rules. [In mortgage 

transactions subject to § 226.19, the 

creditor must redisclose if, between the 

delivery of the required early 

disclosures and consummation, the 

annual percentage rate changes by more 

than a stated tolerance.]flSpecial 

disclosure timing and content 

requirements apply under § 226.19(a)(2) 

to disclosures provided before 

consummation for mortgage transactions 

secured by real property or a 

dwelling.fi When subsequent events 

occur after consummation, new 

disclosures are required only if there is 

a refinancing or an assumption within 

the meaning of § 226.20. 

Paragraph 17(f)(2). 

1. Irregular transactions. For purposes 

of this paragraph, a transaction is 

deemed to be ‘‘irregular’’ according to 

the definition in footnote 46 of 

§ 226.22(a)(3). 

17(g) Mail or telephone orders—delay 

in disclosures. 

1. Conditions for use. When the 

creditor receives a mail or telephone 

request for creditfl, except for 

extensions of credit covered by sections 

226.19(a) and 226.19(b),fi the creditor 

may delay making the disclosures until 

the first payment is due if the following 

conditions are met: 

[•]fli.fi The credit request is 

initiated without face-to-face or direct 

telephone solicitation. (Creditors may, 

however, use the special rule when 

credit requests are solicited by mail.) 

[•]flii.fi The creditor has supplied 

the specified credit information about 

its credit terms either to the individual 

consumer or to the public generally. 

That information may be distributed 

through advertisements, catalogs, 

brochures, special mailers, or similar 

means. 

2. Insurance. The location 

requirements for the insurance 

disclosures under § 226.18(n) permit 

them to appear apart from the other 

disclosures. Therefore, a creditor may 

mail an insurance authorization to the 

consumer and then prepare the other 

disclosures to reflect whether or not the 

authorization is completed by the 

consumer. Creditors may also disclose 

the insurance cost on a unit-cost basis, 

if the transaction meets the 

requirements of § 226.17(g). 

17(h) Series of sales—delay in 

disclosures. 

1. Applicability. The creditor may 

delay the disclosures for individual 

credit sales in a series of such sales until 

the first payment is due on the current 

sale, assuming the 2 conditions in this 

paragraph are met. If those conditions 

are not met, the general timing rules in 

[§ 266.17(b)] fl§ 226.17(b)fi apply. 

2. Basis of disclosures. Creditors 

structuring disclosures for a series of 

sales under § 226.17(h) may compute 

the total sale price as either: 

[•]fli.fi The cash price for the sale 

plus that portion of the finance charge 

and other charges applicable to that 

sale; or 

[•]flii.fi The cash price for the sale, 

other charges applicable to the sale, and 

the total finance charge and outstanding 

principal. 

17(i) Interim student credit 

extensions. 

1. Definition. Student credit plans 

involve extensions of credit for 

education purposes where the 

repayment amount and schedule are not 

known at the time credit is advanced. 

These plans include loans made under 

any student credit plan, whether 

government or private, where the 

repayment period does not begin 

immediately. (Certain student credit 

plans that meet this definition are 

exempt from Regulation Z. See 

§ 226.3(f).) Creditors in interim student 

credit extensions need not disclose the 

terms set forth in this paragraph at the 

time the credit is actually extended but 

must make complete disclosures at the 

time the creditor and consumer agree 

upon the repayment schedule for the 

total obligation. At that time, a new set 

of disclosures must be made of all 

applicable items under § 226.18. 

2. Basis of disclosures. The 

disclosures given at the time of 

execution of the interim note should 

reflect two annual percentage rates, one 

for the interim period and one for the 

repayment period. The use of § 226.17(i) 

in making disclosures does not, by 

itself, make those disclosures estimates. 

Any portion of the finance charge, such 

as statutory interest, that is attributable 

to the interim period and is paid by the 

student (either as a prepaid finance 

charge, periodically during the interim 

period, in one payment at the end of the 

interim period, or capitalized at the 

beginning of the repayment period) 

must be reflected in the interim annual 

percentage rate. Interest subsidies, such 

as payments made by either a State or 

the Federal government on an interim 

loan, must be excluded in computing 

the annual percentage rate on the 

interim obligation, when the consumer 

has no contingent liability for payment 

of those amounts. Any finance charges 

that are paid separately by the student 

at the outset or withheld from the 

proceeds of the loan are prepaid finance 

charges. An example of this type of 

charge is the loan guarantee fee. The 

sum of the prepaid finance charges is 

deducted from the loan proceeds to 

determine the amount financed and 

included in the calculation of the 

finance charge. 

3. Consolidation. Consolidation of the 

interim student credit extensions 

through a renewal note with a set 

repayment schedule is treated as a new 

transaction with disclosures made as 

they would be for a refinancing. Any 

unearned portion of the finance charge 

must be reflected in the new finance 

charge and annual percentage rate, and 

is not added to the new amount 

financed. In itemizing the amount 

financed under § 226.18(c), the creditor 

may combine the principal balances 

remaining on the interim extensions at 

the time of consolidation and categorize 

them as the amount paid on the 

consumer’s account. 

4. Approved student credit forms. See 

the commentary to appendix H 

regarding disclosure forms approved for 

use in certain student credit programs. 

§ 226.18—Content of Disclosures. 

1. As applicable. fli.fi The 

disclosures required by this section 

need be made only as applicable. Any 

disclosure not relevant to a particular 

transaction may be eliminated entirely. 

For example: 

[•]flA.fi In a loan transaction, the 

creditor may delete disclosure of the 

total sale price. 

[•]flB.fi In a credit sale requiring 

disclosure of the total sale price under 

§ 226.18(j), the creditor may delete any 

reference to a downpayment where no 

downpayment is involved. 

flii.fi Where the amounts of several 

numerical disclosures are the same, the 

‘‘as applicable’’ language also permits 

creditors to combine the terms, so long 

as it is done in a clear and conspicuous 

manner. For example: 

[•]flA.fi In a transaction in which 

the amount financed equals the total of 

payments, the creditor may disclose 

‘‘amount financed/total of payments,’’ 

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together with descriptive language, 

followed by a single amount. 

[•]flB.fi However, if the terms are 

separated on the disclosure statement 

and separate space is provided for each 

amount, both disclosures must be 

completed, even though the same 

amount is entered in each space. 

2. Format. See the commentary to 

§ 226.17 and appendix H for a 

discussion of the format to be used in 

making these disclosures, as well as 

acceptable modifications. 

18(a) Creditor. 

1. Identification of creditor. The 

creditor making the disclosures must be 

identified. [This disclosure may, at the 

creditor’s option, appear apart from the 

other disclosures.] Use of the creditor’s 

name is sufficient, but the creditor may 

also include an address and/or 

telephone number. In transactions with 

multiple creditors, any one of them may 

make the disclosures; the one doing so 

must be identified. 

18(b) Amount financed. 

1. Disclosure required. The net 

amount of credit extended must be 

disclosed using the term amount 

financed and a descriptive explanation 

similar to the phrase in the regulation. 

2. Rebates and loan premiums. In a 

loan transaction, the creditor may offer 

a premium in the form of cash or 

merchandise to prospective borrowers. 

Similarly, in a credit sale transaction, a 

seller’s or manufacturer’s rebate may be 

offered to prospective purchasers of the 

creditor’s goods or services. flSuch 

premiums and rebates must be reflected 

in accordance with the terms of the legal 

obligation between the parties. See 

§ 226.17(c)(1) and its commentary. 

Thus, if the creditor is legally obligated 

to provide the premium or rebate to the 

consumer as part of the credit 

transaction, the disclosures should 

reflect its value in the manner and at the 

time the creditor is obligated to provide 

it.fi [At the creditor’s option, these 

amounts may be either reflected in the 

Truth in Lending disclosures or 

disregarded in the disclosures. If the 

creditor chooses to reflect them in the 

§ 226.18 disclosures, rather than 

disregard them, they may be taken into 

account in any manner as part of those 

disclosures.] 

Paragraph 18(b)(1). 

1. Downpayments. A downpayment is 

defined in § 226.2(a)(18) to include, at 

the creditor’s option, certain deferred 

downpayments or pick-up payments. A 

deferred downpayment that meets the 

criteria set forth in the definition may be 

treated as part of the downpayment, at 

the creditor’s option. 

[•]fli.fi Deferred downpayments that 

are not treated as part of the 

downpayment (either because they do 

not meet the definition or because the 

creditor simply chooses not to treat 

them as downpayments) are included in 

the amount financed. 

[•]flii.fi Deferred downpayments 

that are treated as part of the 

downpayment are not part of the 

amount financed under § 226.18(b)(1). 

Paragraph 18(b)(2). 

1. Adding other amounts. Fees or 

other charges that are not part of the 

finance charge and that are financed 

rather than paid separately at 

consummation of the transaction are 

included in the amount financed. 

Typical examples are [real estate 

settlement charges and] premiums for 

voluntary credit life and disability 

insurance excluded from the finance 

charge under § 226.4. This paragraph 

does not include any amounts already 

accounted for under § 226.18(b)(1), such 

as taxes, tag and title fees, or the costs 

of accessories or service policies that the 

creditor includes in the cash price. 

Paragraph 18(b)(3). 

1. Prepaid finance charges. fli.fi 

Prepaid finance charges that are paid 

separately in cash or by check should be 

deducted under § 226.18(b)(3) in 

calculating the amount financed. To 

illustrate[• A]fl, afi consumer applies 

for a loan of $2,500 with a $40 loan fee. 

The face amount of the note is $2,500 

and the consumer pays the loan fee 

separately by cash or check at closing. 

The principal loan amount for purposes 

of § 226.18(b)(1) is $2,500 and $40 

should be deducted under § 226.18(b(3), 

thereby yielding an amount financed of 

$2,460. 

flii.fi In some instances, as when 

loan fees are financed by the creditor, 

finance charges are incorporated in the 

face amount of the note. Creditors have 

the option, when the charges are not 

add-on or discount charges, of 

determining a principal loan amount 

under § 226.18(b)(1) that either includes 

or does not include the amount of the 

finance charges. (Thus the principal 

loan amount may, but need not, be 

determined to equal the face amount of 

the note.) When the finance charges are 

included in the principal loan amount, 

they should be deducted as prepaid 

finance charges under § 226.18(b)(3). 

When the finance charges are not 

included in the principal loan amount, 

they should not be deducted under 

§ 226.18(b)(3). The following examples 

illustrate the application of § 226.18(b) 

to this type of transaction. Each example 

assumes a loan request of $2,500 with 

a loan fee of $40; the creditor assesses 

the loan fee by increasing the face 

amount of the note to $2,540. 

[•]flA.fi If the creditor determines 

the principal loan amount under 

§ 226.18(b)(1) to be $2,540, it has 

included the loan fee in the principal 

loan amount and should deduct $40 as 

a prepaid finance charge under 

§ 226.18(b)(3), thereby obtaining an 

amount financed of $2,500. 

[•]flB.fi If the creditor determines 

the principal loan amount under 

§ 226.18(b)(1) to be $2,500, it has not 

included the loan fee in the principal 

loan amount and should not deduct any 

amount under § 226.18(b)(3), thereby 

obtaining an amount financed of $2,500. 

fliii.fi The same rules apply when 

the creditor does not increase the face 

amount of the note by the amount of the 

charge but collects the charge by 

withholding it from the amount 

advanced to the consumer. To illustrate, 

the following examples assume a loan 

request of $2,500 with a loan fee of $40; 

the creditor prepares a note for $2,500 

and advances $2,460 to the consumer. 

[•]flA.fi If the creditor determines 

the principal loan amount under 

§ 226.18(b)(1) to be $2,500, it has 

included the loan fee in the principal 

loan amount and should deduct $40 as 

a prepaid finance charge under 

§ 226.18(b)(3), thereby obtaining an 

amount financed of $2,460. 

[•]flB.fi If the creditor determines 

the principal loan amount under 

§ 226.18(b)(1) to be $2,460, it has not 

included the loan fee in the principal 

loan amount and should not deduct any 

amount under § 226.18(b)(3), thereby 

obtaining an amount financed of $2,460. 

fliv.fi Thus in the examples where 

the creditor derives the net amount of 

credit by determining a principal loan 

amount that does not include the 

amount of the finance charge, no 

subtraction is appropriate. Creditors 

should note, however, that although the 

charges are not subtracted as prepaid 

finance charges in those examples, they 

are nonetheless finance charges and 

must be treated as such. 

2. Add-on or discount charges. All 

finance charges must be deducted from 

the amount of credit in calculating the 

amount financed. If the principal loan 

amount reflects finance charges that 

meet the definition of a prepaid finance 

charge in § 226.2, those charges are 

included in the § 226.18(b)(1) amount 

and deducted under § 226.18(b)(3). 

However, if the principal loan amount 

includes finance charges that do not 

meet the definition of a prepaid finance 

charge, the § 226.18(b)(1) amount must 

exclude those finance charges. The 

following examples illustrate the 

application of § 226.18(b) to these types 

of transactions. Each example assumes a 

loan request of $1000 for 1 year, subject 

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to a 6 percent precomputed interest rate, 

with a $10 loan fee paid separately at 

consummation. 

[•]fli.fi The creditor assesses add-on 

interest of $60 which is added to the 

$1000 in loan proceeds for an obligation 

with a face amount of $1060. The 

principal for purposes of § 226.18(b)(1) 

is $1000, no amounts are added under 

§ 226.18(b)(2), and the $10 loan fee is a 

prepaid finance charge to be deducted 

under § 226.18(b)(3). The amount 

financed is $990. 

[•]flii.fi The creditor assesses 

discount interest of $60 and distributes 

$940 to the consumer, who is liable for 

an obligation with a face amount of 

$1000. The principal under 

§ 226.18(b)(1) is $940, which results in 

an amount financed of $930, after 

deduction of the $10 prepaid finance 

charge under § 226.18(b)(3). 

[•]fliii.fi The creditor assesses $60 

in discount interest by increasing the 

face amount of the obligation to $1060, 

with the consumer receiving $1000. The 

principal under § 226.18(b)(1) is thus 

$1000 and the amount financed $990, 

after deducting the $10 prepaid finance 

charge under § 226.18(b)(3). 

18(c) Itemization of amount financed. 

1. Disclosure required. fli.fi The 

creditor has 2 alternatives in complying 

with § 226.18(c): 

[•]flA.fi The creditor may inform 

the consumer, on the segregated 

disclosures, that a written itemization of 

the amount financed will be provided 

on request, furnishing the itemization 

only if the customer in fact requests it. 

[•]flB.fi The creditor may provide 

an itemization as a matter of course, 

without notifying the consumer of the 

right to receive it or waiting for a 

request. 

flii.fi Whether given as a matter of 

course or only on request, the 

itemization must be provided at the 

same time as the other disclosures 

required by § 226.18, although separate 

from those disclosures. 

2. Additional information. Section 

226.18(c) establishes only a minimum 

standard for the material to be included 

in the itemization of the amount 

financed. Creditors have considerable 

flexibility in revising or supplementing 

the information listed in § 226.18(c) and 

shown in model form H–3, although no 

changes are required. The creditor may, 

for example, do one or more of the 

following: 

i. Include amounts that reflect 

payments not part of the amount 

financed. For example, [escrow items 

and] certain insurance premiums may 

be included, fleven though they are 

neither part of the amount financed nor 

prepaid finance charges.fi [as discussed 

in the commentary to § 226.18(g).] 

ii. Organize the categories in any 

order. For example, the creditor may 

rearrange the terms in a mathematical 

progression that depicts the arithmetic 

relationship of the terms. 

iii. Add categories. For example, in a 

credit sale, the creditor may include the 

cash price and the downpayment. If the 

credit sale involves a trade-in of the 

consumer’s car and an existing lien on 

that car exceeds the value of the tradein amount, the creditor may disclose the 

consumer’s trade-in value, the creditor’s 

payoff of the existing lien, and the 

resulting additional amount financed. 

iv. Further itemize each category. For 

example, the amount paid directly to 

the consumer may be subdivided into 

the amount given by check and the 

amount credited to the consumer’s 

savings account. 

v. Label categories with different 

language from that shown in § 226.18(c). 

For example, an amount paid on the 

consumer’s account may be revised to 

specifically identify the account as 

‘‘your auto loan with us.’’ 

vi. Delete, leave blank, mark ‘‘N/A,’’ 

or otherwise flnotefi [not] 

inapplicable categories in the 

itemization. For example, in a credit 

sale with no prepaid finance charges or 

amounts paid to others, the amount 

financed may consist of only the cash 

price less downpayment. In this case, 

the itemization may be composed of 

only a single category and all other 

categories may be eliminated. 

3. Amounts appropriate to more than 

one category. When an amount may 

appropriately be placed in any of 

several categories and the creditor does 

not wish to revise the categories shown 

in § 226.18(c), the creditor has 

considerable flexibility in determining 

where to show the amount. For 

example[:] fl,fi [•][I]flifi n a credit 

sale, the portion of the purchase price 

being financed by the creditor may be 

viewed as either an amount paid to the 

consumer or an amount paid on the 

consumer’s account. 

[4. RESPA transactions. The Real 

Estate Settlement Procedures Act 

(RESPA) requires creditors to provide a 

good faith estimate of closing costs and 

a settlement statement listing the 

amounts paid by the consumer. 

Transactions subject to RESPA are 

exempt from the requirements of 

§ 226.18(c) if the creditor complies with 

RESPA’s requirements for a good faith 

estimate and settlement statement. The 

itemization of the amount financed need 

not be given, even though the content 

and timing of the good faith estimate 

and settlement statement under RESPA 

differ from the requirements of 

§§ 226.18(c) and 226.19(a)(2). If a 

creditor chooses to substitute RESPA’s 

settlement statement for the itemization 

when redisclosure is required under 

§ 226.19(a)(2), the statement must be 

delivered to the consumer at or prior to 

consummation. The disclosures 

required by §§ 226.18(c) and 

226.19(a)(2) may appear on the same 

page or on the same document as the 

good faith estimate or the settlement 

statement, so long as the requirements 

of § 226.17(a) are met.] 

Paragraph 18(c)(1)(i). 

1. Amounts paid to consumer. This 

encompasses funds given to the 

consumer in the form of cash or a check, 

including joint proceeds checks, as well 

as funds placed in an asset account. It 

may include money in an interestbearing account even if that amount is 

considered a required deposit under 

§ 226.18(r). For example, in a 

transaction with total loan proceeds of 

$500, the consumer receives a check for 

$300 and $200 is required by the 

creditor to be put into an interestbearing account. Whether or not the 

$200 is a required deposit, it is part of 

the amount financed. At the creditor’s 

option, it may be broken out and labeled 

in the itemization of the amount 

financed. 

Paragraph 18(c)(1)(ii). 

1. Amounts credited to consumer’s 

account. The term consumer’s account 

refers to an account in the nature of a 

debt with that creditor. It may include, 

for example, an unpaid balance on a 

prior loan, a credit sale balance or other 

amounts owing to that creditor. It does 

not include asset accounts of the 

consumer such as savings or checking 

accounts. 

Paragraph 18(c)(1)(iii). 

1. Amounts paid to others. This 

includes, for example, tag and title fees; 

amounts paid to insurance companies 

for insurance premiums; security 

interest fees, and amounts paid to credit 

bureaus, appraisers or public officials. 

When several types of insurance 

premiums are financed, they may, at the 

creditor’s option, be combined and 

listed in one sum, labeled ‘‘insurance’’ 

or similar term. This includes, but is not 

limited to, different types of insurance 

premiums paid to one company and 

different types of insurance premiums 

paid to different companies. Except for 

insurance companies and other 

categories noted in footnote 41, third 

parties must be identified by name. 

2. Charges added to amounts paid to 

others. A sum is sometimes added to the 

amount of a fee charged to a consumer 

for a service provided by a third party 

(such as for an extended warranty or a 

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service contract) that is payable in the 

same amount in comparable cash and 

credit transactions. In the credit 

transaction, the amount is retained by 

the creditor. Given the flexibility 

permitted in meeting the requirements 

of the amount financed itemization (see 

the commentary to § 226.18(c)), the 

creditor in such cases may reflect that 

the creditor has retained a portion of the 

amount paid to others. For example, the 

creditor could add to the category 

‘‘amount paid to others’’ language such 

as ‘‘(we may be retaining a portion of 

this amount).’’ 

Paragraph 18(c)(1)(iv). 

1. Prepaid finance charge. Prepaid 

finance charges that are deducted under 

§ 226.18(b)(3) must be disclosed under 

this section. The prepaid finance 

charges must be shown as a total 

amount but may, at the creditor’s 

option, also be further itemized and 

described. All amounts must be 

reflected in this total, even if portions of 

the prepaid finance charge are also 

reflected elsewhere. For example, if at 

consummation the creditor collects 

interim interest of $30 and a credit 

report fee of $10, a total prepaid finance 

charge of $40 must be shown. At the 

creditor’s option, the credit report fee 

paid to a third party may also be shown 

elsewhere as an amount included in 

§ 226.18(c)(1)(iii). The creditor may also 

further describe the 2 components of the 

prepaid finance charge, although no 

itemization of this element is required 

by § 226.18(c)(1)(iv). 

[2. Prepaid mortgage insurance 

premiums. RESPA requires creditors to 

give consumers a settlement statement 

disclosing the costs associated with 

mortgage loan transactions. Included on 

the settlement statement are mortgage 

insurance premiums collected at 

settlement, which are prepaid finance 

charges. In calculating the total amount 

of prepaid finance charges, creditors 

should use the amount for mortgage 

insurance listed on the line for mortgage 

insurance on the settlement statement 

(line 1002 on HUD–1 or HUD 1–A), 

without adjustment, even if the actual 

amount collected at settlement may vary 

because of RESPA’s escrow accounting 

rules. Figures for mortgage insurance 

disclosed in conformance with RESPA 

shall be deemed to be accurate for 

purposes of Regulation Z.] 

18(d) Finance charge. 

1. Disclosure required. The creditor 

must disclose the finance charge as a 

dollar amount, using the term ‘‘finance 

charge,’’ and must include a brief 

description similar to that in 

§ 226.18(d). The creditor may, but need 

not, further modify the descriptor for 

variable rate transactions with a phrase 

such as ‘‘which is subject to change.’’ 

The finance charge must be shown on 

the disclosures only as a total amount; 

the elements of the finance charge must 

not be itemized in the segregated 

disclosures, although the regulation 

does not prohibit their itemization 

elsewhere. 

[2. [Reserved]] 

[18(d)(2) Other Credit] 

[1]fl2fi. Tolerance. When a financecharge error results in a misstatement of 

the amount financed, or some other 

dollar amount for which the regulation 

provides no specific tolerance, the 

misstated disclosure does not violate the 

act or the regulation if the financecharge error is within the permissible 

tolerance in this paragraph. 

18(e) Annual percentage rate. 

1. Disclosure required. The creditor 

must disclose the cost of the credit as an 

annual rate, using the term ‘‘annual 

percentage rate,’’ plus a brief descriptive 

phrase comparable to that used in 

§ 226.18(e). For variable rate 

transactions, the descriptor may be 

further modified with a phrase such as 

‘‘which is subject to change.’’ Under 

§ 226.17(a), the terms ‘‘annual 

percentage rate’’ and ‘‘finance charge’’ 

must be more conspicuous than the 

other required disclosures. 

2. Exception. [Footnote 42]flSection 

226.18(e)fi provides an exception for 

certain transactions in which no annual 

percentage rate disclosure is required. 

18(f) Variable rate. 

1. Coverage. The requirements of 

§ 226.18(f) apply to [all] transactions 

flnot secured by real property or a 

dwellingfi in which the terms of the 

legal obligation allow the creditor to 

increase the rate [originally disclosed to 

the consumer. It includes]flcharged 

when the transaction is consummated. 

Increases in rate includefi not only 

increases in the interest rate but also 

increases in other components, such as 

the rate of required credit life insurance. 

[The provisions, however, do not apply 

to]flHowever, increases in rate do not 

includefi increases resulting from 

delinquency (including late payment), 

default, assumption, acceleration or 

transfer of the collateral fl, because 

creditors may assume that consumers 

abide by the terms of the legal 

obligation. See comment 17(c)(1)–1.fi 

[Section 226.18(f)(1) applies to variablerate transactions that are not secured by 

the consumer’s principal dwelling and 

to those that are secured by the 

principal dwelling but have a term of 

one year or less. Section 226.18(f)(2) 

applies to variable-rate transactions that 

are secured by the consumer’s principal 

dwelling and have a term greater than 

one year. Moreover, transactions subject 

to section 226.18(f)(2) are subject to the 

special early-disclosure requirements of 

section 226.19(b). (However, ‘‘sharedequity’’ or ‘‘shared-appreciation’’ 

mortgages are subject to the disclosure 

requirements of section 226.18(f)(1) and 

not to the requirements of sections 

226.18(f)(2) and 226.19(b) regardless of 

the general coverage of those sections.) 

Creditors are permitted under footnote 

43 to substitute in any variable-rate 

transaction the disclosures required 

under Section 226.19(b) for those 

disclosures ordinarily required under 

Section 226.18(f)(1). Creditors who 

provide variable-rate disclosures under 

section 226.19(b) must comply with all 

of the requirements of that section, 

including the timing of disclosures, and 

must also provide the disclosures 

required under section 226.18(f)(2). 

Creditors utilizing footnote 43 may, but 

need not, also provide disclosures 

pursuant to section 226.20(c). 

(Substitution of disclosures under 

section 226.18(f)(1) in transactions 

subject to section 226.19(b) is not 

permitted under the footnote.)] 

[Paragraph 18(f)(1).] 

[1.]fl2.fi Terms used in disclosure. 

In describing the variable rate feature, 

the creditor need not use any prescribed 

terminology. For example, limitations 

and hypothetical examples may be 

described in terms of interest rates 

rather than annual percentage rates. The 

model forms in appendix H provide 

examples of ways in which the variable 

rate disclosures may be made. 

[2.]fl3.fi Conversion feature. In 

variable-rate transactions with an option 

permitting consumers to convert to a 

fixed-rate transaction, the conversion 

option is a variable-rate feature that 

must be disclosed. In making 

disclosures under § 226.18(f)[(1)], 

creditors should disclose the fact that 

the rate may increase upon conversion; 

identify the index or formula used to set 

the fixed rate; and state any limitations 

on and effects of an increase resulting 

from conversion that differ from other 

variable-rate features. Because 

§ 226.18(f)[(1)(iv)]fl(4)fi requires only 

one hypothetical example (such as an 

example of the effect on payments 

resulting from changes in the index), a 

second hypothetical example need not 

be given. 

Paragraph 18(f)(1)[(i)]. 

1. Circumstances. The circumstances 

under which the rate may increase 

include identification of any index to 

which the rate is tied, as well as any 

conditions or events on which the 

increase is contingent. 

i. When no specific index is used, any 

identifiable factors used to determine 

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43388 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

whether to increase the rate must be 

disclosed. 

ii. When the increase in the rate is 

purely discretionary, the fact that any 

increase is within the creditor’s 

discretion must be disclosed. 

iii. When the index is internally 

defined (for example, by that creditor’s 

prime rate), the creditor may comply 

with this requirement by either a brief 

description of that index or a statement 

that any increase is in the discretion of 

the creditor. An externally defined 

index, however, must be identified. 

Paragraph 18(f)[(1)(ii)]fl(2)fi. 

1. Limitations. This includes any 

maximum imposed on the amount of an 

increase in the rate at any time, as well 

as any maximum on the total increase 

over the life of the transaction. When 

there are no limitations, the creditor 

may, but need not, disclose that fact. 

Limitations do not include legal limits 

in the nature of usury or rate ceilings 

under State or Federal statutes or 

regulations. (See § 226.30 for the rule 

requiring that a maximum interest rate 

be included in certain variable-rate 

transactions.) 

Paragraph 18(f)[(1)(iii)]fl(3)fi. 

1. Effects. Disclosure of the effect of 

an increase refers to an increase in the 

number or amount of payments or an 

increase in the final payment. In 

addition, the creditor may make a brief 

reference to negative amortization that 

may result from a rate increase. (See the 

commentary to § 226.17(a)(1) regarding 

directly related information.) If the 

effect cannot be determined, the creditor 

must provide a statement of the possible 

effects. For example, if the exercise of 

the variable-rate feature may result in 

either more or larger payments, both 

possibilities must be noted. 

Paragraph 18(f)[(1)(iv)]fl(4)fi. 

1. Hypothetical example. The 

example may, at the creditor’s option 

appear apart from the other disclosures. 

The creditor may provide either a 

standard example that illustrates the 

terms and conditions of that type of 

credit offered by that creditor or an 

example that directly reflects the terms 

and conditions of the particular 

transaction. In transactions with more 

than one variable-rate feature, only one 

hypothetical example need be provided. 

(See the commentary to § 226.17(a)(1) 

regarding disclosure of more than one 

hypothetical example as directly related 

information.) 

2. Hypothetical example not required. 

The creditor need not provide a 

hypothetical example in the following 

transactions with a variable-rate feature: 

i. Demand obligations with no 

alternate maturity date. 

ii. Interim student credit extensions. 

iii. Multiple-advance construction 

loans disclosed pursuant to appendix D, 

Part I. 

[Paragraph 18(f)(2). 

1. Disclosure required. In variable-rate 

transactions that have a term greater 

than one year and are secured by the 

consumer’s principal dwelling, the 

creditor must give special early 

disclosures under section 226.19(b) in 

addition to the later disclosures 

required under section 226.18(f)(2). The 

disclosures under section 226.18(f)(2) 

must state that the transaction has a 

variable-rate feature and that variablerate disclosures have been provided 

earlier. (See the commentary to section 

226.17(a)(1) regarding the disclosure of 

certain directly related information in 

addition to the variable-rate disclosures 

required under section 226.18(f)(2).)] 

18(g) Payment schedule. 

1. Amounts included in repayment 

schedule. The repayment schedule 

should reflect all components of the 

finance charge, not merely the portion 

attributable to interest. A prepaid 

finance charge, however, should not be 

shown in the repayment schedule as a 

separate payment. The payments may 

include amounts beyond the amount 

financed and finance charge. For 

example, the disclosed payments may, 

at the creditor’s option, reflect certain 

insurance premiums where the 

premiums are not part of either the 

amount financed or the finance charge, 

as well as real estate escrow amounts 

such as taxes added to the payment in 

mortgage transactions. 

2. Deferred downpayments. As 

discussed in the commentary to 

§ 226.2(a)(18), deferred downpayments 

or pick-up payments that meet the 

conditions set forth in the definition of 

downpayment may be treated as part of 

the downpayment. Even if treated as a 

downpayment, that amount may 

nevertheless be disclosed as part of the 

payment schedule, at the creditor’s 

option. 

3. Total number of payments. 

flExcept for transactions secured by 

real property or a dwelling, ifi[I]n 

disclosing the number of payments for 

transactions with more than one 

payment level, creditors may but need 

not disclose as a single figure the total 

number of payments for all levels. For 

example, in a transaction calling for 108 

payments of $350, 240 payments of 

$335, and 12 payments of $330, the 

creditors need not state that there will 

be a total of 360 payments. flFor 

transactions secured by real property or 

a dwelling, creditors must disclose as a 

single figure the total number of 

payments for all levels. See 

§ 226.38(e)(5)(i).fi 

4. Timing of payments. i. General 

rule. Section 226.18(g) requires creditors 

to disclose the timing of payments. To 

meet this requirement, creditors may list 

all of the payment due dates. They also 

have the option of specifying the 

‘‘period of payments’’ scheduled to 

repay the obligation. As a general rule, 

creditors that choose this option must 

disclose the payment intervals or 

frequency, such as ‘‘monthly’’ or ‘‘biweekly,’’ and the calendar date that the 

beginning payment is due. For example, 

a creditor may disclose that payments 

are due ‘‘monthly beginning on July 1, 

1998.’’ This information, when 

combined with the number of payments, 

is necessary to define the repayment 

period and enable a consumer to 

determine all of the payment due dates. 

ii. Exception. In a limited number of 

circumstances, the beginning-payment 

date is unknown and difficult to 

determine at the time disclosures are 

made. For example, a consumer may 

become obligated on a credit contract 

that contemplates the delayed 

disbursement of funds based on a 

contingent event, such as the 

completion of home repairs. Disclosures 

may also accompany loan checks that 

are sent by mail, in which case the 

initial disbursement and repayment 

dates are solely within the consumer’s 

control. In such cases, if the beginningpayment date is unknown the creditor 

may use an estimated date and label the 

disclosure as an estimate pursuant to 

§ 226.17(c). Alternatively, the disclosure 

may refer to the occurrence of a 

particular event, for example, by 

disclosing that the beginning payment is 

due ‘‘30 days after the first loan 

disbursement.’’ This information also 

may be included with an estimated date 

to explain the basis for the creditor’s 

estimate. See comment 17(a)(1)–5(iii). 

5. Mortgage insurance. The payment 

schedule should reflect the consumer’s 

mortgage insurance payments until the 

date on which the creditor must 

automatically terminate coverage under 

applicable law, even though the 

consumer may have a right to request 

that the insurance be cancelled earlier. 

The payment schedule must reflect the 

legal obligation, as determined by 

applicable State or other law. For 

example, assume that under applicable 

law, mortgage insurance must terminate 

after the 130th scheduled monthly 

payment, and the creditor collects at 

closing and places in escrow two 

months of premiums. If, under the legal 

obligation, the creditor will include 

mortgage insurance premiums in 130 

payments and refund the escrowed 

payments when the insurance is 

terminated, the payment schedule 

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should reflect 130 premium payments. 

If, under the legal obligation, the 

creditor will apply the amount 

escrowed to the two final insurance 

payments, the payment schedule should 

reflect 128 monthly premium payments. 

(For assumptions in calculating a 

payment schedule that includes 

mortgage insurance that must be 

automatically terminated, see comments 

[17(c)(1)–8 and 17(c)(1)– 

10]fl17(c)(1)(iii)–1 and 17(c)(1)(iii)– 

3fi.) 

[Paragraph ]18(h) Total of payments. 

