1 

BILLING CODE: 4810-AM-P 

BUREAU OF CONSUMER FINANCIAL PROTECTION 

12 CFR Part 1026 

[Docket No. CFPB-2012-0033] 

RIN 3170-AA14 

2012 Truth in Lending Act (Regulation Z) Mortgage Servicing Proposal 

AGENCY: Bureau of Consumer Financial Protection. 

ACTION: Proposed rule with request for public comment. 

SUMMARY: The Bureau of Consumer Financial Protection (the Bureau or CFPB) is proposing 

to amend Regulation Z, which implements the Truth in Lending Act (TILA), and the official 

interpretation of the regulation. The proposed amendments implement the Dodd