1. Disclosure required. The total of 

payments must be disclosed using that 

term, along with a descriptive phrase 

similar to the one in the regulation. The 

descriptive explanation may be revised 

to reflect a variable rate feature with a 

brief phrase such as ‘‘based on the 

current annual percentage rate which 

may change.’’ 

2. Calculation of total of payments. 

The total of payments is the sum of the 

payments disclosed under § 226.18(g). 

For example, if the creditor disclosed a 

deferred portion of the downpayment as 

part of the payment schedule, that 

payment must be reflected in the total 

disclosed under this paragraph. 

3. Exception. [Footnote 44]flSection 

226.18(h)fi permits creditors to omit 

disclosure of the total of payments in 

single-payment transactions. This 

exception does not apply to a 

transaction calling for a single payment 

of principal combined with periodic 

payments of interest. 

4. Demand obligations. In demand 

obligations with no alternate maturity 

date, the creditor may omit disclosure of 

payment amounts under § 226.18(g)(1). 

In those transactions, the creditor need 

not disclose the total of payments. 

[Paragraph] 18(i) Demand feature. 

1. Disclosure requirements. The 

disclosure requirements of this 

provision apply not only to transactions 

payable on demand from the outset, but 

also to transactions that are not payable 

on demand at the time of consummation 

but convert to a demand status after a 

stated period. In demand obligations in 

which the disclosures are based on an 

assumed maturity of 1 year under 

§ 226.17(c)(5), that fact must also be 

stated. Appendix H contains model 

clauses that may be used in making this 

disclosure. 

2. Covered demand features. The type 

of demand feature triggering the 

disclosures required by section 

226.18(i)fl, or section 226.38(d)(2)(iv) 

for transactions secured by real property 

or a dwelling, fiincludes only those 

demand features contemplated by the 

parties as part of the legal obligation. 

For example, [this provision]flsection 

226.18(i), or section 226.38(d)(2)(iv) for 

transactions secured by real property or 

a dwelling,fi do[es] not apply to 

transactions that convert to a demand 

status as a result of the consumer’s 

default. A due-on-sale clause is not 

considered a demand feature. A creditor 

may, but need not, treat its contractual 

right to demand payment of a loan made 

to its executive officers as a demand 

feature to the extent that the contractual 

right is required by Regulation O (12 

CFR 215.5) or other federal law. 

3. Relationship to payment schedule 

disclosures. As provided in section 

226.18(g)(1), flor section 226.38(c) for 

transactions secured by real property or 

a dwelling,fi in demand obligations 

with no alternate maturity date, the 

creditor need only disclose the due 

dates or payment periods of any 

scheduled interest payments for the first 

year. If the demand obligation states an 

alternate maturity, however, the 

disclosed payment schedule must 

reflect that stated term; the special rule 

in section 226.18(g)(1)fl, or section 

226.38(c) for transactions secured by 

real property or a dwelling,fi is not 

available. 

[Paragraph ]18(j) Total sale price. 

1. Disclosure required. In a credit sale 

transaction, the total sale price must be 

disclosed using that term, along with a 

descriptive explanation similar to the 

one in the regulation. For variable rate 

transactions, the descriptive phrase 

may, at the creditor’s option, be 

modified to reflect the variable rate 

feature. For example, the descriptor may 

read: ‘‘The total cost of your purchase 

on credit, which is subject to change, 

including your downpayment of 

* * *.’’ The reference to a 

downpayment may be eliminated in 

transactions calling for no 

downpayment. 

2. Calculation of total sale price. The 

figure to be disclosed is the sum of the 

cash price, other charges added under 

§ 226.18(b)(2), and the finance charge 

disclosed under § 226.18(d). 

3. Effect of existing liens. When a 

credit sale transaction involves property 

that is being used as a trade-in (an 

automobile, for example) and that has a 

lien exceeding the value of the trade-in, 

the total sale price is affected by the 

amount of any cash provided. (See 

comment 2(a)(18)–3.) To illustrate, 

assume a consumer finances the 

purchase of an automobile with a cash 

price of $20,000. Another vehicle used 

as a trade-in has a value of $8,000 but 

has an existing lien of $10,000, leaving 

a $2,000 deficit that the consumer must 

finance. 

i. If the consumer pays $1,500 in cash, 

the creditor may apply the cash first to 

the lien, leaving a $500 deficit, and 

reflect a downpayment of $0. The total 

sale price would include the $20,000 

cash price, an additional $500 financed 

under § 226.18(b)(2), and the amount of 

the finance charge. Alternatively, the 

creditor may reflect a downpayment of 

$1,500 and finance the $2,000 deficit. In 

that case, the total sale price would 

include the sum of the $20,000 cash 

price, the $2,000 lien payoff amount as 

an additional amount financed, and the 

amount of the finance charge. 

ii. If the consumer pays $3,000 in 

cash, the creditor may apply the cash 

first to extinguish the lien and reflect 

the remainder as a downpayment of 

$1,000. The total sale price would 

reflect the $20,000 cash price and the 

amount of the finance charge. (The cash 

payment extinguishes the trade-in 

deficit and no charges are added under 

§ 226.18(b)(2).) Alternatively, the 

creditor may elect to reflect a 

downpayment of $3,000 and finance the 

$2,000 deficit. In that case, the total sale 

price would include the sum of the 

$20,000 cash price, the $2,000 lien 

payoff amount as an additional amount 

financed, and the amount of the finance 

charge. 

[Paragraph ]18(k) Prepayment. 

1. Disclosure required. The creditor 

must give a definitive statement of 

whether or not a penalty will be 

imposed or a rebate will be given. 

[•]fliii.fi The fact that no penalty 

will be imposed may not simply be 

inferred from the absence of a penalty 

disclosure; the creditor must indicate 

that prepayment will not result in a 

penalty. 

[•]flii.fi If a penalty or refund is 

possible for one type of prepayment, 

even though not for all, a positive 

disclosure is required. This applies to 

any type of prepayment, whether 

voluntary or involuntary as in the case 

of prepayments resulting from 

acceleration. 

[•]fliii.fi Any difference in rebate or 

penalty policy, depending on whether 

prepayment is voluntary or not, must 

not be disclosed with the segregated 

disclosures. 

2. Rebate-penalty disclosure. A single 

transaction may involve both a 

precomputed finance charge and a 

finance charge computed by application 

of a rate to the unpaid balance (for 

example, mortgages with mortgageguarantee insurance). In these cases, 

disclosures about both prepayment 

rebates and penalties are required. 

Sample form H–15 in appendix H 

illustrates a mortgage transaction in 

which both rebate and penalty 

disclosures are necessary. 

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3. Prepaid finance charge. The 

existence of a prepaid finance charge in 

a transaction does not, by itself, require 

a disclosure under § 226.18(k). A 

prepaid finance charge is not considered 

a penalty under § 226.18(k)(1), nor does 

it require a disclosure under 

§ 226.18(k)(2). At its option, however, a 

creditor may consider a prepaid finance 

charge to be under § 226.18(k)(2). If a 

disclosure is made under § 226.18(k)(2) 

with respect to a prepaid finance charge 

or other finance charge, the creditor may 

further identify that finance charge. For 

example, the disclosure may state that 

the borrower ‘‘will not be entitled to a 

refund of the prepaid finance charge’’ or 

some other term that describes the 

finance charge. 

Paragraph 18(k)(1). 

1. Penalty. [This]flSection 

226.18(k)(1)fi applies only to those 

transactions in which the interest 

calculation takes account of all 

scheduled reductions in principal, as 

well as transactions in which interest 

calculations are made daily. The term 

penalty as used here encompasses only 

those charges that are assessed strictly 

because of the prepayment in full of a 

simple-interest obligation, as an 

addition to all other amounts. Items 

which are penalties include, for 

example: 

[• Interest charges for any period after 

prepayment in full is made.]fli. Charges 

determined by treating the loan balance 

as outstanding for a period after 

prepayment in full and applying the 

interest rate to such ‘‘balance.’’fi (See 

the commentary to § 226.17(a)(1) 

regarding disclosure of 

[interest]flsuchfi charges assessed for 

periods after prepayment in full as 

directly related informationfl, for 

transactions not secured by real 

property or a dwellingfi.) 

[•]flii.fi A minimum finance charge 

in a simple-interest transaction. (See the 

commentary to § 226.17(a)(1) regarding 

the disclosure of a minimum finance 

charge as directly related information.) 

Items which are not penalties include, 

for example[:]fl,fi 

[• L]fllfioan guarantee feesfl.fi 

[• Interim interest on a student loan.] 

Paragraph 18(k)(2). 

1. Rebate of finance charge. This 

applies to any finance charges that do 

not take account of each reduction in 

the principal balance of an obligation. 

This category includes, for example: 

[•]fli.fi Precomputed finance 

charges such as add-on charges. 

[•]flii.fi Charges that take account of 

some but not all reductions in principal, 

such as mortgage guarantee insurance 

assessed on the basis of an annual 

declining balance, when the principal is 

reduced on a monthly basis. 

fl2.fi Methodology of computing. No 

description of the method of computing 

earned or unearned finance charges is 

required or permitted as part of the 

segregated disclosures under this 

section. 

[Paragraph ]18(l) Late payment. 

1. Definition. This paragraph requires 

a disclosure only if charges are added to 

individual delinquent installments by a 

creditor who otherwise considers the 

transaction ongoing on its original 

terms. Late payment charges do not 

include: 

[•]fli.fi The right of acceleration. 

[•]flii.fi Fees imposed for actual 

collection costs, such as repossession 

charges or attorney’s fees. 

[•]fliii.fi Deferral and extension 

charges. 

[•]fliv.fi The continued accrual of 

simple interest at the contract rate after 

the payment due date. However, an 

increase in the interest rate is a late 

payment charge to the extent of the 

increase. 

2. Content of disclosure. Many State 

laws authorize the calculation of late 

charges on the basis of either a 

percentage or a specified dollar amount, 

and permit imposition of the lesser or 

greater of the 2 charges. The disclosure 

made under § 226.18(l) may reflect this 

alternative. For example, stating that the 

charge in the event of a late payment is 

5% of the late amount, not to exceed 

$5.00, is sufficient. Many creditors also 

permit a grace period during which no 

late charge will be assessed; this fact 

may be disclosed as directly related 

information. (See the commentary to 

§ 226.17(a).) 

[Paragraph ]18(m) Security interest. 

1. Purchase money transactions. 

When the collateral is the item 

purchased as part of, or with the 

proceeds of, the credit transaction, 

section 226.18(m) requires only a 

general identification such as ‘‘the 

property purchased in this transaction.’’ 

However, the creditor may identify the 

property by item or type instead of 

identifying it more generally with a 

phrase such as ‘‘the property purchased 

in this transaction.’’ For example, a 

creditor may identify collateral as ‘‘a 

motor vehicle,’’ or as ‘‘the property 

purchased in this transaction.’’ Any 

transaction in which the credit is being 

used to purchase the collateral is 

considered a purchase money 

transaction and the abbreviated 

identification may be used, whether the 

obligation is treated as a loan or a credit 

sale. 

2. Nonpurchase money transactions. 

In nonpurchase money transactions, the 

property subject to the security interest 

must be identified by item or type. This 

disclosure is satisfied by a general 

disclosure of the category of property 

subject to the security interest, such as 

‘‘motor vehicles,’’ ‘‘securities,’’ ‘‘certain 

household items,’’ or ‘‘household 

goods.’’ (Creditors should be aware, 

however, that the Federal credit 

practices rules, as well as some State 

laws, prohibit certain security interests 

in household goods.) At the creditor’s 

option, however, a more precise 

identification of the property or goods 

may be provided. 

3. Mixed collateral. In some 

transactions in which the credit is used 

to purchase the collateral, the creditor 

may also take other property of the 

consumer as security. In those cases, a 

combined disclosure must be provided, 

consisting of an identification of the 

purchase money collateral consistent 

with comment 18(m)–1 and a specific 

identification of the other collateral 

consistent with comment 18(m)–2. 

4. After-acquired property. An afteracquired property clause is not a 

security interest to be disclosed under 

§ 226.18(m). 

5. Spreader clause. The fact that 

collateral for pre-existing credit with the 

institution is being used to secure the 

present obligation constitutes a security 

interest and must be disclosed. (Such 

security interests may be known as 

‘‘spreader’’ or ‘‘dragnet’’ clauses, or as 

‘‘cross-collateralization’’ clauses.) A 

specific identification of that collateral 

is unnecessary but a reminder of the 

interest arising from the prior 

indebtedness is required. The disclosure 

may be made by using language such as 

‘‘collateral securing other loans with us 

may also secure this loan.’’ At the 

creditor’s option, a more specific 

description of the property involved 

may be given. 

6. Terms used in disclosure. No 

specified terminology is required in 

disclosing a security interest. Although 

the disclosure may, at the creditor’s 

option, use the term security interest, 

the creditor may designate its interest by 

using, for example, pledge, lien, or 

mortgage. 

7. Collateral from third party. In 

certain transactions, the consumer’s 

obligation may be secured by collateral 

belonging to a third party. For example, 

a loan to a student may be secured by 

an interest in the property of the 

student’s parents. In such cases, the 

security interest is taken in connection 

with the transaction and must be 

disclosed, even though the property 

encumbered is owned by someone other 

than the consumer. 

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18(n) Insurancefl,fi [and] debt 

cancellation fl, and debt suspensionfi. 

1. Location. This disclosure may, at 

the creditor’s option, appear apart from 

the other disclosures. It may appear 

with any other information, including 

the amount financed itemization, any 

information prescribed by State law, or 

other supplementary material. When 

this information is disclosed with the 

other segregated disclosures, however, 

no additional explanatory material may 

be included. 

2. Debt cancellation fland debt 

suspensionfi. Creditors may use the 

model credit-insurance disclosures only 

if the debt-cancellation flor debt 

suspensionfi coverage constitutes 

insurance under State law. Otherwise, 

they may provide a parallel disclosure 

that refers to debt-cancellation flor debt 

suspensionfi coverage. 

[Paragraph ]18(o) Certain security 

interest charges. 

1. Format. No special format is 

required for these disclosures; under 

§ 226.4(e), taxes and fees paid to 

government officials with respect to a 

security interest may be aggregated, or 

may be broken down by individual 

charge. For example, the disclosure 

could be labeled ‘‘filing fees and taxes’’ 

and all funds disbursed for such 

purposes may be aggregated in a single 

disclosure. This disclosure may appear, 

at the creditor’s option, apart from the 

other required disclosures. The 

inclusion of this information on a 

statement required under the Real Estate 

Settlement Procedures Act is sufficient 

disclosure for purposes of Truth in 

Lending. 

[Paragraph ]18(p) Contract reference. 

1. Content. Creditors may substitute, 

for the phrase ‘‘appropriate contract 

document,’’ a reference to specific 

transaction documents in which the 

additional information is found, such as 

‘‘promissory note’’ or ‘‘retail installment 

sale contract.’’ A creditor may, at its 

option, delete inapplicable items in the 

contract reference, as for example when 

the contract documents contain no 

information regarding the right of 

acceleration. 

[18(q) Assumption policy 

1. Policy statement. In many 

mortgages, the creditor cannot 

determine, at the time disclosure must 

be made, whether a loan may be 

assumable at a future date on its original 

terms. For example, the assumption 

clause commonly used in mortgages 

sold to the Federal National Mortgage 

Association and the Federal Home Loan 

Mortgage Corporation conditions an 

assumption on a variety of factors such 

as the creditworthiness of the 

subsequent borrower, the potential for 

impairment of the lender’s security, and 

execution of an assumption agreement 

by the subsequent borrower. In cases 

where uncertainty exists as to the future 

assumability of a mortgage, the 

disclosure under § 226.18(q) should 

reflect that fact. In making disclosures 

in such cases, the creditor may use 

phrases such as ‘‘subject to conditions,’’ 

‘‘under certain circumstances,’’ or 

‘‘depending on future conditions.’’ The 

creditor may provide a brief reference to 

more specific criteria such as a due-onsale clause, although a complete 

explanation of all conditions is not 

appropriate. For example, the disclosure 

may state, ‘‘Someone buying your home 

may be allowed to assume the mortgage 

on its original terms, subject to certain 

conditions, such as payment of an 

assumption fee.’’ See comment 17(a)(1)– 

5 for an example of a reference to a dueon-sale clause. 

2. Original terms. The phrase original 

terms for purposes of § 226.18(q) does 

not preclude the imposition of an 

assumption fee, but a modification of 

the basic credit agreement, such as a 

change in the contract interest rate, 

represents different terms.] 

[Paragraph ]18(r) Required deposit. 

1. Disclosure required. The creditor 

must inform the consumer of the 

existence of a required deposit. 

(Appendix H provides a model clause 

that may be used in making that 

disclosure.) [Footnote 45 describes 

three]fl§ 226.18(r)(1) and (2) describe 

twofi types of deposits that need not be 

considered required deposits. Use of the 

phrase ‘‘need not’’ permits creditors to 

include the disclosure even in cases 

where there is doubt as to whether the 

deposit constitutes a required deposit. 

[2. Pledged-account mortgages. In 

these transactions, a consumer pledges 

as collateral funds that the consumer 

deposits in an account held by the 

creditor. The creditor withdraws sums 

from that account to supplement the 

consumer’s periodic payments. 

Creditors may treat these pledged 

accounts as required deposits or they 

may treat them as consumer buydowns 

in accordance with the commentary to 

section 226.17(c)(1).] 

3. Escrow accounts. The escrow 

exception in [footnote 

45]fl§ 226.18(r)(1)fi applies, for 

example, to accounts for such items as 

maintenance fees, repairs, or 

improvements, whether in a realty or a 

nonrealty transaction. (See the 

commentary to section 226.17(c)(1) 

regarding the use of escrow accounts in 

consumer buydown transactions.) 

4. Interest-bearing accounts. When a 

deposit earns at least 5 percent interest 

per year, no disclosure is required under 

§ 226.18(r). This exception applies 

whether the deposit is held by the 

creditor or by a third party. 

5. [Morris Plan 

transactions]flDeposits applied solely 

to pay obligationfi. A deposit [under a 

Morris Plan, in which]fltofi a deposit 

account [is] created for the sole purpose 

of accumulating payments and [this is] 

applied to satisfy entirely the 

consumer’s obligation in the 

transaction[,] is not a required deposit. 

[6.] Examples of amounts excluded. 

The following are among the types of 

deposits that need not be treated as 

required deposits: 

[•]fli.fi Requirement that a borrower 

be a customer or a member even if that 

involves a fee or a minimum balance. 

[•]flii.fi Required property 

insurance escrow on a mobile home 

transaction. 

[•]fliii.fi Refund of interest when 

the obligation is paid in full. 

[•]fliv.fi Deposits that are 

immediately available to the consumer. 

[•]flv.fi Funds deposited with the 

creditor to be disbursed (for example, 

for construction) before the loan 

proceeds are advanced. 

[•]flvi.fi Escrow of condominium 

fees. 

[•]flvii.fi Escrow of loan proceeds to 

be released when the repairs are 

completed. 

§ 226.19—Certain Mortgage and 

Variable-Rate Transactions. 

fl19 Coverage. 

1. General. Section 226.19 applies to 

transactions secured by real property or 

a dwelling, other than home equity lines 

of credit subject to § 226.5b. Creditors 

must make the disclosures required by 

§ 226.19 even if the transaction is not 

subject to the Real Estate Settlement 

Procedures Act (RESPA), 12 U.S.C. 2602 

et seq., and its implementing Regulation 

X, 24 CFR 3500.1 et seq., administered 

by the Department of Housing and 

Urban Development (HUD). For 

example, disclosures are required for 

construction loans that are not covered 

by RESPA or Regulation X because they 

are not considered ‘‘federally related 

mortgage loans.’’ See 12 U.S.C. 2602(1); 

15 CFR 3500.2(b). However, § 226.19 

only applies to transactions that are 

offered or extended to a consumer 

primarily for personal, family, or 

household purposes, even if the 

transactions are secured by real property 

or a dwelling. TILA and Regulation Z do 

not apply to transactions that are 

primarily for business, commercial, or 

agricultural purposes. See 15 U.S.C. 

1603(1); § 226.3(a)(2). See also 

§ 226.2(a)(12) and (b)(2). Section 

226.19(a)(4) contains special disclosure 

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timing requirements for mortgage 

transactions secured by a consumer’s 

interest in a timeshare plan described in 

11 U.S.C. 101(53(D)).fi 

19(a)(1)(i) Time of disclosure. 

[1. Coverage. This section requires 

early disclosure of credit terms in 

mortgage transactions that are secured 

by a consumer’s dwelling (other than 

home equity lines of credit subject to 

§ 226.5b or mortgage transactions 

secured by an interest in a timeshare 

plan) that are also subject to the Real 

Estate Settlement Procedures Act 

(RESPA) and its implementing 

Regulation X, administered by the 

Department of Housing and Urban 

Development (HUD). To be covered by 

§ 226.19, a transaction must be a 

Federally related mortgage loan under 

RESPA. ‘‘Federally related mortgage 

loan’’ is defined under RESPA (12 

U.S.C. 2602) and Regulation X (24 CFR 

3500.2), and is subject to any 

interpretations by HUD.] 

[2.]fl1.fi Timing and use of 

estimates. The disclosures required by 

§ 226.19(a)(1)(i) must be delivered or 

mailed not later than three business 

days after the creditor receives the 

consumer’s written application. The 

general definition of ‘‘business day’’ in 

§ 226.2(a)(6)—a day on which the 

creditor’s offices are open to the public 

for substantially all of its business 

functions—is used for purposes of 

§ 226.19(a)(1)(i). See comment 2(a)(6)–1. 

This general definition is consistent 

with the definition of ‘‘business day’’ in 

HUD’s Regulation X—a day on which 

the creditor’s offices are open to the 

public for carrying on substantially all 

of its business functions. See 24 CFR 

3500.2. Accordingly, the three-businessday period in § 226.19(a)(1)(i) for 

making early disclosures coincides with 

the time period within which creditors 

[subject to RESPA] must provide good 

faith estimates of settlement costs flfor 

transactions subject to RESPAfi. If the 

creditor does not know the precise 

credit terms, the creditor must base the 

disclosures flrequired by 

§ 226.19(a)(1)(i)fi on the best 

information reasonably available and 

indicate that the disclosures are 

estimates under § 226.17(c)(2). If many 

of the disclosures are estimates, the 

creditor may include a statement to that 

effect (such as ‘‘all numerical 

disclosures [except the late-payment 

disclosure] are estimates’’) instead of 

separately labelling each estimate. In the 

alternative, the creditor may label as an 

estimate only the items primarily 

affected by unknown information. (See 

the commentary to § 226.17(c)(2).) The 

creditor may provide explanatory 

material concerning the estimates and 

the contingencies that may affect the 

actual terms, in accordance with the 

commentary to § 226.17(a)(1)[.]fland 

§ 226.37. The disclosures required by 

§ 226.19(a)(2) may not contain 

estimates, however, with limited 

exceptions. See the commentary on 

§ 226.19(a)(2) for a discussion of 

limitations on estimates in disclosures 

made under that subsection.fi 

[3.]fl2.fi Written application. 

Creditors may rely on RESPA and 

Regulation X (including any 

interpretations issued by HUD) in 

deciding whether a ‘‘written 

application’’ has been received. In 

general, Regulation X defines an 

‘‘application’’ to mean the submission of 

a borrower’s financial information in 

anticipation of a credit decision relating 

to a [F]flffiederally related mortgage 

loan. See 24 CFR 3500.2(b). flCreditors 

may rely on RESPA and Regulation X 

even for a transaction not subject to 

RESPA.fi An application is received 

when it reaches the creditor in any of 

the ways applications are normally 

transmitted—by mail, hand delivery, or 

through an intermediary agent or broker. 

(See [comment 19(b)–3]flthe 

commentary on § 19(d)(3)fi for 

guidance in determining whether or not 

the transaction involves an intermediary 

agent or broker.) If an application 

reaches the creditor through an 

intermediary agent or broker, the 

application is received when it reaches 

the creditor, rather than when it reaches 

the agent or broker. 

[4.]fl3.fi Denied or withdrawn 

application. The creditor may determine 

within the three-business-day period 

that the application will not or cannot 

be approved on the terms requested, as, 

for example, when a consumer applies 

for a type or amount of credit that the 

creditor does not offer, or the 

consumer’s application cannot be 

approved for some other reason. In that 

case, or if the consumer withdraws the 

application within the three-businessday waiting period, the creditor need 

not make the disclosures under this 

section. If the creditor fails to provide 

early disclosures and the transaction is 

later consummated on the original 

terms, the creditor will be in violation 

of this provision. If, however, the 

consumer amends the application 

because of the creditor’s unwillingness 

to approve it on its original terms, no 

violation occurs for not providing 

disclosures based on the original terms. 

But the amended application is a new 

application subject to § 226.19(a)(1)(i). 

[5.]fl4.fi Itemization of amount 

financed. In many mortgage transactions 

flsubject to RESPAfi, the itemization 

of the amount financed required by 

[§ 226.18(c)]fl§ 226.38(j)fi will contain 

items, such as origination fees or points, 

that also must be disclosed as part of the 

good faith estimates of settlement costs 

required under RESPA. Creditors 

furnishing the RESPA good faith 

estimates need not give consumers any 

itemization of the amount financedfl, 

whether or not a transaction is subject 

to RESPAfi. 

19(a)(1)(ii) Imposition of fees. 

1. Timing of fees. The consumer must 

receive the disclosures required by this 

section before paying or incurring any 

fee imposed by a creditor or other 

person in connection with the 

consumer’s application for a mortgage 

transaction that is subject to 

§ 226.19(a)(1)(i), except as provided in 

§ 226.19(a)(1)(iii). If the creditor delivers 

the disclosures to the consumer in 

person, a fee may be imposed anytime 

after delivery. If the creditor places the 

disclosures in the mail, the creditor may 

impose a fee after the consumer receives 

the disclosures or, in all cases, after 

midnight [on the third business day] 

following fl the third business day 

afterfi mailing of the disclosures. 

flCreditors that use electronic mail or 

a courier to provide disclosures may 

also follow this approach. Whatever 

method is used to provide disclosures, 

creditors may rely on documentation of 

receipt in determining when a fee may 

be imposed.fi For purposes of 

§ 226.19(a)(1)(ii), the term ‘‘business 

day’’ means all calendar days except 

Sundays and legal public holidays 

referred to in § 226.2(a)(6). See 

[C]flcfiomment 2(a)(6)–2. For 

example, assuming that there are no 

intervening legal public holidays, a 

creditor that receives the consumer’s 

written application on Monday and 

mails the early mortgage loan disclosure 

on Tuesday may impose a fee on the 

consumer [after midnight on 

Friday]flon Saturdayfi. 

19(a)(2) Waiting period(s) required 

1. Business day definition. For 

purposes of § 226.19(a)(2), ‘‘business 

day’’ means all calendar days except 

Sundays and the legal public holidays 

referred to in § 226.2(a)(6). See comment 

2(a)(6)–2. 

2. Consummation after [both]flall fi 

waiting periods expire. Consummation 

may not occur until both the sevenbusiness-day waiting period and the 

three-business-day waiting 

periodfl(s)fi have expired. For 

example, assume a creditor delivers the 

early disclosures to the consumer in 

person or places them in the mail on 

Monday, June 1, and the creditor then 

delivers [corrected]flnewfi disclosures 

in person to the consumer on 

Wednesday, June 3. Although Saturday, 

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June 6 is the third business day after the 

consumer received the 

[corrected]flnewfi disclosures, 

consummation may not occur before 

Tuesday, June 9, the seventh business 

day following delivery or mailing of the 

early disclosures. 

19(a)(2)(i) Seven-business-day waiting 

period. 

1. Timing. The disclosures required 

by § 226.19(a)(1)(i) must be delivered or 

placed in the mail no later than the 

seventh business day before 

consummation. The seven-business-day 

waiting period begins when the creditor 

delivers the early disclosures or places 

them in the mail, not when the 

consumer receives or is deemed to have 

received the early disclosures. For 

example, if a creditor delivers the early 

disclosures to the consumer in person or 

places them in the mail on Monday, 

June 1, consummation may occur on or 

after Tuesday, June 9, the seventh 

business day following delivery or 

mailing of the early disclosures. 

fl19(a)(2)(ii) Three-business-day 

waiting period. 

1. New disclosures in all cases. The 

creditor must provide new disclosures 

under § 226.38 so that the consumer 

receives them not later than the third 

business day before consummation, 

even if the new disclosures are identical 

to the early disclosures provided under 

§ 226.19(a)(1)(i). 

2. Content of disclosures. Disclosures 

made under § 226.19(a)(2)(ii) must 

contain each of the applicable 

disclosures required by § 226.38. 

3. Estimates. Section 226.19(a)(2)(ii) 

provides that only the disclosures 

required by §§ 226.38(c)(3)(i)(C), 

226.38(c)(3)(ii)(C), 226.38(c)(6)(i), and 

226.38(e)(5)(i) may be estimated 

disclosures. Because estimated amounts 

of escrowed taxes and insurance 

premiums and mortgage insurance 

premiums disclosed (as applicable) 

under §§ 226.38(c)(3)(i)(C), 

226.38(c)(3)(ii)(C), and 226.38(c)(6)(i) 

are components of the total periodic 

payments disclosure required by 

§§ 226.38(c)(3)(i)(D) and 

226.38(c)(3)(ii)(D) and the total 

payments disclosure required by 

§ 226.38(e)(5)(i), those disclosures are 

estimated disclosures. (A total payments 

disclosure is not required for loans with 

a negative amortization feature subject 

to § 226.38(c)(6).) Creditors may 

estimate components of the total 

periodic payments disclosures required 

by §§ 226.38(c)(3)(i)(C), 

226.38(c)(3)(ii)(C) and 226.38(c)(6)(i) 

and the total payment disclosure 

required by § 226.38(e)(5)(i) only to the 

extent the estimated escrowed amounts 

and mortgage insurance premiums affect 

those disclosures. 

4. Timing. The creditor must provide 

final disclosures so that the consumer 

receives them not later than the third 

business day before consummation. For 

example, for consummation to occur on 

Thursday, June 11, the consumer must 

receive the disclosures on or before 

Monday, June 8.fi 

ALTERNATIVE 1—PARAGRAPH 

19(a)(2)(iii) 

fl19(a)(2)(iii) Corrected disclosures. 

1. Conditions for corrected 

disclosures. A disclosed annual 

percentage rate is accurate for purposes 

of § 226.19(a)(2)(iii) if the disclosure is 

accurate under § 226.19(a)(2)(iv). If a 

change occurs that does not render the 

annual percentage rate inaccurate, the 

creditor must disclose the changed 

terms before consummation, consistent 

with § 226.17(f). 

2. Content of corrected disclosures. 

Disclosures made under 

§ 226.19(a)(2)(iii) must contain each of 

the applicable disclosures required by 

§ 226.38. 

3. Estimates. In disclosures provided 

under § 226.19(a)(2)(iii), only the 

disclosures required by 

§§ 226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C), 

226.38(c)(6)(i) and 226.38(e)(5)(i) may 

be estimates. See comment 19(a)(2)(ii)-3 

for a discussion of which of the 

disclosures required under § 226.38 

creditors may estimate. 

4. Timing. The creditor must provide 

the corrected disclosures so that the 

consumer receives them not later than 

the third business day before 

consummation. For example, for 

consummation to occur on Saturday, 

June 13, the consumer must receive the 

disclosures on or before Wednesday, 

June 10.fi 

[19(a)(2)(ii) Three-business-day 

waiting period. 

1. Conditions for redisclosure. If, at 

the time of consummation, the annual 

percentage rate disclosed is accurate 

under § 226.22, the creditor does not 

have to make corrected disclosures 

under § 226.19(a)(2). If, on the other 

hand, the annual percentage rate 

disclosed is not accurate under § 226.22, 

the creditor must make corrected 

disclosures of all changed terms 

(including the annual percentage rate) 

so that the consumer receives them not 

later than the third business day before 

consummation. For example, assume 

consummation is scheduled for 

Thursday, June 11 and the early 

disclosures for a regular mortgage 

transaction disclose an annual 

percentage rate of 7.00%. 

i. On Thursday, June 11, the annual 

percentage rate will be 7.10%. The 

creditor is not required to make 

corrected disclosures under 

§ 226.19(a)(2). 

ii. On Thursday, June 11, the annual 

percentage rate will be 7.15%. The 

creditor must make corrected 

disclosures so that the consumer 

receives them on or before Monday, 

June 8. 

2. Content of new disclosures. If 

redisclosure is required, the creditor 

may provide a complete set of new 

disclosures, or may redisclose only the 

changed terms. If the creditor chooses to 

provide a complete set of new 

disclosures, the creditor may but need 

not highlight the new terms, provided 

that the disclosures comply with the 

format requirements of § 226.17(a). If the 

new creditor chooses to disclose only 

the new terms, all the new terms must 

be disclosed. For example, a different 

annual percentage rate will almost 

always produce a different finance 

charge, and often a new schedule of 

payments; all of these changes would 

have to be disclosed. If, in addition, 

unrelated terms such as the amount 

financed or prepayment penalty vary 

from those originally disclosed, the 

accurate terms must be disclosed. 

However, no new disclosures are 

required if the only inaccuracies involve 

estimates other than the annual 

percentage rate, and no variable-rate 

feature has been added. See § 226.17(f). 

For a discussion of the requirement to 

redisclose when a variable-rate feature 

is added, see comment 17(f)-2. For a 

discussion of redisclosure requirements 

in general, see the commentary on 

§ 226.17(f). 

3. Timing. When redisclosures are 

necessary because the annual 

percentage rate has become inaccurate, 

they must be received by the consumer 

no later than the third business day 

before consummation. (For 

redisclosures triggered by other events, 

the creditor must provide corrected 

disclosures before consummation. See 

§ 226.17(f).) If the creditor delivers the 

corrected disclosures to the consumer in 

person, consummation may occur any 

time on the third business day following 

delivery. If the creditor provides the 

corrected disclosures by mail, the 

consumer is considered to have received 

them three business days after they are 

placed in the mail, for purposes of 

determining when the three-businessday waiting period required under 

§ 226.19(a)(2)(ii) begins. Creditors that 

use electronic mail or a courier other 

than the postal service may also follow 

this approach. 

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4. Basis for annual percentage rate 

comparison. To determine whether a 

creditor must make corrected 

disclosures under § 226.22, a creditor 

compares (a) what the annual 

percentage rate will be at consummation 

to (b) the annual percentage rate stated 

in the most recent disclosures the 

creditor made to the consumer. For 

example, assume consummation for a 

regular mortgage transaction is 

scheduled for Thursday, June 11, the 

early disclosures provided in May stated 

an annual percentage rate of 7.00%, and 

corrected disclosures received by the 

consumer on Friday, June 5 stated an 

annual percentage rate of 7.15%: 

1. On Thursday, June 11, the annual 

percentage rate will be 7.25%, which 

exceeds the most recently disclosed 

annual percentage rate by less than the 

applicable tolerance. The creditor is not 

required to make additional corrected 

disclosures or wait an additional three 

business days under § 226.19(a)(2). 

ii. On Thursday, June 11, the annual 

percentage rate will be 7.30%, which 

exceeds the most recently disclosed 

annual percentage rate by more than the 

applicable tolerance. The creditor must 

make corrected disclosures such that the 

consumer receives them on or before 

Monday, June 8.] 

ALTERNATIVE 2—PARAGRAPH 

19(a)(2)(iii) 

fl19(a)(2)(iii) Corrected disclosures. 

1. Conditions for corrected 

disclosures. If the annual percentage 

rate disclosed under § 226.19(a)(2)(ii) 

changes so that it is not accurate under 

§ 226.19(a)(2)(iv) or an adjustable-rate 

feature is added (see comment 17(f)–2), 

the creditor must make corrected 

disclosures of all changed terms 

(including the annual percentage rate) 

so that the consumer receives them not 

later than the third business day before 

consummation. (If a change occurs that 

does not render the annual percentage 

rate on the early disclosures inaccurate, 

the creditor must disclose the changed 

terms before consummation, consistent 

with § 226.17(f).) For example, assume 

consummation is scheduled for 

Thursday, June 11 and the early 

disclosures for a regular mortgage 

transaction disclose an annual 

percentage rate of 7.00%:fi 

[19(a)(2)(ii) Three-business-day 

waiting period. 1. Conditions for 

redisclosure. If, at the time of 

consummation, the annual percentage 

rate disclosed is accurate under 

§ 226.22, the creditor does not have to 

make corrected disclosures under 

§ 226.19(a)(2). If, on the other hand, the 

annual percentage rate disclosed is not 

accurate under § 226.22, the creditor 

must make corrected disclosures of all 

changed terms (including the annual 

percentage rate) so that the consumer 

receives them no later than the third 

business day before consummation. For 

example, assume consummation is 

scheduled for Thursday, June 11 and the 

early disclosures for a regular mortgage 

transaction disclose an annual 

percentage rate of 7.00%:] 

i. On Thursday, June 11, the annual 

percentage rate will be 7.10%. The 

creditor is not required to make 

corrected disclosures under 

§ 226.19(a)(2). 

ii. On Thursday, June 11, the annual 

percentage rate will be 7.15%. The 

creditor must make corrected 

disclosures so that the consumer 

receives them on or before Monday, 

June 8. 

2. Content of [new]flcorrectedfi 

disclosures. If redisclosure is required 

flunder § 226.19(a)(2)(iii)fi, the 

creditor may provide a complete set of 

new disclosures, or may redisclose only 

the changed terms. If the creditor 

chooses to provide a complete set of 

new disclosures, the creditor may but 

need not highlight the new terms, 

provided that the disclosures comply 

with the format requirements of 

§ 226.17(a) fland § 226.37fi. If the new 

creditor chooses to disclose only the 

new terms, all the new terms must be 

disclosed. For example, a different 

annual percentage rate will almost 

always produce [a different finance 

charge, and often a new schedule of 

payments]fldifferent interest and 

settlement charges, and often a new 

payment summaryfi; all of these 

changes would have to be disclosed. If, 

in addition, unrelated terms such as the 

amount financed or prepayment penalty 

vary from those originally disclosed 

flor an adjustable-rate feature is added 

(see comment 17(f)–2)fi, the accurate 

terms must be disclosed. [However, no 

new disclosures are required if the only 

inaccuracies involve estimates other 

than the annual percentage rate, and no 

variable-rate feature has been added. For 

a discussion of the requirement to 

redisclose when a variable-rate feature 

is added, see comment 17(f)–2. For a 

discussion of redisclosure requirements 

in general, see the commentary on 

§ 226.17(f).] 

[3. Timing. When redisclosures are 

necessary because the annual 

percentage rate has become inaccurate, 

they must be received by the consumer 

no later than the third business day 

before consummation. (For 

redisclosures triggered by other events, 

the creditor must provide corrected 

disclosures before consummation. See 

§ 226.17(f).) If the creditor delivers the 

corrected disclosures to the consumer in 

person, consummation may occur any 

time on the third business day following 

delivery. If the creditor provides the 

corrected disclosures by mail, the 

consumer is considered to have received 

them three business days after they are 

placed in the mail, for purposes of 

determining when the three-businessday waiting periods required under 

§ 226.19(a)(2)(ii) begins. Creditors that 

use electronic mail or a courier other 

than the postal service may also follow 

this approach.] 

fl3. Estimates. In disclosures 

provided under § 226.19(a)(2)(iii), only 

the disclosures required by 

§§ 226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C), 

226.38(c)(6)(i) and 226.38(e)(5)(i) may 

be estimates. See comment 19(a)(2)(ii)– 

3 for a discussion of which of the 

disclosures required under § 226.38 

creditors may estimate.fi 

4. Basis for annual percentage rate 

comparison. To determine whether a 

creditor must make corrected 

disclosures under 

[§ 226.22]fl§ 226.19(a)(2)(iii)fi, a 

creditor compares (a) what the annual 

percentage rate will be at consummation 

to (b) the annual percentage rate stated 

in the most recent disclosures the 

creditor made to the consumer. For 

example, assume consummation for a 

regular mortgage transaction is 

scheduled for Thursday, June 11, the 

early disclosures provided in May stated 

an annual percentage rate of 7.00%, and 

[corrected]flnewfi disclosures 

received by the consumer on Friday, 

June 5 stated an annual percentage rate 

of 7.15%: 

i. On Thursday, June 11, the annual 

percentage rate will be 7.25%, which 

exceeds the most recently disclosed 

annual percentage rate by less than the 

applicable tolerance. The creditor is not 

required to make additional corrected 

disclosures or wait an additional three 

business days under § 226.19(a)(2). 

ii. On Thursday, June 11, the annual 

percentage rate will be 7.30%, which 

exceeds the most recently disclosed 

annual percentage rate by more than the 

applicable tolerance. The creditor must 

make corrected disclosures such that the 

consumer receives them on or before 

Monday, June 8. 

fl19(a)(2)(iv) Annual percentage rate 

accuracy. 

1. Other changed terms. If a change 

occurs that does not render the APR 

inaccurate under § 226.19(a)(iv), the 

creditor must disclose the changed 

terms before consummation, consistent 

with § 226.17(f). 

19(a)(2)(v) Timing. 

1. General. If the creditor delivers the 

disclosures required by § 226.19(a)(2)(ii) 

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or (a)(2)(iii) to the consumer in person, 

consummation may occur any time on 

the third business day following 

delivery. If the creditor provides the 

disclosures required by § 226.19(a)(2)(ii) 

or (a)(2)(iii) of this section by mail, the 

consumer is considered to have received 

them three business days after they are 

placed in the mail, for purposes of 

determining when the three-businessday waiting periods required under 

§ 226.19(a)(2)(ii) and (iii) begin. 

Creditors that use electronic mail or a 

courier to provide disclosures may also 

follow this approach. Whatever method 

is used to provide disclosures, creditors 

may rely on documentation of receipt in 

determining when the three-businessday waiting period begins.fi 

19(a)(3) Consumer’s waiver of waiting 

period before consummation. 

1. Modification or waiver. A consumer 

may modify or waive the right to a 

waiting period required by 

§ 226.19(a)(2) only after the creditor 

makes the disclosures required by 

[§ 226.18]fl§ 226.38. A separate waiver 

is required for each waiting period to be 

waived.fi The consumer must have a 

bona fide personal financial emergency 

that necessitates consummating the 

credit transaction before the end of the 

waiting period. Whether these 

conditions are met is determined by the 

facts surrounding individual situations. 

The imminent sale of the consumer’s 

home at foreclosure, where the 

foreclosure sale will proceed unless the 

loan proceeds are made available to the 

consumer during the waiting period, is 

one example of a bona fide personal 

financial emergency. Each consumer 

who is primarily liable on the legal 

obligation must sign the written 

statement for the waiver to be effective. 

[2. Examples of waivers within the 

seven-business-day waiting period. 

Assume the early disclosures are 

delivered to the consumer in person on 

Monday, June 1, and at that time the 

consumer executes a waiver of the 

seven-business-day waiting period 

(which would end on Tuesday, June 9) 

so that the loan can be consummated on 

Friday, June 5: 

i. If the annual percentage rate on the 

early disclosures is inaccurate under 

§ 226.22, the creditor must provide a 

corrected disclosure to the consumer 

before consummation, which triggers 

the three-business-day waiting period in 

§ 226.19(a)(2)(ii). After the consumer 

receives the corrected disclosure, the 

consumer must execute a waiver of the 

three-business-day waiting period in 

order to consummate the transaction on 

Friday, June 5. 

ii. If a change occurs that does not 

render the annual percentage rate on the 

early disclosures inaccurate under 

§ 226.22, the creditor must disclose the 

changed terms before consummation, 

consistent with § 226.17(f). Disclosure of 

the changed terms does not trigger the 

additional waiting period, and the 

transaction may be consummated on 

June 5 without the consumer giving the 

creditor an additional modification or 

waiver.] 

[3. Examples of waivers made after 

the seven-business-day waiting period. 

Assume the early disclosures are 

delivered to the consumer in person on 

Monday, June 1 and consummation is 

scheduled for Friday, June 19.]fl2. 

Examples. Assume consummation is 

scheduled for Friday, June 19, the 

disclosures required by § 226.19(a)(1)(i) 

are delivered to the consumer in person 

on Monday, June 1, and the consumer 

receives the disclosures required by 

§ 226.19(a)(2)(ii) on Monday, June 15.fi 

On Wednesday, June 17, a change in the 

annual percentage rate occurs: 

i. If the annual percentage rate on the 

[early] disclosures flrequired by 

§ 226.19(a)(2)(ii)fi is [inaccurate under 

§ 226.22]flnot accurate under § 226.22 

nor accurate under § 226.19(a)(2)(iv)fi, 

the creditor must provide a corrected 

disclosure before consummation, which 

triggers the three-business-day-waiting 

period in § 226.19(a)(2)fl(iii)fi. After 

the consumer receives the corrected 

disclosure, the consumer must execute 

a waiver of the three-business-day 

waiting period in order to consummate 

the transaction on Friday, June 19. 

ii. If a change occurs that does not 

render the annual percentage rate on the 

[early] disclosures flrequired by 

§ 226.19(a)(2)(ii)fi inaccurate under 

§ 226.22, the creditor must disclose the 

changed terms before consummation, 

consistent with § 226.17(f). Disclosure of 

the changed terms does not trigger an 

additional waiting period, and the 

transaction may be consummated on 

Friday, June 19 without the consumer 

giving the creditor an additional 

modification or waiver. 

[19(a)(4) Notice. 

1. Inclusion in other disclosures. The 

notice required by § 226.19(a)(4) must 

be grouped together with the disclosures 

required by § 226.19(a)(1)(i) or 

§ 226.19(a)(2). See comment 17(a)(1)–2 

for a discussion of the rules for 

segregating disclosures. In other cases, 

the notice set forth in § 226.19(a)(4) may 

be disclosed together with or separately 

from the disclosures required under 

§ 226.18. See comment 17(a)(1)–5(xvi).] 

19(a)[(5)]fl(4)fi(ii) Time of 

disclosures for timeshare plans. 

1. Timing. A mortgage transaction 

secured by a consumer’s interest in a 

‘‘timeshare plan,’’ as defined in 11 

U.S.C. 101(53D), [that is also a Federally 

related mortgage loan under RESPA] is 

subject to the requirements of 

§ 226.19(a)[(5)]fl(4)fi instead of the 

requirements of § 226.19(a)(1) through 

§ 226.19(a)[(4)]fl(3)fi. See comment 

19(a)(1)(i)–1. Early disclosures for 

transactions subject to 

§ 226.19(a)[(5)]fl(4)fi must be given (a) 

before consummation or (b) within three 

business days after the creditor receives 

the consumer’s written application, 

whichever is earlier. The general 

definition of ‘‘business day’’ in 

§ 226.2(a)(6)—a day on which the 

creditor’s offices are open to the public 

for substantially all of its business 

functions—applies for purposes of 

§ 226.19(a)(5)(ii). See comment 2(a)(6)– 

1. These timing requirements are 

different from the timing requirements 

under § 226.19(a)(1)(i). Timeshare 

transactions covered by § 226.19(a)[(5)] 

may be consummated any time after the 

disclosures required by 

§ 226.19(a)[(5)]fl(4)fi(ii) are provided. 

2. Use of estimates. If the creditor 

does not know the precise credit terms, 

the creditor must base the disclosures 

on the best information reasonably 

available and indicate that the 

disclosures are estimates under 

§ 226.17(c)(2). If many of the disclosures 

are estimates, the creditor may include 

a statement to that effect (such as ‘‘all 

numerical disclosures [except the latepayment disclosure] are estimates’’) 

instead of separately labelling each 

estimate. In the alternative, the creditor 

may label as an estimate only the items 

primarily affected by unknown 

information. (See the commentary to 

§ 226.17(c)(2).) The creditor may 

provide explanatory material 

concerning the estimates and the 

contingencies that may affect the actual 

terms, in accordance with the 

commentary to § 226.17(a)(1)[.]fland 

§ 226.37. The disclosures required by 

§ 226.19(a)(2) may not contain 

estimates, however, with limited 

exceptions. See the commentary on 

§ 226.19(a)(2) for a discussion of 

limitations on estimates in disclosures 

made under that subsection.fi 

3. Written application. For timeshare 

transactions, creditors may rely on 

comment 19(a)(1)(i)–[3]fl2fi in 

determining whether a ‘‘written 

application’’ has been received. 

4. Denied or withdrawn applications. 

For timeshare transactions, creditors 

may rely on comment 19(a)(1)(i)– 

[4]fl3fi in determining that disclosures 

are not required by 

§ 226.19(a)[(5)]fl(4)fi(ii) because the 

consumer’s application will not or 

cannot be approved on the terms 

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43396 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

requested or the consumer has 

withdrawn the application. 

5. Itemization of amount financed. 

For timeshare transactions, creditors 

may rely on comment 19(a)(1)(i)– 

[5]fl4fi in determining whether 

providing the good faith estimates of 

settlement costs required by RESPA 

satisfies the requirement of § 226.18(c) 

to provide an itemization of the amount 

financed. 

19(a)[(5)]fl(4)fi(iii) Redisclosure for 

timeshare plans. 

1. Consummation or settlement. For 

extensions of credit secured by a 

consumer’s timeshare plan, when 

corrected disclosures are required, they 

must be given no later than 

‘‘consummation or settlement.’’ 

‘‘Consummation’’ is defined in 

§ 226.2(a). ‘‘Settlement’’ is defined in 

Regulation X (24 CFR 3500.2(b)) and is 

subject to any interpretations issued by 

HUD. In some cases, a creditor may 

delay redisclosure until settlement, 

which may be at a time later than 

consummation. If a creditor chooses to 

redisclose at settlement, disclosures 

may be based on the terms in effect at 

settlement, rather than at 

consummation. For example, in a 

variable-rate transaction, a creditor may 

choose to base disclosures on the terms 

in effect at settlement, despite the 

general rule in comment [17(c)(1)– 

8]fl§ 226.17(c)(1)(iii)fi that variablerate disclosures flgenerallyfi should 

be based on the terms in effect at 

consummation. 

2. Content of new disclosures. 

Creditors may rely on comment 

19(a)(2)(ii)–2 in determining the content 

of corrected disclosures required under 

§ 226.19(a)[(5)]fl(4)fi(iii). 

19(b) [Certain variable-rate 

transactions]flAdjustable-rate 

mortgagesfi. 

[1. Coverage. Section 226.19(b) 

applies to all closed-end variable-rate 

transactions that are secured by the 

consumer’s principal dwelling and have 

a term greater than one year. The 

requirements of this section apply not 

only to transactions financing the initial 

acquisition of the consumer’s principal 

dwelling, but also to any other closedend variable-rate transaction secured by 

the principal dwelling. Closed-end 

variable-rate transactions that are not 

secured by the principal dwelling, or are 

secured by the principal dwelling but 

have a term of one year or less, are 

subject to the disclosure requirements of 

§ 226.18(f)(1) rather than those of 

§ 226.19(b). (Furthermore, ‘‘sharedequity’’ or ‘‘shared-appreciation’’ 

mortgages are subject to the disclosure 

requirements of § 226.18(f)(1) rather 

than those of § 226.19(b) regardless of 

the general coverage of those sections.) 

For purposes of this section, the term of 

a variable-rate demand loan is 

determined in accordance with the 

commentary to § 226.17(c)(5). In 

determining whether a construction 

loan that may be permanently financed 

by the same creditor is covered under 

this section, the creditor may treat the 

construction and the permanent phases 

as separate transactions with distinct 

terms to maturity or a single combined 

transaction. For purposes of the 

disclosures required under § 226.18, the 

creditor may nevertheless treat the two 

phases either as separate transactions or 

as a single combined transaction in 

accordance with § 226.17(c)(6). Finally, 

in any assumption of a variable-rate 

transaction secured by the consumer’s 

principal dwelling with a term greater 

than one year, disclosures need not be 

provided under §§ 226.18(f)(2)(ii) or 

226.19(b).] 

fl1. Coverage. Section 226.19(b) 

applies to all closed-end adjustable-rate 

mortgages described in § 226.38(a)(i) 

that are secured by real property or a 

dwelling. Closed-end adjustable-rate 

transactions that are not secured by real 

property or a dwelling are subject to the 

disclosure requirements of § 226.18(f) 

rather than those of § 226.19(b). In 

determining whether a construction 

loan that may be permanently financed 

by the same creditor is covered under 

this section, the creditor may treat the 

construction and the permanent phases 

as separate transactions with distinct 

terms to maturity or a single combined 

transaction. See comment 17(c)(6)–2. In 

any assumption of an adjustable-rate 

transaction secured by real property or 

a dwelling, disclosures need not be 

provided under § 226.19(b).fi 

[2. Timing. A creditor must give the 

disclosures required under this section 

at the time an application form is 

provided or before the consumer pays a 

nonrefundable fee, whichever is earlier. 

i. Intermediary agent or broker. In 

cases where a creditor receives a written 

application through an intermediary 

agent or broker, however, footnote 45b 

provides a substitute timing rule 

requiring the creditor to deliver the 

disclosures or place them in the mail 

not later than three business days after 

the creditor receives the consumer’s 

written application. (See comment 

19(b)–3 for guidance in determining 

whether or not the transaction involves 

an intermediary agent or broker.) This 

three-day rule also applies where the 

creditor takes an application over the 

telephone. 

ii. Telephone request. In cases where 

the consumer requests an application 

form over the telephone, the creditor 

must include the early disclosures 

required under this section with the 

application that is sent to the consumer. 

iii. Mail solicitations. In cases where 

the creditor solicits applications 

through the mail, the creditor must also 

send the disclosures required under this 

section if an application form is 

included with the solicitation. 

iv. Conversion.]fl2. Disclosure at the 

time of conversion.fi In cases where an 

open-end credit account will convert to 

a closed-end transaction subject to this 

section under a written agreement with 

the consumer, disclosures under this 

section [may be given at the time of 

conversion.]flmust be given at or before 

the time of conversion.fi (See the 

commentary to § 226.20(a) for 

information on the timing requirements 

for § 226.19(b)[(2)] disclosures when [a 

variable-rate]flan adjustable-ratefi 

feature is later added to a transaction.) 

[v. Form of electronic disclosures 

provided on or with electronic 

applications. Creditors must provide the 

disclosures required by this section 

(including the brochure) on or with a 

blank application that is made available 

to the consumer in electronic form, such 

as on a creditor’s Internet Web site. 

Creditors have flexibility in satisfying 

this requirement. Methods creditors 

could use to satisfy the requirement 

include, but are not limited to, the 

following examples: 

A. The disclosures could 

automatically appear on the screen 

when the application appears; 

B. The disclosures could be located 

on the same web page as the application 

(whether or not they appear on the 

initial screen), if the application 

contains a clear and conspicuous 

reference to the location of the 

disclosures and indicates that the 

disclosures contain rate, fee, and other 

cost information, as applicable; 

C. Creditors could provide a link to 

the electronic disclosures on or with the 

application as long as consumers cannot 

bypass the disclosures before submitting 

the application. The link would take the 

consumer to the disclosures, but the 

consumer need not be required to scroll 

completely through the disclosures; or 

D. The disclosures could be located 

on the same web page as the application 

without necessarily appearing on the 

initial screen, immediately preceding 

the button that the consumer will click 

to submit the application. 

Whatever method is used, a creditor 

need not confirm that the consumer has 

read the disclosures. 

3. Intermediary agent or broker. In 

certain transactions involving an 

‘‘intermediary agent or broker,’’ a 

creditor may delay providing 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43397 

disclosures. A creditor may not delay 

providing disclosures in transactions 

involving either a legal agent (as 

determined by applicable law) or any 

other third party that is not an 

‘‘intermediary agent or broker.’’ In 

determining whether or not a 

transaction involves an ‘‘intermediary 

agent or broker’’ the following factors 

should be considered: 

• The number of applications 

submitted by the broker to the creditor 

as compared to the total number of 

applications received by the creditor. 

The greater the percentage of total loan 

applications submitted by the broker in 

any given period of time, the less likely 

it is that the broker would be considered 

an ‘‘intermediary agent or broker’’ of the 

creditor during the next period. 

• The number of applications 

submitted by the broker to the creditor 

as compared to the total number of 

applications received by the broker. 

(This factor is applicable only if the 

creditor has such information.) The 

greater the percentage of total loan 

applications received by the broker that 

is submitted to a creditor in any given 

period of time, the less likely it is that 

the broker would be considered an 

‘‘intermediary agent or broker’’ of the 

creditor during the next period. 

• The amount of work (such as 

document preparation) the creditor 

expects to be done by the broker on an 

application based on the creditor’s prior 

dealings with the broker and on the 

creditor’s requirements for accepting 

applications, taking into consideration 

the customary practice of brokers in a 

particular area. The more work that the 

creditor expects the broker to do on an 

application, in excess of what is usually 

expected of a broker in that area, the 

less likely it is that the broker would be 

considered an ‘‘intermediary agent or 

broker’’ of the creditor. An example of 

an ‘‘intermediary agent or broker’’ is a 

broker who, customarily within a brief 

period of time after receiving an 

application, inquires about the credit 

terms of several creditors with whom 

the broker does business and submits 

the application to one of them. The 

broker is responsible for only a small 

percentage of the applications received 

by that creditor. During the time the 

broker has the application, it might 

request a credit report and an appraisal 

(or even prepare an entire loan package 

if customary in that particular area). 

4. Other variable-rate regulations. 

Transactions in which the creditor is 

required to comply with and has 

complied with the disclosure 

requirements of the variable-rate 

regulations of other Federal agencies are 

exempt from the requirements of 

§ 226.19(b), by virtue of footnote 45a, 

and are exempt from the requirements 

of § 226.20(c), by virtue of footnote 45c. 

Those variable-rate regulations include 

the regulations issued by the Federal 

Home Loan Bank Board and those 

issued by the Department of Housing 

and Urban Development. The exception 

in footnotes 45a and 45c is also 

available to creditors that are required 

by State law to comply with the federal 

variable-rate regulations noted above 

and to creditors that are authorized by 

title VIII of the Depository Institutions 

Act of 1982 (12 U.S.C. 3801 et seq.) to 

make loans in accordance with those 

regulations. Creditors using this 

exception should comply with the 

timing requirements of those regulations 

rather than the timing requirements of 

Regulation Z in making the variable-rate 

disclosures. 

5. Examples of variable-rate 

transactions. 

(i) The following transactions, if they 

have a term greater than one year and 

are secured by the consumer’s principal 

dwelling, constitute variable-rate 

mortgages subject to the disclosure 

requirements of § 226.19(b).] 

fl3. Non-adjustable-rate mortgages. 

The following transactions, if they are 

secured by real property or a dwelling, 

do not constitute adjustable-rate 

mortgages subject to the disclosure 

requirements of § 226.19(b).fi 

[(A)]fl(i)fi Renewable balloonpayment instruments [where]flthat 

have a fixed rate of interest, even iffi 

the creditor is both unconditionally 

obligated to renew the balloon-payment 

loan at the consumer’s option (or is 

obligated to renew subject to conditions 

within the consumer’s control) and has 

the option of increasing the interest rate 

at the time of renewal. (See comment 

[17(c)(1)–11]fl17(c)(1)(iii)–4fi for a 

discussion of conditions within a 

consumer’s control in connection with 

renewable balloon-payment loans.) 

[(B)]fl(ii)fi Preferred-rate loans 

where the terms of the legal obligation 

provide that the initial underlying rate 

is fixed but will increase upon the 

occurrence of some event, such as an 

employee leaving the employ of the 

creditor, and the note reflects the 

preferred rate. [The disclosures under 

§§ 226.19(b)(1) and 226.19(b)(2)(v), 

(viii), (ix), and (xii) are not applicable to 

such loans.] 

[(C)]fl(iii)fi ‘‘Price-level-adjusted 

mortgages’’ or other indexed mortgages 

that have a fixed rate of interest but 

provide for periodic adjustments to 

payments and the loan balance to reflect 

changes in an index measuring prices or 

inflation. [The disclosures under 

§ 226.19(b)(1) are not applicable to such 

loans, nor are the following provisions 

to the extent they relate to the 

determination of the interest rate by the 

addition of a margin, changes in the 

interest rate, or interest rate discounts: 

Section 226.19(b)(2)(i), (iii), (iv), (v), 

(vi), (vii), (viii), and (ix).] (See 

comments 20(c)-2 and 30–1 regarding 

the inapplicability of variable-rate 

adjustment notices and interest rate 

limitations to price-level-adjusted or 

similar mortgages.) 

[(ii)]fl(iv)fi Graduated-payment 

mortgages and step-rate transactions 

without flan adjustable-rate 

feature.fi[a variable-rate feature are not 

considered variable-rate transactions]. 

[Paragraph 19(b)(1). 

1. Substitute. Creditors who wish to 

use publications other than the 

Consumer Handbook on Adjustable 

Rate Mortgages must make a good faith 

determination that their brochures are 

suitable substitutes to the Consumer 

Handbook. A substitute is suitable if it 

is, at a minimum, comparable to the 

Consumer Handbook in substance and 

comprehensiveness. Creditors are 

permitted to provide more detailed 

information than is contained in the 

Consumer Handbook. 

2. Applicability. The Consumer 

Handbook need not be given for 

variable-rate transactions subject to this 

section in which the underlying interest 

rate is fixed. (See comment 19(b)–5 for 

an example of a variable-rate transaction 

where the underlying interest rate is 

fixed.)] 

[Paragraph 19(b)(2). 

1.]fl4. fi Disclosure for each 

[variable]fladjustablefi-rate mortgage 

program. A creditor must provide 

disclosures to the consumer that [fully] 

describe each of the creditor’s 

[variable]fladjustablefi-rate mortgage 

programs in which the consumer 

expresses an interest. If a program is 

made available only to certain 

customers of an institution, a creditor 

need not provide disclosures for that 

program to other consumers who 

express a general interest in a creditor’s 

ARM programs. [Disclosures must be 

given at the time an application form is 

provided or before the consumer pays a 

nonrefundable fee, whichever is earlier. 

If program disclosures cannot be 

provided because a consumer expresses 

an interest in individually negotiating 

loan terms that are not generally offered, 

disclosures reflecting those terms may 

be provided as soon as reasonably 

possible after the terms have been 

decided upon, but not later than the 

time a non-refundable fee is paid. If a 

consumer who has received program 

disclosures subsequently expresses an 

interest in other available variable-rate 

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43398 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

mortgage programs subject to 

226.19(b)(2), or the creditor and 

consumer decide on a program for 

which the consumer has not received 

disclosures, the creditor must provide 

appropriate disclosures as soon as 

reasonably possible. The creditor, of 

course, is permitted to give the 

consumer information about additional 

programs subject to § 226.19(b) 

initially.] 

[2. Variable-rate loan program 

disclosure defined.]fl5. Adjustable-rate 

mortgage loan program defined. fi i. 

Generally, if the identification, the 

presence or absence, or the exact value 

of a loan feature must be disclosed 

under this section, 

[variable]fladjustablefi-rate mortgage 

loans that differ as to such features 

constitute separate loan programs. For 

example, separate loan programs would 

exist based on differences in any of the 

following loan features: 

A. The index or other formula used to 

calculate interest rate adjustments. 

B. The rules relating to changes in the 

index value, interest rate, flandfi 

payments[, and loan balance]. 

C. The presence or absence of, and the 

amount of, rate or payment caps. 

D. The presence of a demand feature. 

E. The possibility of negative 

amortization. 

F. The possibility of interest rate 

carryover. 

G. The frequency of interest rate and 

payment adjustments. 

H. The presence of a discount flor 

premiumfi feature. 

I. [In addition, if a loan feature must 

be taken into account in preparing the 

disclosures required by 

§ 226.19(b)(2)(viii), variable-rate 

mortgage loans that differ as to that 

feature constitute separate programs 

under § 226.19(b)(2).]flThe presence of 

a prepayment penalty provision. 

J. The possibility of making interestonly payments. 

K. The presence of a balloon payment 

feature. 

L. The presence of a shared-equity or 

shared-appreciation feature. 

M. The possibility of providing less 

than full documentation of income or 

assets. 

N. The presence of a demand 

feature.fi 

ii. If, however, [a representative value 

may be given for a loan feature or the 

feature need not be disclosed under 

§ 226.19(b)(2), variable-rate]fla feature 

is not required or permitted to be 

disclosed under § 226.19(b), adjustableratefi mortgage loans that differ as to 

such features do not constitute separate 

loan programs. For example, separate 

programs would not exist based on 

differences in the following loan 

features: 

A. The amount of a discount flor 

premiumfi. 

B. The amount of a margin. 

[3. Form of program disclosures. A 

creditor may provide separate program 

disclosure forms for each ARM loan 

program it offers or a single disclosure 

form that describes multiple programs. 

A disclosure form may consist of more 

than one page. For example, a creditor 

may attach a separate page containing 

the historical payment example for a 

particular program. A disclosure form 

describing more than one program need 

not repeat information applicable to 

each program that is described. For 

example, a form describing multiple 

programs may disclose the information 

applicable to all of the programs in one 

place with the various program features 

(such as options permitting conversion 

to a fixed rate) disclosed separately. The 

form, however, must state if any 

program feature that is described is 

available only in conjunction with 

certain other program features. Both the 

separate and multiple program 

disclosures may illustrate more than one 

loan maturity or payment 

amortization—for example, by including 

multiple payment and loan balance 

columns in the historical payment 

example. Disclosures may be inserted or 

printed in the Consumer Handbook (or 

a suitable substitute) as long as they are 

identified as the creditor’s loan program 

disclosures. 

4. As applicable. The disclosures 

required by this section need only be 

made as applicable. Any disclosure not 

relevant to a particular transaction may 

be eliminated. For example, if the 

transaction does not contain a demand 

feature, the disclosure required under 

§ 226.19(b)(2)(x) need not be given. As 

used in this section, payment refers only 

to a payment based on the interest rate, 

loan balance and loan term, and does 

not refer to payment of other elements 

such as mortgage insurance premiums.] 

fl6. Payment. As used in this section, 

payment refers only to a payment based 

on the interest rate, loan balance and 

loan term, and does not refer to payment 

of other elements such as mortgage 

insurance premiums.fi 

[5.]fl7.fi Revisions. A creditor must 

revise the disclosures required under 

this section [once a year] as soon as 

reasonably possible [after the new index 

value becomes available. Revisions to 

the disclosures also are required] when 

the loan program changes. 

[Paragraph 19(b)(2)(i). 

1. Change in interest rate, payment, or 

term. A creditor must disclose the fact 

that the terms of the legal obligation 

permit the creditor, after consummation 

of the transaction, to increase (or 

decrease) the interest rate, payment, or 

term of the loan initially disclosed to 

the consumer. For example, the 

disclosures for a variable-rate mortgage 

loan program in which the interest rate 

and payment (but not loan term) can 

change might read, ‘‘Your interest rate 

and payment can change yearly.’’ In 

transactions where the term of the loan 

may change due to rate fluctuations, the 

creditor must state that fact. 

Paragraph 19(b)(2)(ii). 

1. Identification of index or formula. 

If a creditor ties interest rate changes to 

a particular index, this fact must be 

disclosed, along with a source of 

information about the index. For 

example, if a creditor uses the weekly 

average yield on U.S. Treasury 

Securities adjusted to a constant 

maturity as its index, the disclosure 

might read, ‘‘Your index is the weekly 

average yield on U.S. Treasury 

Securities adjusted to a constant 

maturity of one year published weekly 

in the Wall Street Journal.’’ If no 

particular index is used, the creditor 

must briefly describe the formula used 

to calculate interest rate changes. 

2. Changes at creditor’s discretion. If 

interest rate changes are at the creditor’s 

discretion, this fact must be disclosed. 

If an index is internally defined, such as 

by a creditor’s prime rate, the creditor 

should either briefly describe that index 

or state that interest rate changes are at 

the creditor’s discretion. 

Paragraph 19(b)(2)(iii). 

1. Determination of interest rate and 

payment. This provision requires an 

explanation of how the creditor will 

determine the consumer’s interest rate 

and payment. In cases where a creditor 

bases its interest rate on a specific index 

and adjusts the index through the 

addition of a margin, for example, the 

disclosure might read, ‘‘Your interest 

rate is based on the index plus a margin, 

and your payment will be based on the 

interest rate, loan balance, and 

remaining loan term.’’ In transactions 

where paying the periodic payments 

will not fully amortize the outstanding 

balance at the end of the loan term and 

where the final payment will equal the 

periodic payment plus the remaining 

unpaid balance, the creditor must 

disclose this fact. For example, the 

disclosure might read, ‘‘Your periodic 

payments will not fully amortize your 

loan and you will be required to make 

a single payment of the periodic 

payment plus the remaining unpaid 

balance at the end of the loan term.’’ 

The creditor, however, need not reflect 

any irregular final payment in the 

historical example or in the disclosure 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43399 

of the initial and maximum rates and 

payments. If applicable, the creditor 

should also disclose that the rate and 

payment will be rounded. 

Paragraph 19(b)(2)(iv). 

1. Current margin value and interest 

rate. Because the disclosures can be 

prepared in advance, the interest rate 

and margin may be several months old 

when the disclosures are delivered. A 

statement, therefore, is required alerting 

consumers to the fact that they should 

inquire about the current margin value 

applied to the index and the current 

interest rate. For example, the 

disclosure might state, ‘‘Ask us for our 

current interest rate and margin.’’] 

fl19(b)(1) Interest rate and payment 

disclosures 

1. As applicable. The disclosures 

required by § 226.19(b)(1) need only be 

made as applicable. Any disclosure not 

relevant to a particular loan program 

may be omitted.fi 

[Paragraph 19(b)(2)(v).]flParagraph 

19(b)(1)(i)fi 

1. Discounted and premium interest 

rate. In some [variable]fladjustablefirate mortgage loan transactions, 

creditors may set an initial interest rate 

that is not determined by the index or 

formula used to make later interest rate 

adjustments. Typically, this initial rate 

charged to consumers is lower than the 

rate would be if it were calculated using 

the index or formula. However, in some 

cases the initial rate may be higher. If 

the initial interest rate will be a 

discount or a premium rate, creditors 

must alert the consumer to this fact. For 

example, if a creditor discounted a 

consumer’s initial rate, the disclosure 

might state, [‘‘Your initial interest rate is 

not based on the index used to make 

later adjustments.’’]fl‘‘The interest rate 

is discounted and will stay the same for 

a 5-year introductory period. After this 

initial period, the interest rate will 

increase, even if market rates do not 

change.’’fi (See the commentary to 

§ 226.17(c)(1) for a further discussion of 

discounted and premium variable-rate 

transactions.) [In addition, the 

disclosure must suggest that consumers 

inquire about the amount that the 

program is currently discounted. For 

example, the disclosure might state, 

‘‘Ask us for the amount our adjustable 

rate mortgages are currently 

discounted.’’] In a transaction with a 

consumer buydown or with a thirdparty buydown that will be incorporated 

in the legal obligation, the creditor 

should disclose the program as a 

discounted [variable]fladjustablefirate mortgage transaction, but need not 

disclose additional information 

regarding the buydown in its program 

disclosures. [(See the commentary to 

§ 226.19(b)(2)(viii) for a discussion of 

how to reflect the discount or premium 

in the historical example or the 

maximum rate and payment 

disclosure).] 

[Paragraph 19(b)(2)(vi)]flParagraph 

19(b)(1)(ii)fi. 

1. Frequency. The frequency of 

interest rate and payment adjustments 

must be disclosed. If interest rate 

changes will be imposed more 

frequently or at different intervals than 

payment changes, a creditor must 

disclose the frequency and timing of 

both types of changes. For example, in 

[a variable]flan adjustablefi-rate 

mortgage transaction where interest rate 

changes are made monthly, but payment 

changes occur on an annual basis, this 

fact must be disclosed. In certain ARM 

transactions, the interval between loan 

closing and the initial adjustment is not 

known and may be different than the 

regular interval for adjustments. In such 

cases, the creditor may disclose the 

initial adjustment period as a range of 

the minimum and maximum amount of 

time from consummation or closing. For 

example, the creditor might state: ‘‘The 

first adjustment to your interest rate and 

payment will occur no sooner than 6 

months and no later than 18 months 

after closing. Subsequent adjustments 

may occur once each year after the first 

adjustment.’’ [(See comments 

19(b)(2)(viii)(A)–7 and 19(b)(2)(viii)(B)– 

4 for guidance on other disclosures 

when this alternative disclosure rule is 

used.)] 

flParagraph 19(b)(1)(iii). 

1. Identification of index or formula. 

If a creditor ties interest rate changes to 

a particular index, this fact must be 

disclosed, along with a source of 

information about the index. If no 

particular index is used, the creditor 

must briefly describe the formula used 

to calculate interest rate changes. To 

describe the index used, the disclosure 

might state, for example: 

i. ‘‘Your interest rate will be based on 

the ‘1-year CMT’ (Constant Maturity 

Treasury) index plus a margin we 

determine upon application. That index 

is published weekly in the Wall Street 

Journal and is available on the Web site 

of the Federal Reserve Board.’’ 

ii. ‘‘Your interest rate is based on the 

1-year LIBOR Index plus a margin that 

is determined at application. This index 

is published daily in the Wall Street 

Journal.’’ 

iii. ‘‘The interest rate is based on the 

11th District COFI Index (Cost of Funds 

Index for 11th District Federal Home 

Loan Bank (FHLB)) plus a margin 

determined upon application. The 11th 

District COFI Index is published 

monthly on the Web site of the San 

Francisco FHLB.’’ 

2. Changes at creditor’s discretion. If 

interest rate changes are at the creditor’s 

discretion, this fact must be disclosed. 

If an index is internally defined, such as 

by a creditor’s prime rate, the creditor 

should either briefly describe that index 

or state that interest rate changes are at 

the creditor’s discretion.fi 

[Paragraph 19(b)(2)(vii)]flParagraph 

19(b)(1)(iv)fi. 

1. Rate and payment caps. The 

creditor must disclose limits on changes 

(increases or decreases) in the interest 

rate or payment. If an initial discount is 

not taken into account in applying 

overall or periodic rate limitations, that 

fact must be disclosed. If separate 

overall or periodic limitations apply to 

interest rate increases resulting from 

other events, such as [the exercise of a 

fixed-rate conversion option or] leaving 

the creditor’s employ, those limitations 

must also be stated. flIf separate overall 

periodic limitations apply to interest 

rate increases resulting from the 

consumer’s exercise of a fixed-rate 

conversion option, those limitations 

must be stated with the disclosures 

about the option required by 

§ 226.19(b)(1)(v).fi Limitations do not 

include legal limits in the nature of 

usury or rate ceilings under State or 

Federal statutes or regulations. (See 

§ 226.30 for the rule requiring that a 

maximum interest rate be included in 

certain [variable]fladjustablefi-rate 

mortgage transactions.) The creditor 

need not disclose each periodic or 

overall rate limitation that is currently 

available. As an alternative, the creditor 

may disclose the range of the lowest and 

highest periodic and overall rate 

limitations that may be applicable to the 

creditor’s ARM transactions. For 

example, the creditor might state: 

fl‘‘Your interest rate can increase 

between 1 and 2 percentage points in 

any one year and between 4 and 7 

percentage points over the life of the 

loan.fi[‘‘The limitation on increases to 

your interest rate at each adjustment 

will be set at an amount in the following 

range: Between 1 and 2 percentage 

points at each adjustment. The 

limitation on increases to your interest 

rate over the term of the loan will be set 

at an amount in the following range: 

Between 4 and 7 percentage points 

above the initial interest rate.’’ A 

creditor using this alternative rule must 

include a statement in its program 

disclosures suggesting that the 

consumer ask about the overall rate 

limitations currently offered for the 

creditor’s ARM loan programs. (See 

comments 19(b)(2)(viii)(A)–6 and 

19(b)(2)(viii)(B)–3 for an explanation of 

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the additional requirements for a 

creditor using this alternative rule for 

disclosure of periodic and overall rate 

limitations.) 

2. Negative amortization and interest 

rate carryover. A creditor must disclose, 

where applicable, the possibility of 

negative amortization. For example, the 

disclosure might state, ‘‘If any of your 

payments is not sufficient to cover the 

interest due, the difference will be 

added to your loan amount.’’ Loans that 

provide for more than one way to trigger 

negative amortization are separate 

variable-rate mortgage programs 

requiring separate disclosures. (See the 

commentary to § 226.19(b)(2) for a 

discussion on the definition of a 

variable-rate mortgage loan program and 

the format for disclosure.) If a consumer 

is given the option to cap monthly 

payments that may result in negative 

amortization, the creditor must fully 

disclose the rules relating to the option, 

including the effects of exercising the 

option (such as negative amortization 

will occur and the principal loan 

balance will increase); however, the 

disclosure in § 226.19(b)(2)(viii) need 

not be provided. 

3. Conversion option. If a loan 

program permits consumers to convert 

their variable-rate mortgage loans to 

fixed-rate loans, the creditor must 

disclose that the interest rate may 

increase if the consumer converts the 

loan to a fixed-rate loan. The creditor 

must also disclose the rules relating to 

the conversion feature, such as the 

period during which the loan may be 

converted, that fees may be charged at 

conversion, and how the fixed rate will 

be determined. The creditor should 

identify any index or other measure or 

formula used to determine the fixed rate 

and state any margin to be added. In 

disclosing the period during which the 

loan may be converted and the margin, 

the creditor may use information 

applicable to the conversion feature 

during the six months preceding 

preparation of the disclosures and state 

that the information is representative of 

conversion features recently offered by 

the creditor. The information may be 

used until the program disclosures are 

otherwise revised. Although the rules 

relating to the conversion option must 

be disclosed, the effect of exercising the 

option should not be reflected 

elsewhere in the disclosures, such as in 

the historical example or in the 

calculation of the initial and maximum 

interest rate and payments. 

4. Preferred-rate loans. Section 

226.19(b) applies to preferred-rate loans, 

where the rate will increase upon the 

occurrence of some event, such as an 

employee leaving the creditor’s employ, 

whether or not the underlying rate is 

fixed or variable. In these transactions, 

the creditor must disclose the event that 

would allow the creditor to increase the 

rate such as that the rate may increase 

if the employee leaves the creditor’s 

employ. The creditor must also disclose 

the rules relating to termination of the 

preferred rate, such as that fees may be 

charged when the rate is changed and 

how the new rate will be determined. 

Paragraph 19(b)(2)(viii). 

1. Historical example and initial and 

maximum interest rates and payments. 

A creditor may disclose both the 

historical example and the initial and 

maximum interest rates and payments. 

Paragraph 19(b)(2)(viii)(A). 

1. Index movement. This section 

requires a creditor to provide an 

historical example, based on a $10,000 

loan amount originating in 1977, 

showing how interest rate changes 

implemented according to the terms of 

the loan program would have affected 

payments and the loan balance at the 

end of each year during a 15-year 

period. (In all cases, the creditor need 

only calculate the payments and loan 

balance for the term of the loan. For 

example, in a five-year loan, a creditor 

would show the payments and loan 

balance for the five-year term, from 1977 

to 1981, with a zero loan balance 

reflected for 1981. For the remaining ten 

years, 1982–1991, the creditor need only 

show the remaining index values, 

margin and interest rate and must 

continue to reflect all significant loan 

program terms such as rate limitations 

affecting them.) Pursuant to this section, 

the creditor must provide a history of 

index values for the preceding 15 years. 

Initially, the disclosures would give the 

index values from 1977 to the present. 

Each year thereafter, the revised 

program disclosures should include an 

additional year’s index value until 15 

years of values are shown. If the values 

for an index have not been available for 

15 years, a creditor need only go back 

as far as the values are available in 

giving a history and payment example. 

In all cases, only one index value per 

year need be shown. Thus, in 

transactions where interest rate 

adjustments are implemented more 

frequently than once per year, a creditor 

may assume that the interest rate and 

payment resulting from the index value 

chosen will stay in effect for the entire 

year for purposes of calculating the loan 

balance as of the end of the year and for 

reflecting other loan program terms. In 

cases where interest rate changes are at 

the creditor’s discretion (see the 

commentary to § 226.19(b)(2)(ii)), the 

creditor must provide a history of the 

rates imposed for the preceding 15 

years, beginning with the rates in 1977. 

In giving this history, the creditor need 

only go back as far as the creditor’s rates 

can reasonably be determined. 

2. Selection of index values. The 

historical example must reflect the 

method by which index values are 

determined under the program. If a 

creditor uses an average of index values 

or any other index formula, the history 

given should reflect those values. The 

creditor should select one date or, when 

an average of single values is used as an 

index, one period and should base the 

example on index values measured as of 

that same date or period for each year 

shown in the history. A date or period 

at any time during the year may be 

selected, but the same date or period 

must be used for each year in the 

historical example. For example, a 

creditor could use values for the first 

business day in July or for the first week 

ending in July for each of the 15 years 

shown in the example. 

3. Selection of margin. For purposes 

of the disclosure required under 

§ 226.19(b)(2)(viii)(A), a creditor may 

select a representative margin that has 

been used during the six months 

preceding preparation of the 

disclosures, and should disclose that the 

margin is one that the creditor has used 

recently. The margin selected may be 

used until a creditor revises the 

disclosure form. 

4. Amount of discount or premium. 

For purposes of the disclosure required 

under § 226.19(b)(2)(viii)(A), a creditor 

may select a discount or premium 

(amount and term) that has been used 

during the six months preceding 

preparation of the disclosures, and 

should disclose that the discount or 

premium is one that the creditor has 

used recently. The discount or premium 

should be reflected in the historical 

example for as long as the discount or 

premium is in effect. A creditor may 

assume that a discount that would have 

been in effect for any part of a year was 

in effect for the full year for purposes of 

reflecting it in the historical example. 

For example, a 3-month discount may 

be treated as being in effect for the 

entire first year of the example; a 15- 

month discount may be treated as being 

in effect for the first two years of the 

example. In illustrating the effect of the 

discount or premium, creditors should 

adjust the value of the interest rate in 

the historical example, and should not 

adjust the margin or index values. For 

example, if during the six months 

preceding preparation of the disclosures 

the fully indexed rate would have been 

10% but the first year’s rate under the 

program was 8%, the creditor would 

discount the first interest rate in the 

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historical example by 2 percentage 

points. 

5. Term of the loan. In calculating the 

payments and loan balances in the 

historical example, a creditor need not 

base the disclosures on each term to 

maturity or payment amortization that it 

offers. Instead, disclosures for ARMs 

may be based upon terms to maturity or 

payment amortizations of 5, 15 and 30 

years, as follows: ARMs with terms or 

amortizations from over 1 year to 10 

years may be based on a 5-year term or 

amortization; ARMs with terms or 

amortizations from over 10 years to 20 

years may be based on a 15-year term or 

amortization; and ARMs with terms or 

amortizations over 20 years may be 

based on a 30-year term or amortization. 

Thus, disclosures for ARMs offered with 

any term from over 1 year to 40 years 

may be based solely on terms of 5, 15 

and 30 years. Of course, a creditor may 

always base the disclosures on the 

actual terms or amortizations offered. If 

the creditor bases the disclosures on 

5-, 15- or 30-year terms or payment 

amortization as provided above, the 

term or payment amortization used in 

making the disclosure must be stated. 

6. Rate caps. A creditor using the 

alternative rule described in comment 

19(b)(2)(vii)–1 for disclosure of rate 

limitations must base the historical 

example upon the highest periodic and 

overall rate limitations disclosed under 

section 226.19(b)(2)(vii). In addition, the 

creditor must state the limitations used 

in the historical example. (See comment 

19(b)(2)(viii)(B)–3 for an explanation of 

the use of the highest rate limitation in 

other disclosures.) 

7. Frequency of adjustments. In 

certain transactions, creditors may use 

the alternative rule described in 

comment 19(b)(2)(vi)–1 for disclosure of 

the frequency of rate and payment 

adjustments. In such cases, the creditor 

may assume for purposes of the 

historical example that the first 

adjustment occurred at the end of the 

first full year in which the adjustment 

could occur. For example, in an ARM in 

which the first adjustment may occur 

between 6 and 18 months after closing 

and annually thereafter, the creditor 

may assume that the first adjustment 

occurred at the end of the first year in 

the historical example. (See comment 

19(b)(2)(viii)(B)–4 for an explanation of 

how to compute the maximum interest 

rate and payment when the initial 

adjustment period is not known.) 

Paragraph 19(b)(2)(viii)(B). 

1. Initial and maximum interest rates 

and payments. The disclosure form 

must state the initial and maximum 

interest rates and payments for a 

$10,000 loan originated at an initial 

interest rate (index value plus margin 

adjusted by the amount of any discount 

or premium) in effect as of an identified 

month and year for the loan program 

disclosure. (See comment 19(b)(2)–5 on 

revisions to the loan program 

disclosure.) In calculating the maximum 

payment under this paragraph, a 

creditor should assume that the interest 

rate increases as rapidly as possible 

under the loan program, and the 

maximum payment disclosed should 

reflect the amortization of the loan 

during this period. Thus, in a loan with 

2 percentage point annual (and 5 

percentage point overall) interest rate 

limitations or ‘‘caps,’’ the maximum 

interest rate would be 5 percentage 

points higher than the initial interest 

rate disclosed. Moreover, the loan 

would not reach the maximum interest 

rate until the fourth year because of the 

2 percentage point annual rate 

limitations, and the maximum payment 

disclosed would reflect the amortization 

of the loan during this period. If the 

loan program includes a discounted or 

premium initial interest rate, the initial 

interest rate should be adjusted by the 

amount of the discount or premium. 

2. Term of the loan. In calculating the 

initial and maximum payments, the 

creditor need not base the disclosures 

on each term to maturity or payment 

amortization offered under the program. 

Instead, the creditor may follow the 

rules set out in comment 

19(b)(2)(viii)(A)–5. If a historical 

example is provided under 

§ 226.19(b)(2)(viii)(A), the terms to 

maturity or payment amortization used 

in the historical example must be used 

in calculating the initial and maximum 

payment. In addition, creditors must 

state the term or payment amortization 

used in making the disclosures under 

this section. 

3. Rate caps. A creditor using the 

alternative rule for disclosure of interest 

rate limitations described in comment 

19(b)(2)(vii)–1 must calculate the 

maximum interest rate and payment 

based upon the highest periodic and 

overall rate limitations disclosed under 

§ 226.19(b)(2)(vii). In addition, the 

creditor must state the rate limitations 

used in calculating the maximum 

interest rate and payment. (See 

comment 19(b)(2)(viii)(A)–6 for an 

explanation of the use of the highest rate 

limitation in other disclosures.) 

4. Frequency of adjustments. In 

certain transactions, a creditor may use 

the alternative rule for disclosure of the 

frequency of rate and payment 

adjustments described in comment 

19(b)(2)(vi)–1. In such cases, the 

creditor must base the calculations of 

the initial and maximum rates and 

payments upon the earliest possible first 

adjustment disclosed under 

§ 226.19(b)(2)(vi). (See comment 

19(b)(2)(viii)(A)–7 for an explanation of 

how to disclose the historical example 

when the initial adjustment period is 

not known.) 

5. Periodic payment statement. The 

statement that the periodic payment 

may increase or decrease substantially 

may be satisfied by the disclosure in 

paragraph 19(b)(2)(vi) if it states for 

example, ‘‘your monthly payment can 

increase or decrease substantially based 

on annual changes in the interest rate.’’ 

Paragraph 19(b)(2)(ix). 

1. Calculation of payments. A creditor 

is required to include a statement on the 

disclosure form that explains how a 

consumer may calculate his or her 

actual monthly payments for a loan 

amount other than $10,000. The 

example should be based upon the most 

recent payment shown in the historical 

example or upon the initial interest rate 

reflected in the maximum rate and 

payment disclosure. In transactions in 

which the latest payment shown in the 

historical example is not for the latest 

year of index values shown (such as in 

a five-year loan), a creditor may provide 

additional examples based on the initial 

and maximum payments disclosed 

under § 226.19(b)(2)(viii)(B). The 

creditor, however, is not required to 

calculate the consumer’s payments. (See 

the model clauses in appendix H–4(C).) 

Paragraph 19(b)(2)(x). 

1. Demand feature. If a variable-rate 

mortgage loan subject to § 226.19(b) 

requirements contains a demand feature 

as discussed in the commentary to 

§ 226.18(i), this fact must be disclosed. 

(Pursuant to § 226.18(i), creditors would 

also disclose the demand feature in the 

standard disclosures given later.) 

Paragraph 19(b)(2)(xi). 

1. Adjustment notices. A creditor 

must disclose to the consumer the type 

of information that will be contained in 

subsequent notices of adjustments and 

when such notices will be provided. 

(See the commentary to § 226.20(c) 

regarding notices of adjustments.) For 

example, the disclosure might state, 

‘‘You will be notified at least 25, but no 

more than 120, days before the due date 

of a payment at a new level. This notice 

will contain information about the 

index and interest rates, payment 

amount, and loan balance.’’ In 

transactions where there may be interest 

rate adjustments without accompanying 

payment adjustments in a year, the 

disclosure might read, ‘‘You will be 

notified once each year during which 

interest rate adjustments, but no 

payment adjustments, have been made 

to your loan. This notice will contain 

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43402 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

information about the index and interest 

rates, payment amount, and loan 

balance.’’ 

Paragraph 19(b)(2)(xii). 

1. Multiple loan programs. A creditor 

that offers multiple variable-rate 

mortgage loan programs is required to 

have disclosures for each variable-rate 

mortgage loan program subject to 

§ 226.19(b)(2). Unless disclosures for all 

of its variable-rate programs are 

provided initially, the creditor must 

inform the consumer that other closedend variable-rate programs exist, and 

that disclosure forms are available for 

these additional loan programs. For 

example, the disclosure form might 

state, ‘‘Information on other adjustable 

rate mortgage programs is available 

upon request.’’] 

fl19(b)(2) Key questions about risk. 

19(b)(2)(i) Required disclosures. 

1. Disclosure of first rate or payment 

increase. The requirement under 

§ 226.19(b)(2)(i)(A) and (B) to disclose 

when the first interest rate or payment 

increase may occur refers to the time 

period in which the increase may occur, 

not the exact calendar date. For 

example, the disclosure may state, 

‘‘Your interest rate may increase at the 

end of the 3-year introductory period.’’ 

19(b)(2)(i)(C) Prepayment penalty as 

risk factor. 

1. Coverage. See comment 38(a)(5)–1 

to determine whether there is a 

prepayment penalty. 

2. Penalty. See comment 38(a)(5)–2 

for examples of charges that are 

prepayment penalties. 

3. Not penalty. See comment 38(a)(5)– 

3 for examples of charges that are not 

prepayment penalties. 

19(b)(2)(ii) Additional disclosures. 

1. As applicable. The disclosures 

required by § 226.19(b)(2)(ii) need only 

be made as applicable. Any disclosure 

not relevant to a particular loan program 

may be omitted. 

19(b)(2)(ii)(C) Balloon payment. 

1. Coverage. The creditor must make 

the disclosure required by 

§ 226.19(b)(ii)(B) if the loan program 

includes a payment schedule with 

regular periodic payments that when 

aggregated do not fully amortize the 

outstanding principal balance. 

2. Time period. The requirement to 

disclose when the balloon payment is 

due refers to the time period when it is 

due, not the exact calendar date. For 

example, the disclosure may state, ‘‘You 

would owe a balloon payment due in 

seven years.’’ 

19(b)(2)(ii)(D) Demand feature. 

1. Disclosure requirements. The 

disclosure requirements of 

§ 226.19(b)(2)(ii)(D) apply not only to 

transactions payable on demand from 

the outset, but also to transactions that 

convert to a demand status after a stated 

period. 

2. Covered demand features. See 

comment 18(i)–2 for examples of 

covered demand features. 

19(c) Conversion to closed-end credit. 

1. Disclosure at the time of 

conversion. In cases where an open-end 

credit account will convert to a closedend transaction under a written 

agreement with the consumer, 

disclosures are not required under 

§ 226.19(c). By contrast, disclosures are 

required in such cases under 

§ 226.19(b). See comment 19(b)–2. 

19(d) Timing of disclosures. 

19(d)(1) General timing. 

1. Oral application. Creditors may 

rely on RESPA and Regulation X 

(including any interpretations issued by 

HUD) in deciding whether they have 

made a written record of a consumer’s 

oral application, even for a transaction 

not subject to RESPA. In general, 

Regulation X defines ‘‘application’’ to 

mean the submission of a borrower’s 

financial information in anticipation of 

a credit decision relating to a federally 

related mortgage loan and states that an 

application may either be in writing or 

electronically submitted, including a 

written record of an oral application. 

See 24 CFR 3500.2(b).fi 

[19(c)]fl19(d)(2)fi Electronic 

disclosures. 

flParagraph 19(d)(2)(i).fi 

[1. Form of disclosures. Whether 

disclosures must be in electronic form 

depends upon the following:] 

[i.]fl1. Electronic disclosures 

required.fi If a consumer accesses [an 

ARM]flafi loan application 

electronically (other than as described 

under [ii. below]fl§ 226.19(d)(ii)fi), 

such as online at a home computer, the 

creditor must provide the disclosures in 

electronic form (such as with the 

application form on its Web site) in 

order to meet the requirement to 

provide disclosures in a timely manner 

on or with the application. If the 

creditor instead mailed paper 

disclosures to the consumer, this 

requirement would not be met. 

fl2. Timing of electronic disclosures 

provided on or with electronic 

applications. Creditors have flexibility 

in satisfying the requirement under 

§ 226.19(d) (subject to § 226.19(d)(1)(ii)) 

to provide disclosures required by 

§ 226.19(b) and (c) in electronic form if 

a consumer accesses an application 

electronically. Methods creditors could 

use to satisfy the requirement include, 

but are not limited to, the following 

examples: 

i. The disclosures could automatically 

appear on the screen when the 

application appears; 

ii. The disclosures could be located 

on the same web page as the application 

(whether or not they appear on the 

initial screen), if the application 

contains a clear and conspicuous 

reference to the location of the 

disclosures and indicates that the 

disclosures contain rate, fee, and other 

cost information, as applicable; 

iii. Creditors could provide a link to 

the electronic disclosures on or with the 

application as long as consumers cannot 

bypass the disclosures before submitting 

the application. The link would take the 

consumer to the disclosures, but the 

consumer need not be required to scroll 

completely through the disclosures; or 

iv. The disclosures could be located 

on the same web page as the application 

without necessarily appearing on the 

initial screen, immediately preceding 

the button that the consumer will click 

to submit the application.fi 

flParagraph 19(d)(2)(ii)fi 

[ii. In contrast, if]fl1. Electronic 

disclosures optional. Iffi a consumer is 

physically present in the creditor’s 

office, and accesses an ARM loan 

application electronically, such as via a 

terminal or kiosk (or if the consumer 

uses a terminal or kiosk located on the 

premises of an affiliate or third party 

that has arranged with the creditor to 

provide applications to consumers), the 

creditor may provide disclosures in 

either electronic or paper form, 

provided the creditor complies with the 

timing, delivery, and retainability 

requirements of the regulation. 

flParagraph 19(d)(3) 

1. Telephone request. Where a 

creditor takes a written application by 

telephone, the creditor must deliver the 

disclosures or place them in the mail 

not later than three business days after 

the creditor receives the consumer’s 

written application. In cases where the 

consumer only requests an application 

over the telephone, the creditor must 

include the early disclosures required 

under this section with the application 

that is sent to the consumer. 

2. Mail solicitations. In cases where 

the creditor solicits applications 

through the mail, the creditor must also 

send the disclosures required under 

§ 226.19(b) and (c) if an application 

form is included with the solicitation. 

3. Intermediary agent or broker. i. 

Where a creditor receives a written 

application through an intermediary 

agent or broker the creditor must deliver 

the disclosures or place them in the 

mail not later than three business days 

after the creditor receives the 

consumer’s written application. 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43403 

However, a creditor must provide 

disclosures at the time an application 

form is provided or the consumer pays 

a non-refundable fee, whichever is 

earlier, in a transaction that involves a 

legal agent, as determined under 

applicable law, or any other third party 

that is not an ‘‘intermediary agent or 

broker.’’ In determining whether or not 

a transaction involves an ‘‘intermediary 

agent or broker’’ the creditor should 

consider the following factors: 

A. The number of applications 

submitted by the broker to the creditor 

as compared to the total number of 

applications received by the creditor. 

The greater the percentage of total loan 

applications submitted by the broker in 

any given period of time, the less likely 

it is that the broker would be considered 

an ‘‘intermediary agent or broker’’ of the 

creditor during the next period. 

B. The number of applications 

submitted by the broker to the creditor 

as compared to the total number of 

applications received by the broker. 

(This factor is applicable only if the 

creditor has such information.) The 

greater the percentage of total loan 

applications received by the broker that 

is submitted to a creditor in any given 

period of time, the less likely it is that 

the broker would be considered an 

‘‘intermediary agent or broker’’ of the 

creditor during the next period. 

C. The amount of work (such as 

document preparation) the creditor 

expects to be done by the broker on an 

application based on the creditor’s prior 

dealings with the broker and on the 

creditor’s requirements for accepting 

applications, taking into consideration 

the customary practice of brokers in a 

particular area. The more work that the 

creditor expects the broker to do on an 

application, in excess of what is usually 

expected of a broker in that area, the 

less likely it is that the broker would be 

considered an ‘‘intermediary agent or 

broker’’ of the creditor. 

ii. An example of an ‘‘intermediary 

agent or broker’’ is a broker who, 

customarily within a brief period of 

time after receiving an application, 

inquires about the credit terms of 

several creditors with whom the broker 

does business and submits the 

application to one of them. The broker 

is responsible for only a small 

percentage of the applications received 

by that creditor. During the time the 

broker has the application, it might 

request a credit report and an appraisal 

(or even prepare an entire loan package 

if customary in that particular area).fi 

§ 226.20—Subsequent Disclosure 

Requirements. 

20(a) Refinancings. 

1. Definition. A refinancing is a new 

transaction requiring a complete new set 

of disclosures. Whether a refinancing 

has occurred is determined by reference 

to whether the original obligation has 

been satisfied or extinguished and 

replaced by a new obligation, based on 

the parties’ contract and applicable law. 

The refinancing may involve the 

consolidation of several existing 

obligations, disbursement of new money 

to the consumer or on the consumer’s 

behalf, or the rescheduling of payments 

under an existing obligation. In any 

form, the new obligation must 

completely replace the prior one. 

i. Changes in the terms of an existing 

obligation, such as the deferral of 

individual installments, will not 

constitute a refinancing unless 

accomplished by the cancellation of that 

obligation and the substitution of a new 

obligation. 

ii. A substitution of agreements that 

meets the refinancing definition will 

require new disclosures, even if the 

substitution does not substantially alter 

the prior credit terms. 

2. Exceptions. A transaction is subject 

to § 226.20(a) only if it meets the general 

definition of a refinancing. Section 

226.20(a) (1) through (5) lists 5 events 

that are not treated as refinancings, even 

if they are accomplished by cancellation 

of the old obligation and substitution of 

a new one. 

3. Variable-rate. i. If a variable-rate 

feature was properly disclosed under 

the regulation, a rate change in accord 

with those disclosures is not a 

refinancing. For example, no new 

disclosures are required when the 

variable-rate feature is invoked on a 

renewable balloon-payment mortgage 

that was previously disclosed as a 

variable-rate transaction. 

ii. Even if it is not accomplished by 

the cancellation of the old obligation 

and substitution of a new one, a new 

transaction subject to new disclosures 

results if the creditor either: 

A. Increases the rate based on a 

variable-rate feature that was not 

previously disclosed; or 

B. Adds a variable-rate feature to the 

obligation. A creditor does not add a 

variable-rate feature by changing the 

index of a variable-rate transaction to a 

comparable index, whether the change 

replaces the existing index or 

substitutes an index for one that no 

longer exists. 

iii. If either of the events in paragraph 

20(a)3.ii.A. or ii.B. occurs in a 

transaction secured by a principal 

dwelling with a term longer than one 

year, the disclosures required under 

§ 226.19(b) also must be given at that 

time. 

4. Unearned finance charge. In a 

transaction involving precomputed 

finance charges, the creditor must 

include in the finance charge on the 

refinanced obligation any unearned 

portion of the original finance charge 

that is not rebated to the consumer or 

credited against the underlying 

obligation. For example, in a transaction 

with an add-on finance charge, a 

creditor advances new money to a 

consumer in a fashion that extinguishes 

the original obligation and replaces it 

with a new one. The creditor neither 

refunds the unearned finance charge on 

the original obligation to the consumer 

nor credits it to the remaining balance 

on the old obligation. Under these 

circumstances, the unearned finance 

charge must be included in the finance 

charge on the new obligation and 

reflected in the annual percentage rate 

disclosed on refinancing. Accrued but 

unpaid finance charges are included in 

the amount financed in the new 

obligation. 

5. Coverage. Section 226.20(a) applies 

only to refinancings undertaken by the 

original creditor or a holder or servicer 

of the original obligation. A 

‘‘refinancing’’ by any other person is a 

new transaction under the regulation, 

not a refinancing under this section. 

Paragraph 20(a)(1). 

1. Renewal. This exception applies 

both to obligations with a single 

payment of principal and interest and to 

obligations with periodic payments of 

interest and a final payment of 

principal. In determining whether a new 

obligation replacing an old one is a 

renewal of the original terms or a 

refinancing, the creditor may consider it 

a renewal even if: 

i. Accrued unpaid interest is added to 

the principal balance. 

ii. Changes are made in the terms of 

renewal resulting from the factors listed 

in § 226.17(c)(3). 

iii. The principal at renewal is 

reduced by a curtailment of the 

obligation. 

Paragraph 20(a)(2). 

1. Annual percentage rate reduction. 

A reduction in the annual percentage 

rate with a corresponding change in the 

payment schedule is not a refinancing. 

If the annual percentage rate is 

subsequently increased (even though it 

remains below its original level) and the 

increase is effected in such a way that 

the old obligation is satisfied and 

replaced, new disclosures must then be 

made. 

2. Corresponding change. A 

corresponding change in the payment 

schedule to implement a lower annual 

percentage rate would be a shortening of 

the maturity, or a reduction in the 

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payment amount or the number of 

payments of an obligation. The 

exception in § 226.20(a)(2) does not 

apply if the maturity is lengthened, or 

if the payment amount or number of 

payments is increased beyond that 

remaining on the existing transaction. 

Paragraph 20(a)(3). 

1. Court agreements. This exception 

includes, for example, agreements such 

as reaffirmations of debts discharged in 

bankruptcy, settlement agreements, and 

post-judgment agreements. (See the 

commentary to § 226.2(a)(14) for a 

discussion of court-approved 

agreements that are not considered 

‘‘credit.’’) 

Paragraph 20(a)(4). 

1. Workout agreements. A workout 

agreement is not a refinancing unless 

the annual percentage rate is increased 

or additional credit is advanced beyond 

amounts already accrued plus insurance 

premiums. 

Paragraph 20(a)(5). 

1. Insurance renewal. The renewal of 

optional insurance added to an existing 

credit transaction is not a refinancing, 

assuming that appropriate Truth in 

Lending disclosures were provided for 

the initial purchase of the insurance. 

20(b) Assumptions. 

1. General definition. An assumption 

as defined in § 226.20(b) is a new 

transaction and new disclosures must be 

made to the subsequent consumer. An 

assumption under the regulation 

requires the following three elements: 

i. [A residential mortgage 

transaction.]flA closed-end credit 

transaction secured by real property or 

a dwelling.fi 

ii. An express acceptance of the 

subsequent consumer by the creditor. 

iii. A written agreement. 

The assumption of a nonexempt 

consumer credit obligation requires no 

disclosures unless all three elements are 

present. For example, an automobile 

dealer need not provide Truth in 

Lending disclosures to a customer who 

assumes an existing obligation secured 

by an automobile. However, [a 

residential mortgage 

transaction]flclosed-end credit 

transaction secured by real property or 

a dwellingfi with the elements 

described in § 226.20(b) is an 

assumption that calls for new 

disclosures; the disclosures must be 

given whether or not the assumption is 

accompanied by changes in the terms of 

the obligation. [(See comment 2(a)(24)– 

5 for a discussion of assumptions that 

are not considered residential mortgage 

transactions.)] 

[2. Existing residential mortgage 

transaction. A transaction may be a 

residential mortgage transaction as to 

one consumer and not to the other 

consumer. In that case, the creditor 

must look to the assuming consumer in 

determining whether a residential 

mortgage transaction exists. To 

illustrate: 

i. The original consumer obtained a 

mortgage to purchase a home for 

vacation purposes. The loan was not a 

residential mortgage transaction as to 

that consumer. The mortgage is assumed 

by a consumer who will use the home 

as a principal dwelling. As to that 

consumer, the loan is a residential 

mortgage transaction. For purposes of 

§ 226.20(b), the assumed loan is an 

‘‘existing residential mortgage 

transaction’’ requiring disclosures, if the 

other criteria for an assumption are 

met.] 

[3.]fl2.fi Express agreement. 

Expressly agrees means that the 

creditor’s agreement must relate 

specifically to the new debtor and must 

unequivocally accept that debtor as a 

primary obligor. The following events 

are not construed to be express 

agreements between the creditor and the 

subsequent consumer: 

i. Approval of creditworthiness. 

ii. Notification of a change in records. 

iii. Mailing of a coupon book to the 

subsequent consumer. 

iv. Acceptance of payments from the 

new consumer. 

[4.]fl3.fi Retention of original 

consumer. The retention of the original 

consumer as an obligor in some capacity 

does not prevent the change from being 

an assumption, provided the new 

consumer becomes a primary obligor. 

But the mere addition of a guarantor to 

an obligation for which the original 

consumer remains primarily liable does 

not give rise to an assumption. 

However, if neither party is designated 

as the primary obligor but the creditor 

accepts payment from the subsequent 

consumer, an assumption exists for 

purposes of § 226.20(b). 

[5.]fl4.fi Status of parties. Section 

226.20(b) applies only if the previous 

debtor was a consumer and the 

obligation is assumed by another 

consumer. It does not apply, for 

example, when an individual takes over 

the obligation of a corporation. 

[6.]fl5.fi Disclosures. For 

transactions that are assumptions within 

this provision, the creditor must make 

disclosures based on the ‘‘remaining 

obligation.’’ For example: 

i. The amount financed is the 

remaining principal balance plus any 

arrearages or other accrued charges from 

the original transaction. 

ii. If the finance charge is computed 

from time to time by application of a 

percentage rate to an unpaid balance, in 

determining the amount of the finance 

charge and the annual percentage rate to 

be disclosed, the creditor should 

disregard any prepaid finance charges 

paid by the original obligor, but must 

include in the finance charge any 

prepaid finance charge imposed in 

connection with the assumption. 

iii. If the creditor requires the 

assuming consumer to pay any charges 

as a condition of the assumption, those 

sums are prepaid finance charges as to 

that consumer, unless exempt from the 

finance charge under § 226.4. If a 

transaction involves add-on or discount 

finance charges, the creditor may make 

abbreviated disclosures, as outlined in 

section 226.20(b)(1) through (5). 

[Creditors providing disclosures 

pursuant to this section for assumptions 

of variable-rate transactions secured by 

the consumer’s principal dwelling with 

a term longer than one year need not 

provide new disclosures under sections 

226.18(f)(2)(ii) or. In such transactions, 

a creditor may disclose the variable-rate 

feature solely in accordance with 

section 226.18(f)(1). 

7. Abbreviated disclosures. The 

abbreviated disclosures permitted for 

assumptions of transactions involving 

add-on or discount finance charges must 

be made clearly and conspicuously in 

writing in a form that the consumer may 

keep. However, the creditor need not 

comply with the segregation 

requirement of § 226.17(a)(1). The terms 

annual percentage rate and total of 

payments, when disclosed according to 

§ 226.20(b)(4) and (5), are not subject to 

the description requirements of § 226.18 

(e) and (h). The term annual percentage 

rate disclosed under § 226.20(b)(4) need 

not be more conspicuous than other 

disclosures. 

Paragraph 20(c) Variable-rate 

adjustments]fl20(c) Rate 

adjustments.fi 

1. [Timing of adjustment 

notices]flGeneralfi. This section 

requires a creditor (or a subsequent 

holder) to provide certain disclosures in 

cases where an adjustment to the 

interest rate is made in an [variable-rate] 

fladjustable-ratefi mortgage 

transaction subject to § 226.19(b). [There 

are two timing rules, depending on 

whether payment changes accompany 

interest rate changes. A creditor is 

required to provide at least one notice 

each year during which interest-rate 

adjustments have occurred without 

accompanying payment adjustments. 

For payment adjustments, a creditor 

must deliver or place in the mail notices 

to borrowers at least 25, but not more 

than 120, calendar days before a 

payment at a new level is due. The 

timing rules also apply to the notice 

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required to be given in connection with 

the adjustment to the rate and payment 

that follows conversion of a transaction 

subject to § 226.19(b) to a fixed-rate 

transaction.]flThis section also requires 

that notice be given where a transaction 

subject to § 226.19(b) is converted to a 

fixed-rate transaction.fi (In cases where 

an open-end account is converted to a 

closed-end transaction subject to 

§ 226.19(b), the requirements of this 

section do not apply until adjustments 

are made following conversion.) 

2. [Exceptions.]flNot applicable.fi 

Section 226.20(c) does not apply to 

[‘‘shared-equity,’’ ‘‘sharedappreciation,’’ or] ‘‘price level adjusted’’ 

or similar mortgagesfl, because such 

mortgages are not adjustable-rate 

mortgages subject to the disclosure 

requirements of § 226.19(b). See 

comment 19(b)–3fi. 

3. Basis of disclosures. The 

disclosures required under this section 

shall reflect the terms of the parties’ 

legal obligation, as required under 

§ 226.17(c)(1). 

fl20(c)(1) Timing of disclosures. 

1. When required. Payment changes 

due to changes in property tax 

obligations or mortgage-related 

insurance premiums do not trigger the 

requirement to make disclosures under 

§ 226.20(c)(1)(i).fi 

[Paragraph 20(c)(1)]flParagraph 

20(c)(2)(ii)fi. 

1. Current and [prior]flnewfi 

interest rates. The requirements under 

this paragraph are satisfied by 

disclosing the interest rate used to 

compute the new adjusted payment 

amount [(‘‘current rate’’)]fl(‘‘new 

rate’’)fi and the adjusted interest rate 

that was disclosed in the last adjustment 

notice[, as well as all other interest rates 

applied to the transaction in the period 

since the last notice (‘‘prior 

rates’’)]fl(‘‘current rate’’)fi. (If there 

has been no prior adjustment notice, the 

[prior rates are]flcurrent rate isfi the 

interest rate applicable to the 

transaction at consummationfl.)fi[, as 

well as all other interest rates applied to 

the transaction in the period since 

consummation.) If no payment 

adjustment has been made in a year, the 

current rate is the new adjusted interest 

rate for the transaction, and the prior 

rates are the adjusted interest rate 

applicable to the loan at the time of the 

last adjustment notice, and all other 

rates applied to the transaction in the 

period between the current and last 

adjustment notices. In disclosing all 

other rates applied to the transaction 

during the period between notices, a 

creditor may disclose a range of the 

highest and lowest rates applied during 

that period.] 

[Paragraph 20(c)(2). 

1. Current and prior index values. 

This section requires disclosure of the 

index or formula values used to 

compute the current and prior interest 

rates disclosed in § 226.20(c)(1). The 

creditor need not disclose the margin 

used in computing the rates. If the prior 

interest rate was not based on an index 

or formula value, the creditor also need 

not disclose the value of the index that 

would otherwise have been used to 

compute the prior interest rate.] 

[Paragraph 20(c)(3)]flParagraph 

20(c)(2)(iv)fi. 

1. Unapplied index increases. The 

requirement that the consumer receive 

information about the extent to which 

the creditor has foregone any increase in 

the interest rate fland the earliest date 

a creditor may apply foregone interest to 

future adjustments, subject to rate 

caps,fi is applicable only to those 

transactions permitting interest rate 

carryover. The amount of increase that 

is foregone at an adjustment is the 

amount that, subject to rate caps, can be 

applied to future adjustments 

independently to increase, or offset 

decreases in, the rate that is determined 

according to the index or formula. 

[Paragraph 20(c)(4). 

1. Contractual effects of the 

adjustment. The contractual effects of 

an interest rate adjustment must be 

disclosed including the payment due 

after the adjustment is made whether or 

not the payment has been adjusted. A 

contractual effect of a rate adjustment 

would include, for example, disclosure 

of any change in the term or maturity of 

the loan if the change resulted from the 

rate adjustment. In transactions where 

paying the periodic payments will not 

fully amortize the outstanding balance 

at the end of the loan term and where 

the final payment will equal the 

periodic payment plus the remaining 

unpaid balance, the amount of the 

adjusted payment must be disclosed if 

such payment has changed as a result of 

the rate adjustment. A statement of the 

loan balance also is required. The 

balance required to be disclosed is the 

balance on which the new adjusted 

payment is based. If no payment 

adjustment is disclosed in the notice, 

the balance disclosed should be the loan 

balance on which the payment 

disclosed under § 226.20(c)(5) is based, 

if applicable, or the balance at the time 

the disclosure is prepared.] 

Paragraph 20(c)(5)]flParagraph 

20(c)(2)(vi)fi. 

1. Fully-amortizing payment. This 

paragraph requires a disclosure flof the 

fully amortizing paymentfi only when 

negative amortization occurs as a result 

of the adjustment. A disclosure is not 

required simply because a loan calls for 

non-amortizing or partially amortizing 

payments. For example, in a transaction 

with a five-year term and payments 

based on a longer amortization 

schedule, and where the final payment 

will equal the periodic payment plus 

the remaining unpaid balance, the 

creditor would not have to disclose the 

payment necessary to fully amortize the 

loan in the remainder of the five-year 

term. A disclosure is required, however, 

if the flnewfi payment disclosed 

under [§ 226.20(c)(4)] 

fl§ 226.20(c)(2)(ii)(C)fi is not sufficient 

to prevent negative amortization in the 

loan. The adjustment notice must state 

the payment required to prevent 

negative amortization. (This paragraph 

does not apply if the payment disclosed 

in [§ 226.20(c)(4)] 

fl§ 226.20(c)(2)(ii)(C)fi is sufficient to 

prevent negative amortization in the 

loan but the final payment will be a 

different amount due to rounding.) 

fl2. Effect on loan term. The creditor 

must disclose any change in the term or 

maturity of the loan if the change 

resulted from the rate adjustment. The 

creditor need not make that disclosure 

if the loan term or maturity has not 

changed. 

20(c)(2)(vii) Loan balance in payment 

change notice. 

1. Basis of disclosure. A statement of 

the loan balance must be disclosed. The 

balance required to be disclosed is the 

balance on which the new adjusted 

payment is based. 

Paragraph 20(c)(3)(iii). 

1. Unapplied index increases. 

Creditors may rely on comment 

20(c)(2)(iv)–1 in determining which 

transactions the requirement to disclose 

foregone interest increases applies to 

and how to disclose such increases. 

Although creditors must disclose the 

earliest date the creditor may apply 

foregone interest to future adjustments 

under § 226.20(c)(2)(iv), creditors need 

not disclose this information in the 

disclosures required by 

§ 226.20(c)(3)(iv), which are made when 

interest rate changes do not cause 

payment changes during a year. 

Paragraph 20(c)(3)(v). 

1. Basis of disclosure. A statement of 

the loan balance must be disclosed. The 

balance required to be disclosed is the 

balance on the last day of the period for 

which the creditor discloses the highest 

and lowest interest rates. 

20(d) Periodic statement. 

20(d)(1) Timing and content of 

disclosures. 

1. Timing and content. Creditors must 

provide payment summary tables under 

§ 226.20(d) starting with the first period 

after consummation, even if the initial 

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43406 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

payments required do not negatively 

amortize the loan. However, payment 

summary tables need contain only those 

disclosures that apply to payment 

options actually available to a 

consumer. For example, if a consumer 

has been making the minimum required 

payments but must begin making fully 

amortizing payments because the 

creditor has recast the loan, the payment 

summary table need not disclose 

payments other than the fully 

amortizing payment. 

2. Assumptions. Creditors may base 

all disclosures on the assumption that 

payments will be made on time and in 

the amounts required by the terms of the 

legal obligation, disregarding any 

possible inaccuracies resulting from 

consumers’ payment patterns. See 

comment 17(c)(1)–1 and comment 

17(c)(2)(i)–3. Creditors may not assume 

that consumers make payments greater 

than the minimum payment required by 

the legal obligation. That is, creditors 

may not base disclosures for loans with 

a payment option that results in 

negative amortization on the fully 

amortizing, interest-only, or other 

payment unless that payment is the 

amount the consumer is required to pay 

under the terms of the legal obligation. 

20(d)(1)(i) Payment. 

1. Payment type. Creditors may rely 

on comment 38(c)(5)–1 to determine 

whether a payment is a regular periodic 

payment or a balloon payment. 

20(d)(1)(ii) Effects. 

1. Legal obligation. The disclosures 

required by § 226.20(d) must reflect the 

terms of the legal obligation. For 

example, the disclosures may not state 

that making fully amortizing payments 

on an interest-only loan will reduce a 

consumer’s loan balance if the creditor 

will not apply payments that exceed the 

interest-only payment to principal. 

20(e) Creditor-placed property 

insurance. 

1. Notice period timing and charges. 

The notice period begins on the day that 

the creditor mails or delivers the notice 

to the consumer and expires 45 days 

later. The creditor may begin to charge 

the consumer for creditor-placed 

property insurance on the 46th calendar 

day after sending the notice if the 

creditor has fulfilled the requirements of 

section 226.20(e)(1)–(3). For example, a 

creditor that mails the required notice 

on January 2, 2011, may begin to charge 

the consumer for the cost of the 

creditor-placed property insurance on 

February 18, 2011. After expiration of 

the 45-day notice period, a creditor may 

retroactively charge a consumer for the 

cost of any required property insurance 

obtained during the 45-day notice 

period if such charge is not prohibited 

by applicable State or other law.fi 

* * * * * 

§ 226.24—Advertising. 

* * * * * 

24(c) Advertisement of rate of finance 

charge. 

* * * * * 

4. Discounted variable-rate 

transactions. The advertised annual 

percentage rate for discounted variablerate transactions must be determined in 

accordance with comment [17(c)(1)–10] 

fl17(c)(1)(iii)–3fi regarding the basis of 

transactional disclosures for such 

financing. 

* * * * * 

ii. Limits or caps on periodic rate or 

payment adjustments need not be 

stated. To illustrate using the second 

example in comment [17(c)(1)–10] 

fl17(c)(1)(iii)–3fi, the fact that the rate 

is presumed to be 11 percent in the 

second year and 12 percent for the 

remaining 28 years need not be 

included in the advertisement. 

* * * * * 

Subpart D—Miscellaneous 

§ 226.25—Record Retention. 

25(a) General rule. 

* * * * * 

fl5. Prohibited payments to loan 

originators. For each transaction secured 

by real property or a dwelling subject to 

the loan originator compensation 

provisions in § 226.36(d)(1), a creditor 

should maintain records of the 

compensation it provided to the loan 

originator for the transaction as well as 

the compensation agreement in effect on 

the date the interest rate was set for the 

transaction. See § 226.35(a) and 

comment 35(a)(2)–3 for additional 

guidance on when a transaction’s rate is 

set. Where a loan originator is a 

mortgage broker, a copy of the HUD–1 

settlement statement required by the 

Real Estate Settlement Procedures Act 

(RESPA) would be presumed to be a 

record of the amount actually paid to 

the loan originator in connection with 

the transaction.fi 

* * * * * 

§ 226.30—Limitation on Rates. 

1. Scope of coverage. fli.fi The 

requirement of this section applies to 

consumer credit obligations secured by 

a dwelling (as dwelling is defined in 

§ 226.2(a)(19)) in which the annual 

percentage rate may increase after 

consummation (or during the term of 

the plan, in the case of open-end credit) 

as a result of an increase in the interest 

rate component of the finance charge— 

whether those increases are tied to an 

index or formula or are within a 

creditor’s discretion. The section 

applies to credit sales as well as loans. 

Examples of credit obligations subject to 

this section include: 

[•]flA.fi Dwelling-secured credit 

obligations that require variable-rate 

disclosures under the regulation 

because the interest rate may increase 

during the term of the obligation. 

[•]flB.fi Dwelling-secured open-end 

credit plans entered into before 

November 7, 1989 (the effective date of 

the home equity rules) that are not 

considered variable-rate obligations for 

purposes of disclosure under the 

regulation but where the creditor 

reserves the contractual right to increase 

the interest rate—periodic rate and 

corresponding annual percentage rate— 

during the term of the plan. 

flii.fi In contrast, credit obligations 

in which there is no contractual right to 

increase the interest rate during the term 

of the obligation are not subject to this 

section. Examples include: 

[•]flA.fi ‘‘Shared-equity’’ or 

‘‘shared-appreciation’’ mortgage loans 

that have a fixed rate of interest and a 

shared-appreciation feature based on the 

consumer’s equity in the mortgaged 

property. (The appreciation share is 

payable in a lump sum at a specified 

time.) 

[•]flB.fi Dwelling-secured fixed-rate 

closed-end balloon-payment mortgage 

loans and dwelling-secured fixed-rate 

open-end plans with a stated term that 

the creditor may renew at maturity. 

(Contrast with the renewable balloonpayment mortgage instrument described 

in comment [17(c)(1)– 

11.)]fl17(c)(1)(iii)–4.fi 

[•]flC.fi Dwelling-secured fixed rate 

closed-end multiple advance 

transactions in which each advance is 

disclosed as a separate transaction. 

[•]flD.fi ‘‘Price level adjusted 

mortgages’’ or other indexed mortgages 

that have a fixed rate of interest but 

provide for periodic adjustments to 

payments and the loan balance to reflect 

changes in an index measuring prices or 

inflation. 

fliii.fi The requirement of this 

section does not apply to credit 

obligations entered into prior to 

December 9, 1987. Consequently, new 

advances under open-end credit plans 

existing prior to December 9, 1987, are 

not subject to this section. 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

* * * * * 

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§ 226.32—Requirements for Certain 

Closed-End Home Mortgages. 

* * * * * 

[32(b) Definitions. 

Paragraph 32(b)(1)(i). 

1. General. Section 226.32(b)(1)(i) 

includes in the total ‘‘points and fees’’ 

items defined as finance charges under 

§§ 226.4(a) and 226.4(b). Items excluded 

from the finance charge under other 

provisions of § 226.4 are not included in 

the total ‘‘points and fees’’ under 

paragraph 32(b)(1)(i), but may be 

included in ‘‘points and fees’’ under 

paragraphs 32(b)(1)(ii) and 32(b)(1)(iii). 

Interest, including per-diem interest, is 

excluded from ‘‘points and fees’’ under 

§ 226.32(b)(1). 

Paragraph 32(b)(1)(ii). 

1. Mortgage broker fees. In 

determining ‘‘points and fees’’ for 

purposes of this section, compensation 

paid by a consumer to a mortgage broker 

(directly or through the creditor for 

delivery to the broker) is included in the 

calculation whether or not the amount 

is disclosed as a finance charge. 

Mortgage broker fees that are not paid 

by the consumer are not included. 

Mortgage broker fees already included 

in the calculation as finance charges 

under § 226.32(b)(1)(i) need not be 

counted again under § 226.32(b)(1)(ii). 

2. Example. Section 226.32(b)(1)(iii) 

defines ‘‘points and fees’’ to include all 

items listed in § 226.4(c)(7), other than 

amounts held for the future payment of 

taxes. An item listed in § 226.4(c)(7) 

may be excluded from the ‘‘points and 

fees’’ calculation, however, if the charge 

is reasonable, the creditor receives no 

direct or indirect compensation from the 

charge, and the charge is not paid to an 

affiliate of the creditor. For example, a 

reasonable fee paid by the consumer to 

an independent, third-party appraiser 

may be excluded from the ‘‘points and 

fees’’ calculation (assuming no 

compensation is paid to the creditor). A 

fee paid by the consumer for an 

appraisal performed by the creditor 

must be included in the calculation, 

even though the fee may be excluded 

from the finance charge if it is bona fide 

and reasonable in amount. 

Paragraph 32(b)(1)(iv). 

1. Premium amount. In determining 

‘‘points and fees’’ for purposes of this 

section, premiums paid at or before 

closing for credit insurance are included 

whether they are paid in cash or 

financed, and whether the amount 

represents the entire premium for the 

coverage or an initial payment.] 

32(c) Disclosures. 

[1. Format. The disclosures must be 

clear and conspicuous but need not be 

in any particular type size or typeface, 

nor presented in any particular manner. 

The disclosures need not be a part of the 

note or mortgage document.] 

* * * * * 

32(c)(5) Amount borrowed. 

1. Optional insurance; debtcancellation flor debtsuspensionficoverage. This disclosure 

is required when the amount borrowed 

in a refinancing includes premiums or 

other charges for credit life, accident, 

health, or loss-of-income 

insurancefl;fi[or] debt-cancellation 

coverage (whether or not the debtcancellation coverage is insurance 

under applicable law) that provides for 

cancellation of all or part of the 

consumer’s liability in the event of the 

loss of life, health, or income or in the 

case of accidentfl; or debt-suspension 

coverage that provides for suspension of 

the obligation to make one or more 

payments on the date(s) otherwise 

required by the credit agreement in the 

event of loss of life, health, or income 

or in the case of accidentfi. See 

comment 4(d)(3)–2 and comment app. G 

and H–2 regarding terminology for debtcancellation fland debt-suspensionfi 

coverage. 

* * * * * 

§ 226.35—Prohibited Acts or Practices 

in Connection With Higher-Priced 

Mortgage Loans. 

35(a) Higher-priced mortgage loans. 

Paragraph 35(a)(2). 

* * * * * 

4. Board table. The Board publishes 

on the flFFIEC’s Web site,fi [Internet,] 

in table form, average prime offer rates 

for a wide variety of transaction types. 

flSee http://www.ffiec.gov/hmda.fi 

The Board calculates an annual 

percentage rate, consistent with 

Regulation Z (see § 226.22 and appendix 

J), for each transaction type for which 

pricing terms are available from a 

survey. The Board estimates annual 

percentage rates for other types of 

transactions for which direct survey 

data are not available based on the loan 

pricing terms available in the survey 

and other information. The Board 

publishes on the flFFIEC’s Web sitefi 

[Internet] the methodology it uses to 

arrive at these estimates. 

fl5. Additional guidance on 

determination of average prime offer 

rates. The average prime offer rate has 

the same meaning in this section as 

under Regulation C, 12 CFR part 203. 

See 12 CFR 203.4(a)(12)(ii). Guidance on 

the average prime offer rate under 

§ 226.35(a)(2), such as when a 

transaction’s rate is set and 

determination of the comparable 

transaction, is provided in the staff 

commentary under Regulation C, the 

Board’s A Guide to HMDA Reporting: 

Getting it Right!, and the relevant 

‘‘Frequently Asked Questions’’ on 

HMDA compliance posted on the 

FFIEC’s Web site at http://ffiec.gov/ 

hmda.fi 

* * * * * 

§ 226.36—Prohibited Acts or Practices 

in Connection with Credit Secured by 

flReal Property or a Dwellingfi [a 

Consumer’s Principal Dwelling]. 

* * * * * 

36(a) flLoan originator andfi 

mortgage broker defined. 

1. Meaning of flloan originatorfi 

[mortgage broker]. Section 226.36(a) 

provides that a flloan originatorfi 

[mortgage broker] is any person who for 

compensation or other monetary gain 

arranges, negotiates, or otherwise 

obtains an extension of consumer credit 

for another person. flThe term ‘‘loan 

originator’’ includes employees of the 

creditorfi [but is not an employee of a 

creditor]. In addition, this definition 

expressly includes any flcreditorfi 

[person] that satisfies this definition but 

makes use of ‘‘table funding.’’ Table 

funding occurs when a transaction is 

consummated with the debt obligation 

initially payable by its terms to one 

person, but another person provides the 

funds for the transaction at 

consummation and receives an 

immediate assignment of the note, loan 

contract, or other evidence of the debt 

obligation. Although § 226.2(a)(17)(i)(B) 

provides that a person to whom a debt 

obligation is initially payable on its face 

generally is a creditor, § 226.36(a) 

provides that, solely for the purposes of 

§ 226.36, such a person is flalso 

considered a loan originatorfi 

[considered a mortgage broker]. flThe 

creditor is not considered a loan 

originator unless table funding 

occurs.fi In addition, although 

consumers themselves often arrange, 

negotiate, or otherwise obtain 

extensions of consumer credit on their 

own behalf, they do not do so for 

compensation or other monetary gain or 

for another person and, therefore, are 

not flloan originatorsfi [mortgage 

brokers] under this section. 

fl2. Mortgage broker. For purposes of 

§ 226.36, with respect to a particular 

transaction, the term ‘‘mortgage broker’’ 

refers to a loan originator who is not an 

employee of the creditor. Accordingly, 

the term ‘‘mortgage broker’’ includes 

companies that engage in the activities 

described in § 226.36(a) and also 

includes employees of such companies 

that engage in these activities. Section 

226.36(d) prohibits certain payments to 

a loan originator. These prohibitions 

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43408 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

apply to payments made to all loan 

originators, including payments made to 

mortgage brokers, and payments made 

by a company acting as a mortgage 

broker to its employees who are loan 

originators.fi 

36(b) Misrepresentation of value of 

consumer’s [principal] dwelling. 

* * * * * 

fl36(d) Prohibited payments to loan 

originators. 

1. Persons covered. Section 226.36(d) 

prohibits any person (including the 

creditor) from paying compensation to a 

loan originator in connection with a 

covered credit transaction, if the amount 

of the payment is based on any of the 

transaction’s terms or conditions. For 

example, a person that purchases a loan 

from the creditor may not compensate 

the loan originator in a manner that 

violates this section. 

2. Mortgage brokers. The payments 

made by a company acting as a mortgage 

broker to its employees who are loan 

originators are subject to the section’s 

prohibitions. For example, a mortgage 

broker may not pay its employee more 

for a transaction with a 7 percent 

interest rate than for a transaction with 

a 6 percent interest rate. 

36(d)(1) Payments based on 

transaction terms and conditions. 

1. Compensation. For purposes of 

§ 226.36(d)(1) and (e) the term 

‘‘compensation’’ is not limited to 

commissions; it includes salaries and 

any financial or similar incentive 

provided to a loan originator that is 

based on any of the terms and 

conditions of the loan originator’s 

transactions. (See comment 36(d)(1)–2 

for examples of types of compensation 

that are not covered by § 226.36(d) and 

(e)). For example, the term 

‘‘compensation’’ includes: 

i. An annual or other periodic bonus; 

or 

ii. Awards of merchandise, services, 

trips, or similar prizes. 

2. Examples of compensation that is 

based on transaction terms or 

conditions. Section 226.36(d)(1) 

prohibits loan originator compensation 

that is based on a transaction’s terms or 

conditions. For example, the rule 

prohibits compensation based on the 

transaction’s interest rate, annual 

percentage rate, loan-to-value ratio, or 

the existence of a prepayment penalty. 

A consumer’s credit score or similar 

representation of credit risk is not one 

of the transaction’s terms and 

conditions, but a creditor does not 

necessarily avoid having based a loan 

originator’s compensation on the 

interest rate or the annual percentage 

rate solely because the originator’s 

compensation happens to vary with the 

consumer’s credit score as well. 

3. Examples of compensation not 

based on transaction terms or 

conditions. Compensation would not be 

based on the transaction’s terms or 

conditions if it were based on, for 

example: 

i. The loan originator’s overall loan 

volume delivered to the creditor. 

ii. The long-term performance of the 

originator’s loans. 

iii. A fixed hourly rate of pay to 

compensate the originator for the actual 

number of hours worked. 

iv. Whether the consumer is an 

existing customer of the creditor or a 

new customer. 

4. Geographic differences. Section 

226.36(d)(1) does not prohibit the 

payment of compensation to a loan 

originator that differs by geographical 

area, provided such compensation is not 

based on the transaction’s terms or 

conditions. Any such arrangement must 

comply with other applicable laws, such 

as the Equal Credit Opportunity Act, 15 

U.S.C. 1691–1691f, and Fair Housing 

Act, 42 U.S.C. 3601–3619. 

5. Creditor’s flexibility in setting loan 

terms. Section 226.36(d)(1) does not 

limit the creditor’s ability to offer a 

higher interest rate in a transaction as a 

means for the consumer to finance the 

payment of the loan originator’s 

compensation or other costs that the 

consumer would otherwise be required 

to pay directly (either in cash or out of 

the loan proceeds). Thus, a creditor may 

charge a higher interest rate to a 

consumer who will pay fewer of the 

costs of the transaction directly, or the 

creditor may offer the consumer a lower 

rate if the consumer pays more of the 

costs directly. For example, if the 

consumer pays half of the transaction 

costs directly, the creditor may charge 

an interest rate of 6% but, if the 

consumer pays none of the transaction 

costs directly, may charge an interest 

rate of 6.5%. Section 226.36(d)(1) also 

does not limit a creditor from offering or 

providing different loan terms to the 

consumer based on the creditor’s 

assessment of the credit risk involved. A 

creditor also may set loan terms by 

offering varying interest rates to 

different consumers that include a 

constant interest rate premium to 

recoup the loan originator’s 

compensation through increased 

interest paid by the consumer (such as 

by adding a constant 1⁄4 of one percent 

to the interest rate on each loan). 

6. Effect of modification of loan terms. 

Under § 226.36(d)(1), a loan originator’s 

compensation may not vary based on 

any of a credit transaction’s terms and 

conditions. Thus, a creditor and 

originator could not agree to set the 

originator’s compensation at a higher 

level and then subsequently lower it in 

selective cases (such as where the 

consumer is able to obtain a lower rate 

from another creditor). When the 

creditor offers to extend a loan with 

specified terms and conditions (such as 

the rate and points) the amount of the 

originator’s compensation for that 

transaction is not subject to change 

(increase or decrease) based on whether 

different loan terms are negotiated. For 

example, if the creditor agrees to lower 

the rate that was initially offered, the 

new offer may not be accompanied by 

a reduction in the loan originator’s 

compensation. 

7. Periodic changes in loan originator 

compensation and transactions’ terms 

and conditions. This section does not 

limit a creditor from periodically 

revising the compensation it agrees to 

pay a loan originator. However, the 

revised compensation arrangement must 

result in payments to the loan originator 

that do not vary based on the terms or 

conditions of a credit transaction. A 

creditor might periodically review 

factors such as loan performance, 

transaction volume, as well as current 

market conditions for originator 

compensation, and prospectively revise 

the compensation it agrees to pay to a 

loan originator. For example, assume 

that during the first 6 months of the 

year, a creditor pays $3,000 to a 

particular loan originator for each loan 

delivered, regardless of the loan terms. 

After considering the volume of 

business produced by that originator, 

the creditor could decide that as of July 

1, it will pay $3,250 for each loan 

delivered by that particular originator, 

regardless of the loan terms. No 

violation occurs even if the loans made 

by the creditor after July 1 generally 

carry a higher interest rate than loans 

made before that date, to reflect the 

higher compensation. 

8. Compensation received directly 

from a consumer. The prohibition in 

§ 226.36(d)(1) does not apply to 

transactions in which the loan 

originator receives compensation 

directly from the consumer, in which 

case no other person may provide any 

compensation to the loan originator, 

directly or indirectly, in connection 

with that particular transaction 

pursuant to § 226.36(d)(2). 

9. Record retention. See comment 

25(a)–5 for guidance on complying with 

the record retention requirements of 

§ 226.25(a) as they apply to this 

section.fi 

ALTERNATIVE COMMENT 36(d)(1)– 

10, TO ACCOMPANY ALTERNATIVE 

2—PARAGRAPH (d): 

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fl10. Principal loan amount. A loan 

originator’s compensation may be based 

on the loan amount. Thus, an 

arrangement that pays a loan originator 

a fixed percentage of the loan amount 

does not violate this section even 

though the dollar amount received by 

the originator will vary from transaction 

to transaction and will be greater as the 

loan amount increases. Section 

226.36(d)(1) does not prohibit an 

arrangement under which a loan 

originator is paid a fixed percentage of 

the loan amount, subject to specified 

minimum or maximum dollar amount. 

For example, a loan originator’s 

compensation may be set at one percent 

of the principal loan amount but not 

less than $1,000 or greater than 

$5,000.fi 

fl36(d)(2) Payments by persons other 

than consumer. 

1. Compensation in connection with a 

particular transaction. Under 

§ 226.36(d)(2), if a loan originator 

receives compensation directly from a 

consumer in a transaction, no other 

person may provide any compensation 

to the loan originator, directly or 

indirectly, in connection with that 

particular credit transaction. The 

restrictions imposed under 

§ 226.36(d)(2) relate only to payments, 

such as commissions, that are specific 

to, and paid solely in connection with, 

the transaction in which the consumer 

has paid compensation directly to the 

loan originator. Thus, compensation 

paid by a mortgage broker company to 

an employee in the form of a salary or 

hourly wage, which is not tied 

specifically to a single transaction, does 

not violate § 226.36(d)(2) even if the 

consumer directly pays a broker a fee in 

connection with a specific transaction. 

2. Compensation received directly 

from a consumer. Under Regulation X, 

which implements the Real Estate 

Settlement Procedures Act (RESPA), a 

yield spread premium paid by a creditor 

to the loan originator may be 

characterized on the RESPA disclosures 

as a ‘‘credit’’ that will be applied to 

reduce the consumer’s settlement 

charges, including origination fees. A 

yield spread premium disclosed in this 

manner is not considered to be received 

by the loan originator directly from the 

consumer for purposes of 

§ 226.36(d)(2).fi 

fl36(d)(3) Affiliates. 

1. For purposes of § 226.36(d), 

affiliated entities are treated as a single 

‘‘person.’’ For example, assume a parent 

company has two mortgage lending 

subsidiaries. Under § 226.36(d)(1), 

subsidiary ‘‘A’’ could not pay a loan 

originator greater compensation for a 

loan with an interest rate of 8 percent 

than it would pay for a loan with an 

interest rate of 7 percent. If the loan 

originator may deliver loans to both 

subsidiaries, they must compensate the 

loan originator in the same manner. 

Accordingly, if the loan originator 

delivers the loan to subsidiary ‘‘B’’ and 

the interest rate is 8 percent, the 

originator must receive the same 

compensation that would have been 

paid by subsidiary A for a loan with a 

rate of either 7 or 8 percent.fi 

COMMENTS 36(e)–1, 36(e)(1)–1 

THROUGH 36(e)(1)–3, 36(e)(2)–1 AND 

36(e)(2)–2, and 36(e)(3)–1 THROUGH 

36(e)(3)–4, TO ACCOMPANY 

OPTIONAL PROPOSAL—PARAGRAPH 

(e). 

fl36(e) Prohibition on steering. 

1. Compensation. See comment 

36(d)(1)–1 for guidance on 

compensation that is subject to 

§ 226.36(e). 

Paragraph 36(e)(1). 

1. Steering. For purposes of 

§ 226.36(e), directing or ‘‘steering’’ a 

consumer to a particular credit 

transaction means advising, counseling, 

or otherwise influencing a consumer to 

accept that transaction. For such actions 

to constitute steering, the consumer 

must actually consummate the 

transaction in question. Thus 

§ 226.36(e)(1) does not address the 

actions of a loan originator if the 

consumer does not actually obtain a 

loan through that originator. 

2. Prohibited conduct. Under 

§ 226.36(e)(1), a loan originator may not 

direct or steer a consumer to a loan to 

increase the amount of compensation 

that the originator will receive for the 

transaction unless the loan is in the 

consumer’s interest. 

i. In determining whether a 

consummated transaction is in the 

consumer’s interest, that transaction 

must be compared to other possible loan 

offers available through the originator, 

and for which the consumer was likely 

to qualify, at the time the consummated 

transaction was offered to the consumer. 

Possible loan offers are available 

through the loan originator if they could 

be obtained from a creditor with which 

the loan originator regularly does 

business. Section 226.36(e)(1) does not 

require a loan originator to establish a 

business relationship with any creditor 

with which the loan originator does not 

already do business. To be considered a 

‘‘possible loan offer,’’ an offer need not 

be extended by the creditor; it need only 

be an offer that the creditor likely would 

extend upon receiving an application 

from a qualified applicant, based on the 

creditor’s current rate sheets or other, 

similar means of communicating its 

current credit terms to the loan 

originator. An originator need not 

inform the consumer about a possible 

loan offer if the originator is able to 

make a good faith determination that the 

consumer is not likely to qualify for the 

loan. 

ii. Section 226.36(e)(1) does not 

require a loan originator to direct a 

consumer to the transaction that will 

result in a creditor paying the least 

amount of compensation to the 

originator. However, if the loan 

originator reviews possible loan offers 

available from a significant number of 

the creditors with which the originator 

regularly does business, and the 

originator directs the consumer to the 

transaction that will result in the least 

amount of creditor-paid compensation 

for the loan originator, the requirements 

of § 226.36(e)(1) are deemed to be 

satisfied. A loan originator who is an 

employee of the creditor may not obtain 

compensation that is based on the 

transaction’s terms or conditions 

pursuant to § 226.36(d)(1), and 

compliance with that provision by such 

a loan originator also satisfies the 

requirements of § 226.36(e)(1). 

iii. See the commentary under 

§ 226.36(e)(3) for additional guidance on 

what constitutes a ‘‘significant number 

of creditors with which a loan originator 

regularly does business’’ and guidance 

on the determination about transactions 

for which ‘‘the consumer likely 

qualifies.’’ 

3. Examples. Assume the originator 

determines that a consumer likely 

qualifies for a loan from Creditor A that 

has a fixed interest rate of 7.00 percent, 

but the loan originator directs the 

consumer to a loan from Creditor B 

having a rate of 7.50 percent. If the loan 

originator receives more in 

compensation from Creditor B than the 

amount that would have been paid by 

Creditor A, the prohibition in 

§ 226.36(e) is violated unless the higherrate loan is in the consumer’s interest. 

For example, a higher rate loan might be 

in the consumer’s interest if the lower 

rate loan has a prepayment penalty, or 

if the lower rate loan requires the 

consumer to pay more in up-front 

charges that the consumer is unable or 

unwilling to pay or finance as part of 

the loan amount. 

36(e)(2) Permissible transactions. 

1. Safe harbors. A loan originator that 

complies with § 226.36(e)(2) is deemed 

to comply with § 226.36(e)(1). A loan 

originator that does not comply with 

§ 226.36(e)(2) is not subject to any 

presumption regarding the originator’s 

compliance or noncompliance with 

§ 226.36(e)(1). 

2. Minimum number of loan options. 

To obtain the safe harbor, § 226.36(e)(2) 

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43410 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

requires that the loan originator present 

at least three loan options for each type 

of transaction in which the consumer 

expressed an interest. As required by 

§ 226.36(e)(3)(ii), the loan originator 

must have a good faith belief that the 

options presented are loans for which 

the consumer likely qualifies. If the loan 

originator is not able to form such a 

good faith belief for at least three 

options for a given type of transaction, 

the loan originator may satisfy the 

minimum number of loan options set 

forth in § 226.36(e)(2) by presenting all 

loan options for which the consumer 

likely qualifies and that meet the other 

requirements of § 226.36(e)(3). 

36(e)(3) Loan options presented. 

1. Significant number of creditors. A 

significant number of the creditors with 

which a loan originator regularly does 

business is three or more of those 

creditors. If the loan originator regularly 

does business with fewer than three 

creditors, the originator is deemed to 

comply by obtaining loan options from 

all the creditors with which it regularly 

does business. Under § 226.36(e)(3)(i), 

the loan originator must obtain loan 

options from a significant number of 

creditors with which the loan originator 

regularly does business, but the loan 

originator need not present loan options 

from all such creditors to the consumer 

to satisfy § 226.36(e)(2). For example, if 

three loan options available from one of 

the creditors with which the loan 

originator regularly does business 

satisfy § 226.36(e)(3)(i), presenting those 

and no options from any other creditor 

satisfies § 226.36(e)(2). 

2. Creditors with which loan 

originator regularly does business. To 

qualify for the safe harbor in 

§ 226.36(e)(2), the loan originator must 

obtain and review loan options from a 

significant number of the creditors with 

which the loan originator regularly does 

business. For this purpose, a loan 

originator regularly does business with 

a creditor if: 

i. There is a written agreement 

between the originator and the creditor 

governing the originator’s submission of 

mortgage loan applications to the 

creditor; 

ii. The creditor has extended credit 

secured by real property or a dwelling 

to one or more consumers during the 

current or previous calendar month 

based on an application submitted by 

the loan originator; or 

iii. The creditor has extended credit 

secured by real property or a dwelling 

25 or more times during the previous 

twelve calendar months based on 

applications submitted by the loan 

originator. For this purpose the previous 

twelve calendar months begins with the 

calendar month that precedes the month 

in which the loan originator accepted 

the consumer’s application. 

3. Lowest interest rate. To qualify 

under the safe harbor in § 226.36(e)(2), 

for each type of transaction in which the 

consumer has expressed an interest, the 

loan originator must present the 

consumer with at least three loans that 

include the loan with the lowest interest 

rate, the loan with the second lowest 

rate, and the loan with the lowest total 

dollar amount for discount points and 

origination points. To determine the 

loan with the lowest interest rate, for 

any loan that has an initial rate that is 

fixed for at least five years, the loan 

originator shall use the initial rate that 

would be in effect at consummation. For 

a loan with an initial rate that is not 

fixed for at least five years: 

i. If the interest rate varies based on 

changes to an index, the originator shall 

use the fully-indexed rate that would be 

in effect at consummation without 

regard to any initial discount. 

ii. For a step-rate loan the originator 

shall use the highest rate that would 

apply during the first five years. 

4. Transactions for which the 

consumer likely qualifies. To qualify 

under the safe harbor in § 226.36(e)(2), 

the loan originator must have a good 

faith belief that the loan options 

presented to the consumer pursuant to 

§ 226.36(e)(3) are transactions for which 

the consumer likely qualifies. The loan 

originator’s belief that the consumer 

likely qualifies should be based on all 

information reasonably available to the 

loan originator at the time the loan 

options are being presented. The loan 

originator may rely on information 

provided by the consumer, even if it 

subsequently is determined to be 

inaccurate. For purposes of 

§ 226.36(e)(3), a loan originator is not 

expected to know all aspects of each 

creditor’s underwriting criteria. But 

pricing or other information that is 

routinely communicated by creditors to 

loan originators is considered to be 

reasonably available to the loan 

originator, for example, rate sheets 

showing creditors’ current pricing and 

the required minimum credit score or 

other eligibility criteria.fi 

flSection 226.37—Special Disclosure 

Requirements for Closed-End Mortgages 

37(a) Form of disclosures. 

1. Controlling standard. Transactions 

subject to this part are also subject to the 

clear and conspicuous standard under 

§ 226.17(a)(1). In some instances, 

§ 226.17(a)(1) provides creditors more 

flexibility in meeting the clear and 

conspicuous standard. For example, 

disclosures for transactions subject only 

to § 226.17(a)(1) may be grouped 

together and segregated in a variety of 

ways and need not be given in a 

particular type size. In contrast, 

disclosures required for transactions 

secured by real property or a dwelling, 

and therefore, also subject to § 226.37, 

must be segregated from all other 

material and be provided in a minimum 

10-point font. For such disclosures, 

creditors must use the standards set 

forth under § 226.37(a) through (d). 

37(a)(1) General. 

1. Clear and conspicuous standard. 

The clear and conspicuous standard 

generally requires that disclosures be in 

a reasonably understandable form and 

readily noticeable to the consumer. 

2. Clear and conspicuous standard— 

readily noticeable. To meet the readily 

noticeable standard, disclosures 

required by §§ 226.19, 226.20(c), 

226.20(d), and 226.38 must be given in 

a minimum 10-point font. 

3. Location. The disclosures required 

under §§ 226.19 or 226.38 must appear 

on a document separate from all other 

material. The disclosures required 

under §§ 226.19, 226.20(c), 226.20(d) or 

226.38 may be made on more than one 

page, continued from one page to 

another, and made on the front or back 

side of a page, except as otherwise 

specifically required. 

37(a)(2) Grouped and Segregated. 

1. Segregation of disclosures. The 

disclosures required by §§ 226.19, 

226.20(c), 226.20(d) or 226.38 must be 

segregated from other information. The 

disclosures under § 226.38 may be 

grouped together, in accordance with 

the requirements under § 226.38(a)–(j), 

and segregated from other required 

disclosures under § 226.38 

i. By outlining them in a box. 

ii. By bold print dividing lines. 

iii. By a different color background. 

iv. By a different type style. 

2. Content of segregated disclosures. 

Section 226.37(a)(2)(i)–(ii) contains 

exceptions to the requirement that the 

disclosures required under § 226.38 be 

grouped together and segregated from 

material that is not directly related to 

those disclosures. Section 226.37(a)(2)(i) 

lists the items that may be added to the 

segregated disclosures, even though not 

directly related to those disclosures. 

Section 226.37(a)(2)(ii) lists the items 

required under § 226.38 that may be 

deleted from the segregated disclosures 

and appear elsewhere. Any of these 

additions or deletions may be combined 

and appear either together with or 

separate from the segregated 

disclosures. 

3. Directly related. The segregated 

disclosures may, at the creditor’s option, 

include any information that is directly 

related to those disclosures. The 

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following is directly related 

information: 

i. The basis for any estimates used in 

making disclosures. For example, if the 

maturity date of a loan depends solely 

on the occurrence of a future event, the 

creditor may indicate that the 

disclosures assume that event will occur 

at a certain time. 

ii. An explanation of the use of 

pronouns or other references to the 

parties to the transaction. For example, 

the disclosures may state, ‘‘ ‘You’ refers 

to the customer and ‘we’ refers to the 

creditor.’’ 

iii. A brief caption identifying the 

disclosures. For example, the 

disclosures may bear a general title such 

as ‘‘Federal Truth in Lending 

Disclosures’’ or a descriptive title such 

as ‘‘Real Estate Loan Disclosures.’’ 

4. Balloon payment financing with 

leasing characteristics. See comment 

17(a)(1)–7. 

37(c) Terminology. 

1. Consistent Terminology. Language 

used in disclosures required by 

§§ 226.19, 226.20(c), 226.20(d), and 

226.38 must be close enough in meaning 

to enable the consumer to relate the 

different disclosures; however, the 

language need not be identical, unless 

the use of specific terminology is 

required. 

2. Combining terminology. Where the 

amounts of several numerical 

disclosures are the same, creditors may 

combine the terms, so long as it is done 

in a clear and conspicuous manner and 

in accordance with the requirements 

under § 226.38. For example, in a 

transaction in which the amount 

financed equals the total payments, the 

creditor may disclose a single dollar 

amount together with the descriptive 

statement required for total payments 

under § 226.38(e)(5)(i) and an 

explanation that the figure represents 

both the total payments and the amount 

financed, and is used to calculate the 

annual percentage rate. However, if the 

terms are required to be disclosed 

separately, both disclosures must be 

completed even though the same 

amount is entered into each space. 

3. When disclosures must be more 

conspicuous. The following rules apply 

to the requirement that the annual 

percentage rate for the loan transaction, 

when disclosed with the term annual 

percentage rate, be shown more 

conspicuously: 

i. the annual percentage rate, 

expressed as a percentage, must be more 

conspicuous only in relation to other 

required disclosures under § 226.38. 

ii. the annual percentage rate, 

expressed as a percentage, need not be 

more conspicuous except as part of the 

annual percentage rate disclosure 

required under §§ 226.37(c)(2) and 

226.38(b)(1). 

iii. the term ‘‘annual percentage rate’’ 

must not be more conspicuous than the 

annual percentage rate, expressed as a 

percentage and disclosed as required 

under §§ 226.37(c)(2) and 226.38(b)(1). 

iv. the creditor’s identity under 

§ 226.38(g)(1) may, but need not, be 

more prominently displayed than the 

annual percentage rate. 

4. Making disclosures more 

conspicuous. The annual percentage 

rate for the loan transaction, expressed 

as a percentage, may be made more 

conspicuous in any way that highlights 

it in relation to the other required 

disclosures. For example, it may be: 

i. Printed in bold print or different 

type face; or 

ii. Underlined. 

37(d) Specific Formats. 

1. Prominent Location. Disclosures 

meet the prominent location standard if 

located on the first page and on the front 

side of the disclosure statement. 

2. Close Proximity. If the required 

disclosures are located immediately 

next to or directly above or below each 

other, without any intervening text or 

graphical displays, the disclosures are 

deemed to be in close proximity. 

Section 226.38—Content of Disclosures 

for Closed-End Mortgages 

1. As applicable. The disclosures 

required by this section should be 

provided only as applicable. Any 

provision not relevant to a particular 

transaction should not be disclosed, 

except as otherwise required under 

§ 226.38(d)(1). 

2. Format. See the commentary to 

§§ 226.17(a)(1) and 226.37 for a 

discussion of the format to be used in 

making these disclosures, as well as 

acceptable modifications. 

38(a) Loan summary. 

38(a)(3) Loan type and features. 

1. General. The disclosure of loan 

type and features should reflect the 

terms of the legal obligation between the 

parties. 

38(a)(3)(i) Loan type. 

1. General. Creditors must identify the 

loan type as required in § 226.38(a)(3)(i). 

Only one loan type may be disclosed. 

The categories used in § 226.38(a)(3)(i) 

are different from the categories in 

§ 226.18(f) and commentary to 

§ 226.17(c)(1). 

38(a)(3)(i)(A) Adjustable-rate 

mortgages. 

1. General. A transaction is an 

adjustable-rate mortgage for the 

purposes of this section if the annual 

percentage rate may increase after 

consummation. However, a transaction 

in which the annual percentage rate 

may change after consummation solely 

because of a shared-equity or sharedappreciation feature is not an 

adjustable-rate mortgage for the 

purposes of this section. See 

§ 226.38(d)(2)(vi). Also, a step-rate 

mortgage is not an adjustable-rate 

mortgage for purposes of this section 

unless the interest rate or the applicable 

period for each interest rate can change 

other than as specified in the terms of 

the legal obligation between the parties. 

See § 226.38(a)(3)(i)(B). A fixed interest 

rate loan with a renewable balloon 

payment is not an adjustable-rate 

mortgage for purposes of this section. 

See comment 38(a)(3)(i)(C)–1(v). 

2. Examples. The following 

transactions, for which the interest rate 

is variable, are examples of adjustablerate mortgages for purposes of this 

section. 

i. the seller or a 3rd party pays an 

amount either to the creditor or to the 

consumer to buy down the interest rate 

for all or a portion of the credit term as 

described in comment 17(c)(1)(i)–1, 

regardless of whether the disclosures 

take the buydown into account. 

ii. the consumer pays an amount to 

the creditor to buy down the interest 

rate for all or a portion of the credit term 

as described in comment 17(c)(1)(i)–2. 

iii. a third party (such as a seller) and 

a consumer both pay an amount to the 

creditor to buy down the interest rate for 

all or a portion of the credit term as 

described in comment 17(c)(1)(i)–4. 

iv. a rate reduction option permits the 

consumer to adjust the existing variable 

interest rate to a lower variable interest 

rate under certain conditions, in 

accordance with the terms of the legal 

obligation between the parties. 

v. the renewable balloon-payment 

option permits the consumer to renew 

the loan as described in comment 

17(c)(1)(iii)–4(i). 

vi. the terms of the legal obligation 

provide that the rate will increase upon 

the occurrence of some event, such as 

an employee leaving the employ of the 

creditor, as described in comment 

17(c)(1)(iii)–4(ii). 

vii. the terms of the legal obligation 

provide for periodic adjustments to 

payments and the loan balance, such as 

‘‘price-level-adjusted mortgages’’ or 

other indexed mortgages that have a 

variable rate of interest and provide for 

periodic adjustments to payments and 

the loan balance to reflect changes in an 

index measuring prices or inflation, as 

described in comment 17(c)(1)(iii)– 

4(iii). 

viii. if the interest rate or the 

applicable period for each interest rate 

can change other than as specified in 

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the terms of the legal obligation between 

the parties, such as certain step-rate 

mortgages, as described in comment 

38(a)(3)(i)(B)–1. 

ix. the terms of the legal obligation 

provide for scheduled adjustments in 

payment amounts during the loan term, 

such as certain graduated-payment 

adjustable-rate mortgages, as described 

in comment 17(c)(1)(iii)–6. 

x. the terms of the legal obligation 

give the consumer an option to convert 

the variable interest rate into a fixed 

interest rate at a designated time or 

upon satisfaction of certain conditions. 

38(a)(3)(i)(B) Step-rate mortgages. 

1. General. A step-rate mortgage is a 

transaction for which the annual 

percentage rate will change after 

consummation, and all of the interest 

rates that will apply throughout the 

term of the loan, including the 

applicable period for each interest rate, 

are specified in the terms of the legal 

obligation between the parties. As 

discussed in comment 38(a)(3)(i)(A)–1, 

if the interest rate or the applicable 

period for each interest rate can change 

other than as specified in the terms of 

the legal obligation between the parties, 

such mortgage is considered an 

adjustable-rate mortgage and not a steprate mortgage for purposes of this 

section. 

2. Exclusion. Preferred-rate loans 

where the terms of the legal obligation 

provide that the initial interest rate is 

fixed but will increase upon the 

occurrence of some event, such as an 

employee leaving the employ of the 

creditor, as described in comment 

17(c)(1)(iii)–4, are considered fixed-rate 

mortgages and not step-rate mortgages 

for purposes of this section. See 

comment 38(a)(3)(i)(C)–1(vi). 

38(a)(3)(i)(C) Fixed-rate mortgages. 

1. Examples. The following 

transactions, for which the interest rate 

is fixed, are examples of fixed-rate 

mortgages for purposes of this section. 

i. the seller or a third party pays an 

amount either to the creditor or to the 

consumer to buy down the interest rate 

for all or a portion of the credit term as 

described in comment 17(c)(1)(i)–1, 

regardless of whether the disclosures 

take the buydown into account. 

ii. the consumer pays an amount to 

the creditor to buy down the interest 

rate for all or a portion of the credit term 

as described in comment 17(c)(1)(i)–2. 

iii. a third party (such as a seller) and 

a consumer both pay an amount to the 

creditor to buy down the interest rate for 

all or a portion of the credit term as 

described in comment 17(c)(1)(i)–4. 

iv. a rate reduction option permits the 

consumer to adjust the existing fixed 

interest rate to a lower fixed interest rate 

under certain conditions, in accordance 

with the terms of the legal obligation 

between the parties. 

v. the renewable balloon-payment 

option permits the consumer to renew 

the loan as described in comment 

17(c)(1)(iii)–4(i). 

vi. the terms of the legal obligation 

provide that the rate will increase upon 

the occurrence of some event, such as 

an employee leaving the employ of the 

creditor, as described in comment 

17(c)(1)(iii)–4(ii). 

vii. the terms of the legal obligation 

provide for periodic adjustments to 

payments and the loan balance, such as 

‘‘price-level-adjusted mortgages’’ or 

other indexed mortgages that have a 

fixed rate of interest but provide for 

periodic adjustments to payments and 

the loan balance to reflect changes in an 

index measuring prices or inflation, as 

described in comment 17(c)(1)(iii)– 

4(iii). 

38(a)(3)(ii) Loan features. 

1. General. Creditors must indicate 

whether a loan has the features 

specified in § 226.38(a)(3)(ii). Under 

§ 226.38(a)(3)(ii), a creditor should 

disclose no more than two features for 

a single loan. A loan may have both a 

‘‘step-payment’’ feature in 

§ 226.38(a)(3)(ii)(A) and one of the 

features in § 226.38(a)(3)(ii)(B)–(D). 

38(a)(3)(ii)(A) Step-payments. 

1. General. If, under the terms of the 

legal obligation, a periodic monthly 

payment may increase by a set amount 

for a specified amount of time, the 

creditor must disclose that the loan has 

a ‘‘step-payment’’ feature. For instance, 

if the consumer is offered a fixed-rate 

mortgage with 24 monthly payments at 

$1,000 that will later increase to $1,200 

and remain at that level for a specified 

period of time, and the loan amortizes 

fully over the loan term, the creditor 

would disclose ‘‘Fixed-rate mortgage, 

step-payments’’ for the loan type in the 

loan summary. See comment 

17(c)(1)(iii)–5 clarifying that graduatedpayment mortgages and step-rate 

transactions without an adjustable-rate 

mortgage feature are not considered 

adjustable-rate mortgage transactions. 

However, if the consumer is offered an 

adjustable-rate mortgage loan with 

scheduled variations in payment 

amounts during the loan term, the 

creditor would disclose ‘‘Adjustable-rate 

mortgage, step-payments.’’ See comment 

17(c)(1)(iii)–6 for a discussion of 

graduated-payment adjustable-rate 

mortgages. Also see comment 

38(a)(3)(ii)–2 regarding loans with 

multiple features. 

Paragraphs 38(a)(3)(ii)(B) and (C) 

1. ‘‘Payment option’’ and ‘‘negative 

amortization’’ features—loans with 

negative amortization. 

i. Negative amortization occurs when 

one or more regular periodic payments 

is not sufficient to cover interest 

accrued and the unpaid interest is 

added to the loan balance. For purposes 

of the loan feature disclosure in 

§ 226.38(a)(3)(ii), features that result in 

negative amortization are divided into 

two types: 

A. ‘‘Payment option’’ features, in 

which the terms of the legal obligation 

permit the consumer to make payments 

that result in negative amortization and 

other types of payments; and 

B. ‘‘Negative amortization’’ features, 

in which the terms of the legal 

obligation require the consumer to make 

payments that result in negative 

amortization—that is, the legal 

obligation does not permit the consumer 

to make payments that would cover all 

interest accrued or all interest accrued 

and principal. 

ii. Under § 226.38(a)(3)(ii)(B) and (C), 

a creditor should disclose the loan 

feature as either ‘‘payment option’’ or 

‘‘negative amortization’’ but not both. 

Under § 226.38(a)(3)(ii)(A), however, a 

loan may have both a ‘‘step-payment’’ 

feature and either a ‘‘payment option’’ 

or a ‘‘negative amortization’’ feature. 

2. Consumer’s choice. For a loan to 

have a ‘‘payment option’’ feature, all 

periodic payment choices must be 

specified in the legal obligation and 

must include a choice to make 

payments that may result in negative 

amortization. For example, if the 

consumer is offered a loan with 

minimum monthly payments that will 

not reduce the loan balance to remain 

the same (i.e., interest-only payments), 

but the terms of the legal obligation do 

not prevent the consumer from making 

payments that will decrease the loan 

balance, such a loan would be disclosed 

as having an ‘‘interest-only’’ feature and 

not a ‘‘payment option’’ feature for 

purposes of this section. 

Paragraph 38(a)(3)(ii)(D) 

1. Interest-only feature. The creditor 

must disclose an ‘‘interest-only’’ feature 

if the terms of the legal obligation 

permit or require the consumer to make 

one or more regular periodic payments 

of interest accrued and no principal, 

and the legal obligation does not require 

or permit any payments that would 

result in negative amortization. Thus, a 

creditor should not disclose both an 

‘‘interest-only’’ feature and a ‘‘payment 

option’’ feature or ‘‘negative 

amortization’’ feature in a single 

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transaction. Under § 226.38(a)(3)(ii)(A), 

however, a loan may have both an 

‘‘interest-only’’ feature and a ‘‘steppayment’’ feature. 

38(a)(4) Total settlement charges. 

1. Disclosure required. For the good 

faith estimate required by 

§ 226.19(a)(1)(i), the creditor must 

disclose the amount of the ‘‘Total 

Estimated Settlement Charges’’ as 

disclosed on the Good Faith Estimate 

under Regulation X, 12 CFR part 3500, 

Appendix C. For the final disclosure 

required by § 226.19(a)(2)(ii), the 

creditor must disclose the sum of the 

final settlement charges. For the final 

disclosure, the creditor may use the sum 

of the ‘‘Charges That Cannot Increase,’’ 

‘‘Charges That In Total Cannot Increase 

By More Than 10%,’’ and ‘‘Charges That 

Can Change’’ as would be disclosed in 

the column entitled ‘‘HUD–1’’ on page 

three of the HUD–1 or on page two of 

the HUD–1A settlement statement under 

Regulation X, 12 CFR part 3500, 

Appendix A. Alternatively, for the final 

disclosure, the creditor may provide the 

consumer with the final HUD–1 or 

HUD–1A settlement statement. For 

transactions in which a Good Faith 

Estimate, HUD–1 or HUD–1A are not 

required, the creditor may look to such 

documents for guidance on how to 

comply with the requirements of this 

section. 

38(a)(5) Prepayment penalty. 

1. Coverage. Section 226.38 (a)(5) 

applies only to those transactions in 

which the interest calculation takes 

account of all scheduled reductions in 

principal, as well as transactions in 

which interest calculations are made 

daily. 

2. Penalty. The term ‘‘penalty’’ as 

used in § 226.38(a)(5) encompasses only 

those charges that are assessed solely 

because of the prepayment in full of a 

transaction in which the interest 

calculation takes account of all 

scheduled reductions in principal. 

Charges which are penalties include, for 

example: 

i. Charges determined by treating the 

loan balance as outstanding for a period 

after prepayment in full and applying 

the interest rate to such ‘‘balance.’’ 

ii. A minimum finance charge in a 

simple-interest transaction. 

iii. Fees, such as loan closing costs, 

that are waived unless the consumer 

prepays the obligation. 

3. Fees that are not prepayment 

penalties. Charges which are not 

penalties include, for example: 

i. Loan guarantee fees. 

ii. Fees imposed for preparing and 

providing documents in connection 

with prepayment, such as a loan payoff 

statement, a reconveyance, or other 

document releasing the creditor’s 

security interest in the property 

securing the loan. 

4. As applicable. When the legal 

obligation includes a finance charge 

computed from time to time by 

application of a rate to the unpaid 

principal balance and no penalty may 

be imposed, disclosures made under 

§ 226.38(a)(5) need not be made. In such 

a case, however, § 226.38(d)(1)(iii) 

requires the creditor to indicate whether 

or not the legal obligation permits the 

creditor to impose a prepayment 

penalty. 

5. Content of disclosure. Section 

226.38(a)(5) requires creditors to 

disclose the amount of the maximum 

penalty, the circumstances under which 

the creditor may impose the penalty, 

and the period during which the 

creditor may impose the penalty. The 

creditor must state the maximum 

penalty as a dollar numerical amount. 

See § 226.2(b)(5) and comment 2(b)(5)– 

2. 

6. Basis of disclosure. The creditor 

should assume that the consumer 

prepays at a time when the prepayment 

penalty may be charged. For example, if 

the prepayment penalty on a negatively 

amortizing loan equals 2% of the 

amount prepaid during the first two 

years after loan origination, the creditor 

should disclose the maximum penalty 

using the maximum loan balance during 

those years even if the loan balance, and 

thus the amount prepaid, may increase 

thereafter. If more than one type of 

prepayment penalty applies, the 

creditor should include the maximum 

amount of each type of prepayment 

penalty in the maximum penalty 

disclosed. 

i. If the legal obligation permits the 

creditor to treat the loan balance as 

outstanding for a period after 

prepayment in full and charge amounts 

determined by applying the interest rate 

to the ‘‘balance’’ deemed outstanding 

during that period, the maximum the 

creditor should include is the maximum 

such charges in calculating the 

maximum prepayment penalty. 

ii. If a minimum finance charge 

applies, the creditor should include the 

minimum finance charge in calculating 

the maximum prepayment penalty. 

iii. If a prepayment penalty is 

determined by applying to the loan 

balance at the time of prepayment a rate 

that does not change, the prepayment 

penalty amount should be calculated 

assuming the highest balance possible. 

For amortizing loans and interest-only 

loans, the balance is highest at 

consummation, assuming the consumer 

makes timely payments in full. 

However, for loans with negative 

amortization, the loan’s balance may be 

higher after consummation. For 

example, assume the principal balance 

of a negatively amortizing loan is 

$200,000 at consummation. The terms 

of the legal obligation allow the creditor 

to impose a fee equal to 3% of the 

amount prepaid if the consumer prepays 

during the first three years after 

consummation. The legal obligation 

provides that the interest rate for the 

loan is 1.50% for the first month, the 

maximum interest rate is 10.50%, and 

there are no limitations on how much 

the interest rate can increase on any 

adjustment date. Initial minimum 

payment amounts are based on the 1.5% 

initial rate. Payment amounts are 

adjusted yearly, but payments may not 

increase by more than 7.5% on any 

adjustment date, except that the 

consumer must make fully amortizing 

payments starting with the period in 

which the principal balance reaches 

115% of the original principal balance. 

Assuming that the interest rate increases 

to 10.50% in the second month and 

remains at that rate and that the 

consumer makes minimum payments, 

the highest principal balance is 

$229,243, reached in the twenty-eighth 

month following origination. For 

purposes of this disclosure, the creditor 

should assume the consumer prepays in 

the 28th month, and the maximum 

prepayment penalty is $6,877.29. 

iv. In some cases, the legal obligation 

may allow the creditor to determine the 

penalty using a penalty rate that may 

change over time (such as where a 

prepayment penalty on an adjustablerate loan equals six months’ interest 

payments.) In such cases, the creditor 

should disclose (1) the penalty charged 

when the penalty rate is the highest 

possible or (2) the penalty charged when 

the balance is the highest possible, 

whichever is greater. For example, 

assume that the interest rate for an 

adjustable-rate mortgage will remain 

fixed for the first 3 years after 

consummation and will adjust annually 

thereafter. The principal balance will be 

$200,000 at consummation and the loan 

amortizes. The initial interest rate on 

the loan is 5.625% and the maximum 

amount the interest rate can increase 

upon any rate adjustment is 2 

percentage points. The terms of the legal 

obligation permit the creditor to impose 

a fee equal to 6 months’ interest if the 

consumer prepays within the first 4 

years. To determine the maximum 

prepayment penalty, the creditor must 

disclose (1) the penalty when the 

balance is highest or (2) the penalty 

when the penalty rate is highest, 

whichever is greater. The balance would 

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be highest at consummation because the 

loan amortizes. The interest due the 1st 

month after consummation is $937.50. 

Six times the interest due in the first 

month is $5,625.00. The penalty rate 

would be highest in the 37th month 

after consummation, the first time the 

interest rate may increase during the 

period in which a prepayment penalty 

may be charged. Assuming the interest 

rate increased as much as possible, by 

2 percentage points, the monthly 

interest due in the 37th month is 

$1,218.69. Six times the interest due in 

the 37th month is $7,312.14. The 

maximum penalty is the maximum 

penalty when the balance is highest, or 

$7,312.14, which is greater than the 

maximum penalty when the penalty rate 

is highest, or $5,625.00. 

7. Timely payment assumed. The 

creditor may assume that the consumer 

makes payments on time and in the 

amount required by the terms of the 

legal obligation and may disregard any 

possible differences resulting from the 

consumer’s payment patterns. See 

comment 17(c)(2)(i)–3. Where the terms 

of the obligation require a periodic 

payment that is not a fully amortizing 

payment, such as an interest only 

payment or a minimum payment that 

causes the loan balance to increase, the 

creditor must base disclosures on the 

required periodic payment and may not 

assume that the consumer will make 

payments that exceed the required 

payment. 

8. Rebate-penalty disclosure. A single 

transaction may involve both a finance 

charge computed by application of a 

rate to the unpaid balance and a finance 

charge that is precomputed or otherwise 

does not take into account each 

reduction in the principal balance (for 

example, mortgages with mortgageguarantee insurance for which 

premiums are calculated on an annual 

basis and do not take into account 

monthly declines in the principal 

balance). See comment 36(j)(6)–1. In 

these cases, disclosures about both 

prepayment rebates and penalties are 

required. Sample form H–15 in 

appendix H illustrates a mortgage 

transaction in which both rebate and 

penalty disclosures are necessary, and 

associated commentary explains the 

assumptions used in generating the 

sample. 

38(b) Annual percentage rate. 

Paragraph 38(b)(1). 

1. Disclosure required. The creditor 

must disclose the cost of the credit as an 

annual rate, expressed as a percentage 

and using the term ‘‘annual percentage 

rate,’’ plus a brief descriptive phrase as 

required under § 226.38(b)(1). Under 

§ 226.37(c)(2), the annual rate, 

expressed as a percentage, must be more 

conspicuous than the other required 

disclosures and in at least 16 point font. 

Paragraph 38(b)(3). 

1. Applicable average prime offer rate 

and higher-priced loan threshold. 

Creditors must disclose the APR on the 

loan offered, the average prime offer rate 

for a comparable transaction, and the 

higher priced loan threshold, for the 

week in which the creditor provides the 

disclosure. The higher-priced loan 

threshold is 1.5 percentage points above 

the comparable average prime offer rate 

for first lien loans, and 3.5 percentage 

points above the comparable average 

prime offer rate for subordinate lien 

loans. The Board publishes a table at 

least weekly with average prime offer 

rates by transaction type and loan term. 

Creditors should follow the guidance on 

how to determine the average prime 

offer rate and the higher-priced loan 

threshold in § 226.35(a)(2) and 

comments 35(a)(2)–1 through –4. 

Paragraph 38(b)(4). 

1. Average per-period saving for 1 

percentage-point reduction in the APR. 

Section 226.38(b)(4) requires creditors 

to disclose the average per-period 

savings of a 1 percentage-point 

reduction in the APR disclosed in 

paragraph (b)(1). The creditor should 

base this disclosure on the terms of the 

legal obligation, except that the creditor 

must reduce the interest rate by one 

percentage point. If the legal obligation 

requires monthly payments, the creditor 

should identify the savings as the 

‘‘average per-month’’ savings. 

2. Examples. In both examples, 

assume the loan amount is $200,000 and 

the loan has a 30 year term with a total 

of 360 payments due monthly. 

i. Fixed-rate interest-only mortgage. 

Assume that the loan is a fixed-rate 

mortgage with the option to make 

interest-only payments for the first 10 

years of the loan. The interest rate is 6.5 

percent. The total of payments disclosed 

under § 226.38(e)(5)(i) is $588,313.89. 

To calculate the average per-month 

savings, the creditor would reduce the 

interest rate to 5.5 percent for the full 30 

year term of the loan and calculate a 

hypothetical total of payments of 

$540,627.21. The difference between the 

total of payments disclosed under 

§ 226.38(e)(5)(i) and the hypothetical 

total of payments is $47,686.68. The 

creditor would divide $47,686.68 by the 

number of periods (360) and disclose an 

average per-month savings of $132. 

ii. Adjustable-rate mortgage. Assume 

the loan is an ARM with a three-year 

introductory rate of 5.625 percent; the 

fully-indexed rate is 7.75 percent. At the 

end of the three year period, the interest 

rate will adjust, subject to a 2 percent 

rate cap. Thus, the interest rate in effect 

for year 4 is 7.625 percent. In year 5 the 

rate adjusts to the fully-indexed rate of 

7.75 percent. The creditor should 

assume that the rate does not increase 

after it reaches the fully-indexed rate. 

The total of payments disclosed under 

§ 226.38(e)(5)(i) is $585,778.09. To 

calculate the average per-month savings, 

the creditor would assume interest rates 

of 4.625 percent for the first 3 years; 

6.625 percent for year 4; and 6.75 

percent for the remainder of the loan. 

Thus, the rates are reduced by 1 

percentage point, but the margin, 

periodic caps and other loan terms 

remain the same. The hypothetical total 

of payments is $537,087.61. The 

difference between the total of payments 

disclosed under § 226.38(e)(5)(i) and the 

hypothetical total of payments is 

$48,690.48. The creditor would divide 

$48,690.48 by the number of periods 

(360) and disclose an average permonth savings of $135. 

38(c) Interest rate and payment 

summary. 

1. In general. Section 226.38(c) 

prescribes format and content for 

disclosure of interest rates and monthly 

payments. The information in paragraph 

(c)(2)–(4) is required to be in the form 

of a table, except as provided otherwise. 

The required format and content of the 

table vary depending primarily on 

whether the loan has negative 

amortization. In all cases, however, the 

table should have no more than five 

vertical columns, showing applicable 

interest rates; payments would be 

shown in horizontal rows. Certain loan 

types and terms are defined for 

purposes of § 226.38(c) in § 226.38(c)(7). 

2. Amortizing loans. Loans described 

as amortizing in § 226.38(c)(2)(i) and 

226.38(c)(3) include loans with interestonly features that do not also have 

negative amortization features. (For 

rules relating to loans with balloon 

payments, see § 226.38(c)(5)). If an 

amortizing loan is an adjustable-rate 

mortgage with an introductory rate (less 

than the fully-indexed rate), creditors 

must provide a special explanation of 

introductory rates. See 

§ 226.38(c)(2)(iii). 

3. Negative amortization. For loans 

with negative amortization, creditors 

should follow the rules in 

§§ 226.38(c)(2)(ii) and 226.38(c)(4) in 

disclosing interest rates and monthly 

payments. Loans with negative 

amortization also require special 

explanatory disclosures about rates and 

payments. See § 226.38(c)(6). Loans 

with negative amortization include 

‘‘payment option’’ loans, in which the 

consumer is permitted to make 

minimum payments that will cover only 

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some of the interest accruing each 

month. See also comment 17(c)(1)(iii)– 

6, regarding graduated-payment 

adjustable-rate mortgages. 

38(c)(2) Interest rates. 

38(c)(2)(i) Amortizing loans. 

Paragraph 38(c)(2)(i)(A). 

1. Fixed rate loans—payment 

increases. Although the interest rate 

will not change after consummation for 

a fixed-rate loan, some fixed-rate loans 

may have periodic payments that 

increase after consummation. For 

example, the terms of the legal 

obligation may permit the consumer to 

make interest-only payments for a 

specified period such as the first five 

years after consummation. In such 

cases, the creditor must include the 

increased payment under 

§ 226.38(c)(4)(ii)(B) in the payment row, 

and must show the interest rate in the 

column for that payment, even though 

the rate has not changed since 

consummation. See also comment 

17(c)(1)(iii)–7, regarding growth equity 

mortgages. 

Paragraph 38(c)(2)(i)(B). 

1. ARMs and step-rate mortgages. 

Creditors must disclose more than one 

interest rate for ARMs and step-rate 

mortgages, in accordance with 

paragraph (c)(2)(i)(B). Creditors must 

assume that interest rates rise after 

consummation, taking into account the 

terms of the legal obligation. 

2. Maximum interest rate at first 

adjustment—adjustable-rate mortgages 

and step-rate mortgages. The creditor 

must disclose the maximum possible 

rate that could apply at the first 

scheduled adjustment in the interest 

rate. If there are no interest rate caps 

other than the maximum possible rate 

required under § 226.30, then the 

creditor should disclose only the rate at 

consummation and the maximum 

possible rate. Such a table would only 

have two columns. 

i. For an adjustable rate mortgage, the 

creditor must take into account any 

interest rate caps when disclosing the 

maximum interest rate at the first 

adjustment. The creditor must also 

disclose the date on which the first 

scheduled adjustment occurs. 

ii. If the transaction is a step-rate 

mortgage, the creditor should disclose 

the rate that will apply after 

consummation. For example, the legal 

obligation may provide that the rate is 

6 percent for the first two years 

following consummation, and then 

increases to 7 percent. The creditor 

should disclose the rate at first 

adjustment as 7 percent and the date on 

which the rate is scheduled to increase 

to 7 percent. 

3. Maximum interest rate at any time. 

The creditor must disclose the 

maximum rate that could apply at any 

time during the term of the loan and the 

earliest date on which the maximum 

interest rate could apply. 

i. For an adjustable-rate mortgage, the 

creditor must take into account any 

interest rate caps in disclosing the 

maximum possible interest rate. For 

example, if the legal obligation provides 

that at each annual adjustment the rate 

may increase by no more than 2 

percentage points, the creditor must 

take this limit into account in 

determining the earliest date on which 

the maximum possible rate may be 

reached. 

ii. For a step-rate loan, the creditor 

should disclose the highest rate that 

could apply under the terms of the legal 

obligation. 

Paragraph 38(c)(2)(i)(C). 

1. Payment increases. For some loans, 

the payment may increase following 

consummation for reasons unrelated to 

an interest rate adjustment. For 

example, an adjustable-rate mortgage 

may have an introductory fixed-rate for 

the first five years following 

consummation, and permit the borrower 

to make interest-only payments for the 

first three years. Under 

§ 26.38(c)(3)(ii)(B), the creditor must 

disclose the first payment of principal 

and interest. In such a case, the creditor 

must also disclose the interest rate that 

corresponds to the first payment of 

principal and interest, even though the 

interest rate will not adjust after 

consummation. The table would show, 

from left to right: the interest rate and 

payment at consummation with the 

payment itemized to show that the 

payment is being applied to interest 

only; the interest rate and payment 

when the interest-only option ends; the 

maximum interest rate and payment at 

first adjustment; and the maximum 

possible interest rate and payment. 

38(c)(2)(ii) Loans with negative 

amortization. 

1. Rate at consummation. In all cases 

the interest rate in effect at 

consummation must be disclosed, even 

if it will apply only for a short period 

such as one month. 

2. Rates for adjustable rate mortgages. 

The creditor must assume that interest 

rates rise as quickly as possible after 

consummation, in accordance with any 

interest rate caps under the legal 

obligation. For ARMs with no interest 

rate caps except a maximum possible 

rate cap, creditors must assume that the 

interest rate reaches the maximum 

possible interest rate at first adjustment. 

For example, assume that the legal 

obligation provides for an interest rate at 

consummation of 1.5 percent. One 

month after consummation, the interest 

rate adjusts and will adjust monthly 

thereafter, according to changes in the 

index. The consumer may make 

payments that cover only part of the 

interest accruing each month, until the 

date the principal balance reaches 115 

percent of its original balance, or until 

the 5th year after consummation, 

whichever comes first. The maximum 

possible rate is 10.5 percent. No other 

limits on interest rate changes apply. 

The minimum required payment adjusts 

each year, and may increase by no more 

than 7.5 percent over the previous year’s 

payment. The creditor should disclose 

the transaction as follows. The creditor 

should disclose the following rates and 

the dates when they are scheduled to 

occur: a rate of 1.5 percent for the first 

month following consummation and the 

minimum payment; a rate of 10.5 

percent, and the corresponding 

minimum payment taking into account 

the 7.5 percent limit, at the beginning of 

the second year; the rate of 10.5 percent 

and the corresponding minimum 

payment taking into account the 7.5 

percent limit, at the beginning of the 

third year. The creditor must also 

disclose the rate of 10.5 percent, the 

fully amortizing payment, and the date 

on which the consumer must first make 

such a payment under the terms of the 

legal obligation. 

Paragraph 38(c)(2)(iii). 

1. Introductory rate. In some 

adjustable-rate mortgages, creditors may 

set an initial interest rate that is lower 

than the fully-indexed rate at 

consummation. For amortizing loans 

with an introductory rate, creditors 

must disclose the information required 

in 226.38(c)(2)(iii) directly below the 

table. 

38(c)(3) Payments for amortizing 

loans. 

1. Payments corresponding to interest 

rates. Creditors must disclose a payment 

that corresponds to each interest rate 

disclosed under § 226.38(c)(2)(i)(A)–(C). 

Balloon payments, however, must be 

disclosed as provided in § 226.38(c)(5). 

2. Principal and interest payment 

amounts; examples. 

i. For fixed-rate interest-only 

transactions, § 226.38(c)(3)(ii)(B) 

requires scheduled increases in the 

regular periodic payment amounts to be 

disclosed along with the date of the 

increase. For example, in a fixed rate 

interest-only loan, a scheduled increase 

in the payment amount from an interestonly payment to a fully amortizing 

payment must be disclosed. Similarly, 

in a fixed-rate balloon loan, the balloon 

payment must be disclosed in 

accordance with § 226.38(c)(5). 

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ii. For adjustable-rate mortgage 

transactions, § 226.38(c)(3)(i)(A) 

requires that for each interest rate 

required to be disclosed under 

§ 226.38(c)(2)(i) (the interest rate at 

consummation, the maximum rate at the 

first adjustment, and the maximum 

possible rate) a corresponding payment 

amount must be disclosed. 

iii. The format of the payment 

disclosure varies depending on whether 

all regular periodic payment amounts 

will include principal and interest, and 

whether there will be an escrow account 

for taxes and insurance. 

38(c)(3)(i)(C) Estimated amounts for 

taxes and insurance. 

1. Taxes and insurance. An estimated 

payment amount for taxes and 

insurance must be disclosed if the 

creditor will establish an escrow 

account for such amounts. The payment 

amount must include estimated 

amounts for property taxes and 

premiums for mortgage-related 

insurance required by the creditor, such 

as insurance against loss of or damage 

to property, or against liability arising 

out of the ownership or use of the 

property, or insurance protecting the 

creditor against the consumer’s default 

or other credit loss. 

2. Mortgage insurance. Payment 

amounts under § 226.38(c)(3)(i) should 

reflect the consumer’s mortgage 

insurance payments until the date on 

which the creditor must automatically 

terminate coverage under applicable 

law, even though the consumer may 

have a right to request that the 

insurance be cancelled earlier. The 

payment amount must reflect the terms 

of the legal obligation, as determined by 

applicable State or other law. For 

example, assume that under applicable 

law, mortgage insurance must terminate 

after the 130th scheduled monthly 

payment, and the creditor collects at 

closing and places in escrow two 

months of premiums. If, under the legal 

obligation, the creditor will include 

mortgage insurance premiums in 130 

payments and refund the escrowed 

payments when the insurance is 

terminated, payment amounts disclosed 

up to the 130th payment should reflect 

premium payments. If, under the legal 

obligation, the creditor will apply the 

amount escrowed to the two final 

insurance payments, payments 

disclosed up to the 128th payment 

should reflect premium payments. 

Paragraph 38(c)(3)(i)(D). 

1. Total monthly payment. For 

amortizing loans, each column should 

add up to a total estimated payment. 

The total estimated payment amount 

should be labeled. If periodic payments 

are not due monthly, the creditor should 

use the appropriate term such as 

‘‘quarterly’’ or ‘‘annually.’’ 

38(c)(4) Payments for negative 

amortization loans. 

1. Table. Section 226.38(c)(1) 

provides that tables shall include only 

the information required in paragraph 

(c)(2)–(4). Thus, a table for a negative 

amortization loan must contain no more 

than two horizontal rows of payments 

and no more than five vertical columns 

of interest rates. 

Paragraph 38(c)(4)(i). 

1. Minimum required payments. In 

one row of the table, the creditor must 

show the minimum required payment in 

each column, for each interest rate or 

adjustment required in § 226.38(c)(2)(ii), 

except that under the last column the 

fully amortizing payment must be 

shown and must be identified as the 

‘‘full payment.’’ The payments in this 

row must be calculated based on an 

assumption that the consumer makes 

the minimum required payment for as 

long as possible under the terms of the 

legal obligation. This row should be 

identified as the minimum payment 

option, and the statement required by 

§ 226.38(c)(4)(i)(C) should be included 

in the heading for the row. 

Paragraph 38(c)(4)(iii). 

1. Fully amortizing payments. In one 

row of the table, the creditor must show 

the fully amortizing payment for every 

interest rate required in 

§ 226.38(c)(2)(ii). The creditor must 

assume, for purposes of calculating the 

amounts in this row that the consumer 

makes only fully amortizing payments. 

38(c)(5) Balloon payment. 

1. General. A balloon payment is one 

that is more than two times the regular 

periodic payment. A balloon payment 

must be disclosed in a row under the 

table, unless the balloon payment 

coincides with an interest rate 

adjustment or a scheduled payment 

increase. In those cases, the balloon 

payment must be disclosed in the table. 

38(d) Key Questions About Risk. 

38(d)(1) Required disclosures. 

1. Disclosure of first rate or payment 

increase. Under § 226.38(d)(1)(i) and 

(ii), the creditor must disclose the 

calendar month and year in which the 

first interest rate or payment increase 

may occur. 

38(d)(1)(iii) Prepayment penalty. 

1. Coverage. See comment 38(a)(5)–1 

to determine whether there is a 

prepayment penalty. 

2. Penalty. See comment 38(a)(5)–2 

for examples of charges that are 

prepayment penalties. 

3. Not penalty. See comment 38(a)(5)– 

3 for examples of charges that are not 

prepayment penalties. 

4. Basis of disclosure. Creditors may 

rely on comment 38(a)(5)–6 in 

determining the maximum prepayment 

penalty. 

5. Timely payment assumed. In 

accordance with comment 38(a)(5)–7, 

creditors may disregard any possible 

differences resulting from the 

consumer’s payment patterns and may 

base disclosures on the required 

payment and not an amortizing 

payment, if the loan has a negative 

amortization feature. 

38(d)(2) Additional disclosures. 

1. As applicable. The disclosures 

required by § 226.38(d)(2) need only be 

made as applicable. Any disclosure not 

relevant to the loan may be omitted. 

38(d)(2)(iii) Balloon payment. 

1. The creditor must make the balloon 

payment disclosure if the loan program 

includes a payment schedule with 

regular periodic payments that when 

aggregated do not fully amortize the 

outstanding principal balance. 

38(d)(2)(iv) Demand feature. 

1. Disclosure requirements. The 

disclosure requirements of 

§ 226.38(d)(2)(iv) apply not only to 

transactions payable on demand from 

the outset, but also to transactions that 

convert to a demand status after a stated 

period. 

2. Covered demand features. See 

comment 18(i)–2 for examples of 

covered demand features. 

38(e) Information about payments. 

38(e)(1) Rate calculation. 

1. Calculation. If the interest rate will 

be calculated based on an index, an 

identification of the index to which the 

rate is tied, the amount of any margin 

that will be added to the index, and any 

conditions or events on which the 

increase is contingent must be 

disclosed. When no specific index is 

used, the factors used to determine any 

rate increase must be disclosed. When 

the increase in the rate is discretionary, 

the fact that any increase is within the 

creditor’s discretion must be disclosed. 

When the index is internally defined 

(for example, by that creditor’s prime 

rate), the creditor may comply with this 

requirement by providing either a brief 

description of that index or a statement 

that any increase is in the discretion of 

the creditor. 

38(e)(2) Rate and payment change 

limits. 

1. Limitations on interest rate 

increases. Limitations include any 

maximum imposed on the amount of an 

increase in the rate at any time, as well 

as any maximum on the total increase 

over the loan’s term to maturity. 

2. Limitations on payment increases; 

negatively amortizing loans. Limitations 

include any limit imposed on the 

change of a minimum payment amount 

whether or not the change is 

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accompanied by an adjustment to the 

interest rate. Any conditions on the 

limitation on payment increases must 

also be disclosed. For example, some 

loan programs provide that the 

minimum payment will not increase by 

more than a certain percentage, 

regardless of the corresponding increase 

in the interest rate. However, there may 

be exceptions to the limitation on the 

payment increase, such as if the 

consumer’s principal balance reaches a 

certain threshold, or if the legal 

obligation sets out a scheduled time 

when payment increases will not be 

limited. 

38(e)(5)(i) Total payments. 

1. Calculation of total payments 

scheduled. Creditors should use the 

rules under § 226.18(g) and associated 

commentary, and comments 

17(c)(1)(iii)–1 and –3 for adjustable-rate 

transactions, to calculate the total 

payments amount, except that the 

calculation of the total payments 

amount must include any amount 

required to be disclosed under 

§ 226.38(c)(3)(i)(C). 

2. Number of payments. See comment 

18(g)–3. 

3. Demand obligations. In demand 

obligations with no alternate maturity 

date, the creditor must make disclosure 

of total payments scheduled described 

in § 226.17(c)(5). 

38(e)(5)(ii) Interest and settlement 

charges. 

1. Calculation of interest and 

settlement charges. The interest and 

settlement charges disclosure is 

identical to the finance charge, as 

calculated under § 226.4. 

2. Disclosure required. The creditor 

must disclose the interest and 

settlement charges as a dollar amount, 

using the term interest and settlement 

charges, together with a brief statement 

as required by § 226.38(e)(5)(ii). The 

interest and settlement charges must be 

disclosed only as a total amount; the 

components of the interest and 

settlement charges amount may not be 

itemized in the segregated disclosures, 

except as permitted under 

§ 226.38(a)(4), although the regulation 

does not prohibit itemization elsewhere. 

38(e)(5)(iii) Amount financed. 

1. Principal loan amount. In a 

mortgage transaction subject to § 226.38, 

the principal loan amount is the same 

as the loan amount disclosed under 

§ 226.38(a)(1). As provided in that 

section, the loan amount is the principal 

amount the consumer will borrow 

reflected in the loan contract. Thus the 

principal loan amount includes all 

amounts financed as part of the 

transaction, whether they are finance 

charges or not. 

2. Loan premiums and buydowns. In 

a mortgage transaction, the creditor may 

offer a premium in the form of cash or 

merchandise to prospective borrowers. 

Similarly, a third party, such as a real 

estate developer or other seller, may 

offer to pay some portion of the 

consumer’s costs of the credit 

transaction or to pay the creditor to 

‘‘buy down’’ the consumer’s interest 

rate. Such premiums and buydowns 

must be reflected in accordance with the 

terms of the legal obligation between the 

creditor and consumer. See 

§ 226.17(c)(1) and comments 17(c)(1)–1, 

–2 and 17(c)(1)(i)–1 through –4. Thus, if 

the creditor is legally obligated by the 

terms of the credit obligation to charge 

a reduced interest rate or reduced costs 

as a consequence of the premium or 

buydown, regardless of its source, the 

disclosures, including the amount 

financed, should reflect those credit 

terms. Otherwise, the disclosures 

should be calculated without regard to 

any such premium or buydown. 

3. Disclosure required. The net 

amount of credit extended must be 

disclosed using the term ‘‘amount 

financed’’ together with a descriptive 

statement as required by 

§ 226.38(e)(5)(iii). 

38(f)(4) Tax deductibility. 

1. Example. The creditor can use the 

following language to satisfy the 

requirements of this section: ‘‘If you 

borrow more than your home is worth, 

the interest on the extra amount may not 

be deductible for federal income tax 

purposes. Consult a tax advisor to find 

out whether the interest you pay is 

deductible.’’ 

2. Applicability. If the creditor is not 

certain at the time of application 

whether the credit extended may exceed 

the fair market value of the dwelling, 

the creditor may, at its discretion, 

provide the disclosure required by this 

section in connection with all 

applications for closed-end credit 

secured by a dwelling or real property. 

38(g) Identification of loan originator 

and creditor. 

38(g)(1) Creditor. 

1. Identification of creditor. The 

creditor making the disclosures must be 

identified. Use of the creditor’s name is 

sufficient, but the creditor may also 

include an address and/or telephone 

number. In transactions with multiple 

creditors, any one of them may make the 

disclosures; the one doing so must be 

identified. 

38(g)(2) Loan originator. 

1. Multiple loan originators. In 

transactions with multiple loan 

originators, each loan originator’s 

unique identifier must be disclosed. For 

example, in a transaction where a 

mortgage broker meets the definition of 

a loan originator under the Secure and 

Fair Enforcement for Mortgage 

Licensing Act of 2008, Section 1503(3), 

12 U.S.C. 5102(3), the identifiers for the 

broker and for its employee originator 

meeting that definition must be 

disclosed. 

38(h) Credit insurance and debt 

cancellation and debt suspension 

coverage. 

1. Location. This disclosure may, at 

the creditor’s option, appear apart from 

the other disclosures. It may appear 

with any other information, including 

the amount financed itemization, any 

information prescribed by State law, or 

other information. When this 

information is disclosed with the other 

segregated disclosures, however, no 

additional explanatory material may be 

included. 

Paragraph 38(h)(5). 

1. Compliance. If, based on the 

creditor’s review of the consumer’s age 

and/or employment status at the time of 

enrollment in the product, the consumer 

would not be eligible to receive the 

benefits of the product, then providing 

the disclosure required under 

§ 226.38(h)(5) would not comply with 

this provision. That is, if the consumer 

does not meet the age and/or 

employment eligibility criteria, then the 

creditor cannot state that the consumer 

may be eligible to receive benefits and 

cannot comply with this requirement. If 

the creditor offers a bundled product 

(such as credit life insurance combined 

with credit involuntary unemployment 

insurance) and the consumer is not 

eligible for all of the bundled products, 

then providing the disclosure required 

under § 226.38(h)(5) would not comply 

with this provision. However, the 

disclosure still satisfies the 

requirements of this section if an event 

subsequent to enrollment, such as the 

consumer passing the age limit of the 

product, makes the consumer ineligible 

for the product based on the product’s 

age or employment eligibility 

restrictions. 

2. Reasonably reliable evidence. A 

disclosure under § 226.38(h)(5) shall be 

deemed to comply with this section if 

the creditor used reasonably reliable 

evidence to determine whether the 

consumer met the age or employment 

eligibility criteria of the product. 

Reasonably reliable evidence of a 

consumer’s age would include using the 

date of birth on the consumer’s credit 

application, on the driver’s license or 

other government-issued identification, 

or on the credit report. Reasonably 

reliable evidence of a consumer’s 

employment status would include a 

consumer’s statement on a credit 

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application form, an Internal Revenue 

Service Form W–2, tax returns, payroll 

receipts, or other written evidence such 

as a letter or e-mail from the consumer 

or the consumer’s employer. 

38(i) Required deposit. 

1. Disclosure required. The creditor 

must inform the consumer of the 

existence of a required deposit. 

(Appendix H provides a model clause 

that may be used in making that 

disclosure.) Section 226.38(i)(1) and (2) 

describe two types of deposits that need 

not be considered required deposits. 

Use of the phrase ‘‘need not’’ permits 

creditors to include the disclosure even 

in cases where there is doubt as to 

whether the deposit constitutes a 

required deposit. 

2. Pledged-account mortgages. In 

these transactions, a consumer pledges 

as collateral funds that the consumer 

deposits in an account held by the 

creditor. The creditor withdraws sums 

from that account to supplement the 

consumer’s periodic payments. 

Creditors may treat these pledged 

accounts as required deposits or they 

may treat them as consumer buydowns 

in accordance with the commentary to 

§ 226.17(c)(1). 

3. Escrow accounts. The escrow 

exception in § 226.38(i) applies, for 

example, to accounts for such items as 

maintenance fees, repairs, or 

improvements. (See the commentary to 

§ 226.17(c)(1) regarding the use of 

escrow accounts in consumer buydown 

transactions.) 

4. Interest-bearing accounts. When a 

deposit earns at least 5 percent interest 

per year, no disclosure is required. This 

exception applies whether the deposit is 

held by the creditor or by a third party. 

5. Examples of amounts excluded. 

The following are among the types of 

deposits that need not be treated as 

required deposits: 

i. Requirement that a borrower be a 

customer or a member even if that 

involves a fee or a minimum balance. 

ii. Required property insurance 

escrow on a mobile home transaction. 

iii. Refund of interest when the 

obligation is paid in full. 

iv. Deposits that are immediately 

available to the consumer. 

v. Funds deposited with the creditor 

to be disbursed (for example, for 

construction) before the loan proceeds 

are advanced. 

vi. Escrow of condominium fees. 

vii. Escrow of loan proceeds to be 

released when the repairs are 

completed. 

38(j) Separate disclosures. 

38(j)(1) Itemization of amount 

financed. 

1. Compliance alternatives. The 

creditor has three alternatives in 

complying with § 226.38(j)(1). Under all 

three alternatives, the itemization (or its 

substitute) must be provided at the same 

time as the other disclosures required by 

§ 226.38, although separate from those 

disclosures. The three alternatives are as 

follows: 

i. The creditor may provide an 

itemization as a matter of course, 

without notifying the consumer of the 

right to receive the itemization. 

ii. The creditor may inform the 

consumer, as part of the segregated 

disclosures, that a written itemization of 

the amount financed will be provided 

on request, furnishing the itemization 

only if the consumer in fact requests it. 

iii. The creditor may substitute the 

GFE or HUD–1 settlement statement for 

the itemization. See comment 

38(j)(1)(iii)–1 for additional guidance on 

this alternative. 

Paragraph 38(j)(1)(i). 

1. Additional information. Section 

226.38(j)(1)(i) establishes a minimum 

standard for the information to be 

included in the itemization of the 

amount financed. Creditors have 

considerable flexibility in revising or 

supplementing the information listed in 

§ 226.38(j)(1)(i). The creditor may, for 

example, do one or more of the 

following: 

i. Include amounts that reflect 

payments not part of the amount 

financed. For example, costs of the 

transaction that the consumer pays 

directly, rather than out of loan 

proceeds, may be included. 

ii. Organize the categories in any 

order. For example, the creditor may 

rearrange the terms in a mathematical 

progression that depicts the arithmetic 

relationship of the terms. 

iii. Further itemize each category. For 

example, the amount paid directly to 

the consumer may be subdivided into 

the amount given by check and the 

amount credited to the consumer’s 

savings account. 

iv. Label categories with different 

language from that shown in 

§ 226.38(j)(1)(i). For example, an amount 

paid on the consumer’s account may be 

revised to identify the account 

specifically as ‘‘your existing mortgage 

loan with us.’’ 

v. Delete, leave blank, mark ‘‘N/A,’’ or 

otherwise note inapplicable categories 

in the itemization. For example, in a 

mortgage transaction to finance the 

purchase of a dwelling with no proceeds 

distributed directly to the consumer or 

amount credited to the consumer’s 

account with the creditor, the amount 

financed may consist of only the 

amounts paid to others and the prepaid 

finance charge. In this case, the 

itemization may be composed of only 

those categories, and the other 

categories may be eliminated. 

2. Amounts appropriate to more than 

one category. When an amount may 

appropriately be placed in any of 

several categories and the creditor does 

not wish to revise the categories shown 

in § 226.38(j)(1)(i), the creditor has 

considerable flexibility in determining 

where to reflect the amount. For 

example, in a mortgage transaction to 

refinance an existing mortgage held by 

the same creditor with additional 

proceeds paid to the consumer, the 

portion of the proceeds used to pay off 

the existing mortgage debt may be 

treated as either an amount paid to the 

consumer or an amount paid on the 

consumer’s account. If the existing 

mortgage is held by another creditor, the 

portion of the proceeds used to pay it 

off may be treated as either an amount 

paid to the consumer or an amount paid 

to others on the consumer’s behalf. 

Paragraph 38(j)(1)(i)(A). 

1. Amounts paid to consumer. This 

category encompasses funds given to the 

consumer in the form of cash or a check, 

including joint proceeds checks, as well 

as funds placed in an asset account. It 

may include money in an interestbearing account even if that amount is 

considered a required deposit under 

§ 226.38(i). For example, in a 

transaction with total loan proceeds of 

$50,000, assume the consumer receives 

a check for $30,000 and $20,000 is 

required by the creditor to be put into 

an interest-bearing account. Whether or 

not the $20,000 is a required deposit, it 

is part of the amount financed. At the 

creditor’s option, it may be broken out 

and labeled in the itemization of the 

amount financed. 

Paragraph 38(j)(1)(i)(B). 

1. Amounts credited to consumer’s 

account. The term consumer’s account 

refers to an account in the nature of a 

debt with that creditor. It may include, 

for example, an unpaid balance on a 

prior loan or other amounts owing to 

that creditor. It does not include asset 

accounts of the consumer such as 

savings or checking accounts. 

Paragraph 38(j)(1)(i)(C). 

1. Amounts paid to others. This 

category includes, for example, title 

fees; amounts paid to insurance 

companies for insurance premiums; 

security interest fees; and amounts paid 

to credit bureaus, appraisers, and public 

officials. When several types of 

insurance premiums are financed, they 

may, at the creditor’s option, be 

combined and listed in one sum, labeled 

‘‘insurance’’ or similar term. This 

includes, but is not limited to, different 

types of insurance premiums paid to 

one company and different types of 

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insurance premiums paid to different 

companies. Except for insurance 

companies and other categories noted in 

§ 226.38(j)(1)(i)(C), third parties must be 

identified by name. 

Paragraph 38(j)(1)(i)(D). 

1. Prepaid finance charge. Prepaid 

finance charges that are subtracted from 

the loan amount to calculate the amount 

financed, under § 226.38(e)(5)(iii), must 

be disclosed under § 226.38(j)(1)(i)(D). 

The prepaid finance charges must be 

shown as a total amount but, at the 

creditor’s option, also may be further 

itemized and described. All amounts 

must be reflected in this total, even if 

portions of the prepaid finance charge 

are also reflected elsewhere. For 

example, if at consummation the 

creditor collects interim interest of $30 

and an underwriting fee of $100, a total 

prepaid finance charge of $130 must be 

shown. At the creditor’s option, the 

underwriting fee paid to a third party 

also may be shown elsewhere as an 

amount included in § 226.38(j)(1)(i)(C). 

The creditor also may further describe 

the two components of the prepaid 

finance charge, although no itemization 

of this element is required by 

§ 226.38(j)(1)(i)(D). 

2. Prepaid finance charges placed in 

escrow. RESPA requires creditors to give 

consumers a settlement statement 

disclosing the costs associated with 

mortgage loan transactions. Included on 

the settlement statement are payments 

into an escrow account for items that are 

prepaid finance charges. In calculating 

the total amount of prepaid finance 

charges, creditors should use the 

amounts listed on the respective lines of 

the settlement statement for each of 

those items, without adjustment, even if 

the actual amount collected at 

settlement may vary because of RESPA’s 

escrow accounting rules. Figures for 

such items disclosed in conformance 

with RESPA shall be deemed to be 

accurate for purposes of Regulation Z. 

Paragraph 38(j)(1)(iii). 

1. RESPA disclosures. RESPA requires 

creditors to provide a good faith 

estimate of closing costs and a 

settlement statement listing the amounts 

paid by the consumer. For transactions 

subject to § 226.38, whether or not they 

are subject to RESPA, the creditor can 

satisfy § 226.38(j)(1) if the creditor 

complies with RESPA’s requirements 

for a good faith estimate and settlement 

statement. The itemization of the 

amount financed need not be given, 

even though the content of the good 

faith estimate and HUD–1 settlement 

statement under RESPA differs from the 

requirements of § 226.38(j)(1)(i). If a 

creditor chooses to substitute RESPA’s 

settlement statement for the itemization 

when redisclosure is required under 

§ 226.19(a)(2), however, the statement 

must be provided to the consumer at the 

time required by that section. 

38(j)(2) Rebate. 

1. Disclosure required. The creditor 

must give a definitive statement of 

whether or not a rebate will be given. If 

a refund is possible for one type of 

prepayment, even though not for all, a 

positive disclosure is required. This 

applies to any type of prepayment, 

whether voluntary or involuntary as in 

the case of prepayments resulting from 

acceleration. 

2. Rebate-penalty disclosure. 

Creditors may rely on comment 

38(a)(5)–8 in determining how to 

disclose both a prepayment penalty and 

a rebate in a single transaction. Sample 

form H–15 in Appendix H illustrates a 

mortgage transaction in which both 

rebate and penalty disclosures are 

necessary. 

3. Prepaid finance charge. The 

existence of a prepaid finance charge in 

a transaction does not, by itself, require 

a disclosure under § 226.38(j)(2). A 

prepaid finance charge is not considered 

a rebate under § 226.38(j)(2). At its 

option, however, a creditor may 

consider a prepaid finance charge to be 

a rebate under § 226.38(j)(2). If a 

disclosure is made under § 226.38(j)(2) 

with respect to a prepaid finance charge 

or other finance charge, the creditor may 

further identify that finance charge. For 

example, the disclosure may state that 

the borrower ‘‘will not be entitled to a 

refund of the prepaid finance charge’’ or 

some other term that describes the 

finance charge. 

4. Rebate of finance charge. This 

applies to any finance charges that do 

not take account of each reduction in 

the principal balance of an obligation. 

i. This category includes, for example: 

A. Precomputed finance charges such 

as add-on charges. 

B. Charges that take account of some 

but not all reductions in principal, such 

as mortgage guarantee insurance 

assessed on the basis of an annual 

declining balance, when the principal is 

reduced on a monthly basis. 

ii. No description of the method of 

computing earned or unearned finance 

charges is required or permitted as part 

of the segregated disclosures under this 

section. 

38(j)(3) Late payment. 

1. Definition. This paragraph requires 

a disclosure only if charges are added to 

individual delinquent installments by a 

creditor who otherwise considers the 

transaction ongoing on its original 

terms. Late payment charges do not 

include: 

i. The right of acceleration. 

ii. Fees imposed for actual collection 

costs, such as repossession charges or 

attorney’s fees. 

iii. Deferral and extension charges. 

iv. The continued accrual of simple 

interest at the contract rate after the 

payment due date. However, an increase 

in the interest rate is a late payment 

charge to the extent of the increase. 

2. Content of disclosure. Many State 

laws authorize the calculation of late 

charges on the basis of either a 

percentage or a specified dollar amount, 

and permit imposition of the lesser or 

greater of the 2 charges. The disclosure 

made under § 226.38(j)(3) may reflect 

this alternative. For example, stating 

that the charge in the event of a late 

payment is 5% of the late amount, not 

to exceed $5.00, is sufficient. 

38(j)(5) Contract reference. 

1. Content. Creditors may substitute, 

for the phrase ‘‘loan contract,’’ a 

reference to specific transaction 

documents in which the additional 

information is found, such as 

‘‘promissory note.’’ A creditor may, at 

its option, delete inapplicable items in 

the contract reference. 

38(j)(6) Assumption policy. 

1. Policy statement. In many 

mortgages, the creditor cannot 

determine, at the time disclosure must 

be made, whether a loan may be 

assumable at a future date on its original 

terms. For example, the assumption 

clause commonly used in mortgages 

sold to the Federal National Mortgage 

Association and the Federal Home Loan 

Mortgage Corporation conditions an 

assumption on a variety of factors such 

as the creditworthiness of the 

subsequent borrower, the potential for 

impairment of the lender’s security, and 

execution of an assumption agreement 

by the subsequent borrower. In cases 

where uncertainty exists as to the future 

assumability of a mortgage, the 

disclosure under § 226.38(j)(6) should 

reflect that fact. In making disclosures 

in such cases, the creditor may use 

phrases such as ‘‘subject to conditions,’’ 

‘‘under certain circumstances,’’ or 

‘‘depending on future conditions.’’ The 

creditor may provide a brief reference to 

more specific criteria such as a due-onsale clause, although a complete 

explanation of all conditions is not 

appropriate. For example, the disclosure 

may state, ‘‘If you sell your home after 

you take out this loan, we may permit 

the new buyer to take over the payments 

on your mortgage, subject to certain 

conditions, such as payment of an 

assumption fee.’’ See comment 17(a)(1)– 

5 for an example of a reference to a dueon-sale clause. 

2. Original terms. The phrase 

‘‘original terms’’ for purposes of section 

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43420 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

226.38(j)(6) does not preclude the 

imposition of an assumption fee, but a 

modification of the basic credit 

agreement, such as a change in the 

contract interest rate, represents 

different terms. 

* * * * * 

Appendices G and H—Open-End and 

Closed-End Model Forms and Clauses 

1. Permissible Changes. Although use 

of the model forms and clauses is not 

required, creditors using them properly 

will be deemed to be in compliance 

with the regulation with regard to those 

disclosures. Creditors may make certain 

changes in the format or content of the 

forms and clauses and may delete any 

disclosures that are inapplicable to a 

transaction or a plan without losing the 

act’s protection from liabilityfl.fi[, 

except] flHowever,fi formatting 

changes may not be made to flto the 

followingfi model formsfl, model 

clauses,fi and samplesfl in 

Appendices G and H:fi G–2[(A)], G– 

3[(A)], G–4[(A)], G–10(A)–(E), flG– 

14(A)–(E), G–15(A)–(D),fi G–17(A)–(D), 

G–18(A) (except as permitted pursuant 

to § 226.7(b)(2)), G–18(B)–(C), G–19, G– 

20, [and]G–21fl, G–22(A)–(B), G– 

23(A)–(B), G–24(A) (except as permitted 

pursuant to § 226.7(a)(2)), G–25, and G– 

26; and H–4(B) through H–4(L), H–17(A) 

through (D), H–19(A)–(I), and H–20 

through H–22.fi The rearrangement of 

the model forms and clauses may not be 

so extensive as to affect the substance, 

clarity, or meaningful sequence of the 

forms and clauses. Creditors making 

revisions with that effect will lose their 

protection from civil liability. Except as 

otherwise specifically required, 

acceptable changes include, for 

example: 

i. Using the first person, instead of the 

second person, in referring to the 

borrower. 

ii. Using ‘‘borrower’’ and ‘‘creditor’’ 

instead of pronouns. 

iii. Rearranging the sequences of the 

disclosures. 

iv. Not using bold type for headings. 

v. Incorporating certain state ‘‘plain 

English’’ requirements. 

vi. Deleting inapplicable disclosures 

by whiting out, blocking out, filling in 

‘‘N/A’’ (not applicable) or ‘‘0,’’ crossing 

out, leaving blanks, checking a box for 

applicable items, or circling applicable 

items. (This should permit use of 

multipurpose standard forms flfor 

transactions not secured by real 

property or a dwellingfi.) 

[vii. Using a vertical, rather than a 

horizontal, format for the boxes in the 

closed-end disclosures.] 

2. Debt cancellation coverage. This 

regulation does not authorize creditors 

to characterize debt cancellation flor 

debt suspensionfi fees as insurance 

premiums for purposes of this 

regulation. Creditors may provide a 

disclosure that refers to debt 

cancellation flor debt suspensionfi 

coverage whether or not the coverage is 

considered insurance. Creditors may use 

the model credit insurance disclosures 

only if the debt cancellation flor debt 

suspensionfi coverage constitutes 

insurance under State law. 

* * * * * 

Appendix H—Closed-End Model Forms 

and Clauses 

1. Models H–1 and H–2. Creditors may 

make several types of changes to closed-end 

model forms H–1 (credit sale) and H–2 (loan) 

and still be deemed to be in compliance with 

the regulation, provided that the required 

disclosures are made clearly and 

conspicuously. Permissible changes include 

the addition of the information permitted by 

[footnote 37 to] section 226.17 and ‘‘directly 

related’’ information as set forth in the 

commentary to section 226.17(a). 

The creditor may also delete, or on multipurpose forms, indicate inapplicable 

disclosures, such as: 

• The itemization of the amount financed 

option (See sample[s] H–12[ through H–15].) 

• The credit [life and disability] 

insurancefl or debt cancellation or debt 

suspension coveragefi disclosures (See 

flmodel clauses andfi samples H- 

[11]fl17(A) and H–17(C)fi and H- 

[12]fl17(B) and H–17(D)fi.) 

• The property insurance disclosures (See 

flmodel clause H–18, and fisamples H–10 

through H–12[, and H–14].) 

• The ‘‘filing fees’’ and ‘‘nonfiling 

insurance’’ disclosures (See samples H–11 

and H–12.) 

• The prepayment penalty or rebate 

disclosures (See sample[s] H–12[ and H–14].) 

• The total sale price (See samples H–11 

through H-[15]fl12fi.) 

Other permissible changes include: 

• Adding the creditor’s address or 

telephone number. (See the commentary to 

§ 226.18(a).) 

• Combining required terms where several 

numerical disclosures are the same, for 

instance, if the ‘‘total of payments’’ equals 

the ‘‘total sale price.’’ (See the commentary 

to § 226.18.) 

• Rearranging the sequence or location of 

the disclosures—for instance, by placing the 

descriptive phrases outside the boxes 

containing the corresponding disclosures, or 

by grouping the descriptors together as a 

glossary of terms in a separate section of the 

segregated disclosures; by placing the 

payment schedule at the top of the form; or 

by changing the order of the disclosures in 

the boxes, including the annual percentage 

rate and finance charge boxes. 

• Using brackets, instead of checkboxes, to 

indicate inapplicable disclosures. 

• Using a line for the consumer to initial, 

rather than a checkbox, to indicate an 

election to receive an itemization of the 

amount financed. 

• Deleting captions for disclosures. 

• Using a symbol, such as an asterisk, for 

estimated disclosures, instead of an ‘‘e.’’ 

• Adding a signature line to the insurance 

disclosures to reflect joint policies. 

• Separately itemizing the filing fees. 

• Revising the late charge disclosure in 

accordance with the commentary to 

§ 226.18(l). 

2. Model H–3. flExcept as otherwise 

specifically provided,fi[C]flcfireditors 

have considerable flexibility in filling out 

model H–3 (itemization of the amount 

financed). Appropriate revisions, such as 

those set out in the commentary to section 

226.18(c)fl, or section 226.38(j)(1) for 

transactions secured by real property or a 

dwellingfi, may be made to this form 

without loss of protection from civil liability 

for proper use of the model forms. 

3. Models H–4fl(A)fi[ through]fl, H–4(C), 

H–4(H), H–5,fi H–7fl, H–16, H–17(A), H– 

17(C), H–18, and H–20 through H–23fi. The 

model clauses are not included in the model 

forms although they are mandatory for 

certain transactions. Creditors using the 

model clauses when applicable to a 

transaction are deemed to be in compliance 

with the regulation with regard to that 

disclosure. 

4. Model H–4(A). This model contains the 

variable-rate model clauses applicable to 

transactions subject to section 226.18(f)[(1)] 

and is intended to give creditors considerable 

flexibility in structuring variable-rate 

disclosures to fit individual plans. The 

information about circumstances, limitations, 

and effects of an increase may be given in 

terms of the contract interest rate or the 

annual percentage rate. Clauses are shown for 

hypothetical examples based on the specific 

amount of the transaction and based on a 

representative amount. Creditors may 

preprint the variable-rate disclosures based 

on a representative amount for similar types 

of transactions, instead of constructing an 

individualized example for each transaction. 

In both representative examples and 

transaction-specific examples, creditors may 

refer either to the incremental change in rate, 

payment amount, or number of payments, or 

to the resulting rate, payment amount, or 

number of payments. For example, creditors 

may state that the rate will increase by 2 

percent, with a corresponding $150 increase 

in the payment, or creditors may state that 

the rate will increase to 16 percent, with a 

corresponding payment of $850. 

5. Model H–4(B)fl and Samples H–4(D) 

through (F)fi. [This model clause illustrates 

the variable-rate disclosure required under 

section 226.18(f)(2), which would alert 

consumers to the fact that the transaction 

contains a variable-rate feature and that 

disclosures were provided earlier]flModel 

H–4(B) illustrates, in the tabular format, the 

disclosures required under section 226.19(b) 

for adjustable-rate transactions secured by 

real property or a dwelling. The model form 

alerts consumers to risky features of the 

specific adjustable-rate mortgage program, 

and includes information on how the interest 

rate is determined and how it can change 

over time. The model form also directs the 

consumer to a Web site to obtain additional 

information on adjustable-rate programs or to 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43421 

find a list of licensed housing counselors. 

Samples H–4(D) through (F) illustrate how to 

adapt the model form and clauses contained 

in appendix H–4(B) and H–4(C) to the 

creditor’s own particular adjustable-rate 

program. Except as otherwise permitted, 

disclosures must be substantially similar in 

sequence and format to Model H–4(B). See 

comment app. H–18 regarding formatting 

details for samples H–4(D) through H–4(F).fi 

6. Model H–4(C). Th[is]flefi model 

clauseflsfi illustrate[s] flcertainfi[the] 

early disclosures required generally under 

226.19(b). [It]flTheyfi include[s] 

information on how the consumer’s interest 

rate is determined and how it can change 

over the term of the loanfl when there is 

carryover interest, a conversion feature, or a 

preferred ratefi[, and explains changes that 

may occur in the borrower’s monthly 

payment. It contains an example of how to 

disclose historical changes in the index or 

formula values used to compute interest rates 

for the preceding 15 years. The model clause 

also illustrates the disclosure of the initial 

and maximum interest rates and payments 

based on an initial interest rate (index value 

plus margin, adjusted by the amount of any 

discount or premium) in effect as of an 

identified month and year for the loan 

program disclosure and illustrates how to 

provide consumers with a method for 

calculating the monthly payment for the loan 

amount to be borrowed]. 

7. Modelflsfi H–4[D]fl(G), (H), and (K), 

and Samples H–4(I) and (J)fi. [This 

model]flModel H–4(G), andfi model 

clausefls contained in H–4(H),fi 

illustrate[s]fl, in the tabular format, the 

disclosuresfi [the adjustment notice] 

required under section 226.20(c) [and 

provides] flregarding interest rate 

adjustment notices for adjustable rate 

transactions secured by real property or a 

dwelling. Model H–4(K) illustrates an annual 

notice of interest rate change without any 

corresponding change to payment. Samples 

H–4(I) and (J) providefi examples of 

payment-change notices [and annual notices 

of interest-rate changes]fl for an interestonly, adjustable rate transaction and a hybrid 

adjustable rate transaction, respectively. 

Except as otherwise permitted, disclosures 

must be substantially similar in sequence and 

format to Models H–4(G) or H–4(K).fi 

8. Model H–5. This contains the demand 

feature clause. 

9. Model H–6. [This contains the 

assumption clause.]flReservedfi 

10. Model H–7. This contains the required 

deposit clause. 

11. Models H–8 and H–9. These models 

contain the rescission notices for a typical 

closed-end transaction and a refinancing, 

respectively. The last paragraph of each 

model form contains a blank for the date by 

which the consumer’s notice of cancellation 

must be sent or delivered. A parenthetical is 

included to address the situation in which 

the consumer’s right to rescind the 

transaction exists beyond 3 business days 

following the date of the transaction, for 

example, where the notice or material 

disclosures are delivered late or where the 

date of the transaction in paragraph 1 of the 

notice is an estimate. The language of the 

parenthetical is not optional. See the 

commentary to section 226.2(a)(25) regarding 

the specificity of the security interest 

disclosure for model form H–9. The prior 

version of model form H–9 is substantially 

similar to the current version and creditors 

may continue to use it, as appropriate. 

Creditors are encouraged, however, to use the 

current version when reordering or reprinting 

forms. 

12. Sample forms. [The sample 

forms]flSamplesfi [(]flH–4(D) through H- 

(F), H4(I) and H–4(J),fiH–10 through H- 

[15]fl12, H–17(B) and H–17(D), and H–19(D) 

through (I)fi[)] serve a different purpose than 

the model formsfl and model clausesfi. The 

samples illustrate various ways of adapting 

the model forms to the individual 

transactions described in the commentary to 

appendix H. The deletions and 

rearrangements shown relate only to the 

specific transactions described. As a result, 

the samples do not provide the general 

protection from civil liability provided by the 

model forms and clauses. 

13. Sample H–10. This sample illustrates 

an automobile credit sale. The cash price is 

$7,500 with a downpayment of $1,500. There 

is an 8% add-on interest rate and a term of 

3 years, with 36 equal monthly payments. 

The credit life insurance premium and the 

filing fees are financed by the creditor. There 

is a $25 credit report fee paid by the 

consumer before consummation, which is a 

prepaid finance charge. 

14. Sample H–11. This sample illustrates 

an installment loan. The amount of the loan 

is $5,000. There is a 12% simple interest rate 

and a term of 2 years. The date of the 

transaction is expected to be April 15, 1981, 

with the first payment due on June 1, 1981. 

The first payment amount is labelled as an 

estimate since the transaction date is 

uncertain. The odd days’ interest ($26.67) is 

collected with the first payment. The 

remaining 23 monthly payments are equal. 

15. Sample H–12. This sample illustrates a 

refinancing and consolidation loan. The 

amount of the loan is $5,000. There is a 15% 

simple interest rate and a term of 3 years. The 

date of the transaction is April 1, 1981, with 

the first payment due on May 1, 1981. The 

first 35 monthly payments are equal, with an 

odd final payment. The credit disability 

insurance premium is financed. In 

calculating the annual percentage rate, the 

U.S. Rule has been used. Since an 

itemization of the amount financed is 

included with the disclosures, the statement 

regarding the consumer’s option to receive an 

itemization is deleted. 

16. Samples H–[13]fl19(D)fi through H– 

[15]fl19(I)fi. These samples illustrate 

various mortgage transactions. They assume 

that the mortgages are subject to the Real 

Estate Settlement Procedures Act (RESPA). 

As a result, no option regarding the 

itemization of the amount financed has been 

included in the samples, because providing 

the good faith estimates of settlement costs 

required by RESPA satisfies Truth in 

Lending’s amount financed itemization 

requirement. (See [footnote 39 to § 226.18(c) 

]fl§ 226.38(j)(1)(iii)fi.) 

17. Sample H–[13]fl16fi. flThis sample 

illustrates the disclosures required under 

§ 226.32(c)(1) through (5). The sample 

illustratesfl notices,fi the amount 

borrowedfl,fi and the disclosures about 

optional insurance that are required for 

mortgage refinancings under § 226.32(c)(5). 

The sample also includes disclosures 

required under § 226.32(c)(3) when the legal 

obligation includes a balloon 

payment.fi[This sample illustrates a 

mortgage with a demand feature. The loan 

amount is $44,900, payable in 360 monthly 

installments at a simple interest rate of 

14.75%. The 15 days of interim interest 

($294.34) is collected as a prepaid finance 

charge at the time of consummation of the 

loan (April 15, 1981). In calculating the 

disclosure amounts, the minor irregularities 

provision in § 226.17(c)(4) has been used. 

The property insurance premiums are not 

included in the payment schedule. This 

disclosure statement could be used for notes 

with the 7-year call option required by the 

Federal National Mortgage Association 

(FNMA) in states where due-on-sale clauses 

are prohibited.] 

18. [Sample H–14]flModels H–19(A) 

through H–19(C)fi. fli. These model forms 

illustrate, in the tabular format, the 

disclosures required generally under 

§ 226.38(a) through 226.38(j) for transactions 

secured by real property or a dwelling. 

Creditors can use model H–19(A) for fixedrate mortgage loans subject to § 226.38; 

model H–19(B) for adjustable-rate mortgages 

subject to § 226.38; and model H–19(C) for 

mortgages that are negatively amortizing and 

subject to § 226.38. 

ii. Except as otherwise permitted, 

disclosures must be substantially similar in 

sequence and format to model forms H–19(A) 

through (C), as applicable. 

iii. Although creditors are not required to 

use a certain paper size in disclosing the 

§§ 226.19(b), 226.20(c), 226.20(d) or 226.38 

disclosures, samples H–4(D) through H–(F), 

and H–19(D) through H–19(I) are designed to 

be printed on an 8 × 111⁄2 sheet of paper. In 

addition, the following formatting techniques 

were used in presenting the information in 

the sample forms to ensure that the 

information is readable: 

A. A readable font style and font size (10- 

point Arial font style, except for the annual 

percentage rate which is shown in 16-point 

type); 

B. Sufficient spacing between lines of the 

text; 

C. Standard spacing between words and 

characters. In other words, the text was not 

compressed to appear smaller than 10-point 

type, except the headings in the tabular 

format used to provide the interest rate and 

payment disclosures required under 

§ 226.38(c), which are shown in 9-point type; 

D. Sufficient white space around the text 

of the information in each row, by providing 

sufficient margins above, below and to the 

sides of the text; 

E. Sufficient contrast between the text and 

the background. Generally, black text was 

used on white paper. 

iv. The Board is not requiring creditors to 

use the above formatting techniques in 

presenting information in the tabular format 

or scaled graph (except for the 10-point and 

16-point minimum font requirements); 

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43422 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 

however, the Board encourages creditors to 

consider these techniques when disclosing 

information in the table or scaled graph to 

ensure that the information is presented in a 

readable format.fi[This sample disclosure 

form illustrates the disclosures under 

§ 226.19(b) for a variable-rate transaction 

secured by the consumer’s principal dwelling 

with a term greater than one year. The 

sample form shows a creditor how to adapt 

the model clauses in appendix H–4(C) to the 

creditor’s own particular variable-rate 

program. The sample disclosure form 

describes the features of a specific variablerate mortgage program and alerts the 

consumer to the fact that information on the 

creditor’s other closed-end variable-rate 

programs is available upon request. It 

includes information on how the interest rate 

is determined and how it can change over 

time. Section 226.19(b)(2)(viii) permits 

creditors the option to provide either a 

historical example or an initial and 

maximum interest rates and payments 

disclosure; both are illustrated in the sample 

disclosure. The historical example explains 

how the monthly payment can change based 

on a $10,000 loan amount, payable in 360 

monthly installments, based on historical 

changes in the values for the weekly average 

yield on U.S. Treasury Securities adjusted to 

a constant maturity of one year. Index values 

are measured for 15 years, as of the first week 

ending in July. This reflects the requirement 

that the index history be based on values for 

the same date or period each year in the 

example. The sample disclosure also 

illustrates the alternative disclosure under 

§ 226.19(b)(2)(viii)(B) that the initial and the 

maximum interest rates and payments be 

shown for a $10,000 loan originated at an 

initial interest rate of 12.41 percent (which 

was in effect July 1996) and to have 2 

percentage point annual (and 5 percentage 

point overall) interest rate limitations or 

caps. Thus, the maximum amount that the 

interest rate could rise under this program is 

5 percentage points higher than the 12.41 

percent initial rate to 17.41 percent, and the 

monthly payment could rise from $106.03 to 

a maximum of $145.34. The loan would not 

reach the maximum interest rate until its 

fourth year because of the 2 percentage point 

annual rate limitations, and the maximum 

payment disclosed reflects the amortization 

of the loan during that period. The sample 

form also illustrates how to provide 

consumers with a method for calculating 

their actual monthly payment for a loan 

amount other than $10,000.] 

19. Sample H–[15]fl19(D)fi. flThis 

sample illustrates the disclosures under 

§ 226.38 for a fixed rate mortgage with a 

shared-equity feature. The loan amount is 

$210,000, payable in 36 monthly installments 

at a simple interest rate of 5.50%. The date 

of the transaction is March 26, 2009, and the 

sample assumes the average prime offer rate 

for the week of March 23, 2009 is 5.66%. 

There is a balloon payment of $202,217.84 

due in March 2012. The taxes and property 

insurance premiums are not escrowed, and 

therefore, are shown as not included in the 

interest rate and payment summary table 

required under § 226.38(c).fi[This sample 

illustrates a graduated payment mortgage 

with a 5-year graduation period and a 71⁄2

percent yearly increase in payments. The 

loan amount is $44,900, payable in 360 

monthly installments at a simple interest rate 

of 14.75%. Two points ($898), as well as an 

initial mortgage guarantee insurance 

premium of $225.00, are included in the 

prepaid finance charge. The mortgage 

guarantee insurance premiums are calculated 

on the basis of 1⁄4 of 1% of the outstanding 

principal balance under an annual reduction 

plan. The abbreviated disclosure permitted 

under § 226.18(g)(2) is used for the payment 

schedule for years 6 through 30. The 

prepayment disclosure refers to both 

penalties and rebates because information 

about penalties is required for the simple 

interest portion of the obligation and 

information about rebates is required for the 

mortgage insurance portion of the obligation.] 

20. Sample H–[16]fl19(E)fi. flThis 

sample illustrates the disclosures under 

§ 226.38 for a fixed rate mortgage with 

interest-only payments for the first 10 years. 

The loan amount is $200,000, payable in 360 

monthly installments, at a simple interest 

rate of 6.50%. The date of the transaction is 

February 26, 2009, and the sample assumes 

the average prime offer rate for the week of 

February 23, 2009 is 6.19%. The taxes and 

property insurance premiums are escrowed, 

and therefore, are shown as included in the 

total estimated monthly payment in the 

interest rate and payment summary table 

required under § 226.38(c).fi[This sample 

illustrates the disclosures required under 

§ 226.32(c). The sample illustrates the 

amount borrowed and the disclosures about 

optional insurance that are required for 

mortgage refinancings under § 226.32(c)(5). 

Creditors may, at their option, include these 

disclosures for all loans subject to § 226.32. 

The sample also includes disclosures 

required under § 226.32(c)(3) when the legal 

obligation includes a balloon payment]. 

fl21. Sample H–19(F). This sample 

illustrates the disclosures under § 226.38 for 

a step-payment mortgage with a seven-year 

step period and a 4 percent annual payment 

cap. This sample does not offer payment 

options. The consumer is required to make 

minimum payments for the first seven years; 

the minimum payments cover no principal 

and only some interest for the first two years 

and therefore, the mortgage has a negative 

amortization feature. Fully amortizing 

payments begin in year eight. The loan 

amount is $200,000, payable in 360 monthly 

installments at a simple interest rate of 

6.50%. The date of the transaction is 

February 4, 2009, and the sample assumes 

the average prime offer rate for the week of 

February 2, 2009 is 5.75%. The taxes and 

property insurance are escrowed, and 

therefore, a statement of the amount of 

estimated taxes and insurance is included in 

the interest rate and payment summary 

disclosure required under § 226.38(c)(6)(i). 

22. Sample H–19(G). This sample 

illustrates the disclosures under § 226.38 for 

a hybrid adjustable rate mortgage with a 

prepayment penalty that is in effect for the 

first 2 years. The loan amount is $200,000, 

payable in 360 monthly installments, with an 

initial discounted rate of 5.625% that is fixed 

for the first 3 years. The date of the 

transaction is February 26, 2009, and the 

sample assumes the average prime offer rate 

for the week of February 23, 2009 is 6.50%. 

The taxes and property insurance premiums 

are escrowed, and therefore, are shown as 

included in the total estimated monthly 

payment in interest rate and payment 

summary table required under § 226.38(c). 

23. Sample H–19(H). This sample 

illustrates the disclosures under § 226.38 for 

a hybrid adjustable rate mortgage. The loan 

has an interest only payment option for the 

first 5 years, and a prepayment penalty that 

is in effect for the first 2 years. The loan 

amount is $200,000, payable in 360 monthly 

installments, with an initial discounted rate 

of 6.875% that is fixed for the first 5 years. 

The date of the transaction is February 26, 

2009, and the sample assumes the average 

prime offer rate for the week of February 23, 

2009 is 4.00%. The taxes, property insurance 

and private mortgage insurance premiums 

are escrowed, and therefore, are included in 

the interest rate and payment summary table 

required under § 226.38(c). 

24. Sample H–19(I). This sample illustrates 

the disclosures under § 226.38 for an 

adjustable-rate mortgage with payment 

options. The loan amount is $200,000 and 

payable in 360 monthly installments. The 

loan has an initial 1-month introductory rate 

of 1.5% that adjusts to the maximum of 

10.5% in the second month of the loan. The 

date of the transaction is February 4, 2009, 

and the sample assumes the average prime 

offer rate for the week of February 2, 2009 is 

4.75%. The minimum payment option has an 

annual payment cap of 7.5% and can be 

made until the loan recasts at 115% of the 

original loan amount. This sample assumes 

only minimum payments are made until the 

loan recasts in June 2011, when fully 

amortizing payments of $2,402.54 would be 

required. The taxes and property insurance 

are escrowed, and therefore, a statement of 

the amount of estimated taxes and insurance 

is included in the interest rate and payment 

summary disclosure required under 

§ 226.38(c)(6)(i). 

25. Model H–20. This contains the balloon 

payment clause. 

26. Model H–21. This contains the 

introductory rate clause. 

27. Model H–22. These model clauses 

illustrate, in the tabular format, the 

disclosures required generally under 

§ 226.38(d)(2) regarding key questions about 

risk for transactions secured by real property 

or a dwelling. Except as otherwise permitted, 

disclosures must be substantially similar in 

sequence and format to model forms H– 

19(A)–(C). 

28. Model H–23. These model clauses 

illustrate the following disclosures required 

generally under § 226.38(j)(2)–(6) for 

transactions secured by real property or a 

dwelling: rebate; late payment; property 

insurance; contract reference; and 

assumption.fi 

[21]fl29fi. HRSA–500–1 9–82. Pursuant 

to section 113(a) of the Truth in Lending Act, 

Form HRSA–500–1 9–82 issued by the U.S. 

Department of Health and Human Services 

for certain student loans has been approved. 

The form may be used for all Health 

Education Assistance Loans (HEAL) with a 

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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43423 

variable interest rate that are interim student 

credit extensions as defined in Regulation Z. 

[22]fl30fi. HRSA–500–2 9–82. Pursuant 

to section 113(a) of the Truth in Lending Act, 

Form HRSA–500–2 9–82 issued by the U.S. 

Department of Health and Human Services 

for certain student loans has been approved. 

The form may be used for all HEAL loans 

with a fixed interest rate that are interim 

student credit extensions as defined in 

Regulation Z. 

[23]fl31fi. HRSA–502–1 9–82. Pursuant 

to section 113(a) of the Truth in Lending Act, 

Form HRSA–502–1 9–82 issued by the U.S. 

Department of Health and Human Services 

for certain student loans has been approved. 

The form may be used for all HEAL loans 

with a variable interest rate in which the 

borrower has reached repayment status and 

is making payments of both interest and 

principal. 

[24]fl32fi. HRSA–502–2 9–82. Pursuant 

to section 113(a) of the Truth in Lending Act, 

Form HRSA–502–2 9–82 issued by the U.S. 

Department of Health and Human Services 

for certain student loans has been approved. 

The form may be used for all HEAL loans 

with a fixed interest rate in which the 

borrower has reached repayment status and 

is making payments of both interest and 

principal. 

By order of the Board of Governors of the 

Federal Reserve System, July 24, 2009. 

Robert deV. Frierson, 

Deputy Secretary of the Board. 

Note: The following attachments A and B 

will not appear in the Code of Federal 

Regulations. 

BILLING CODE 6210–01–P 

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43424 Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 


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Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / Proposed Rules 43425 

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

BILLING CODE 6210–01–C 


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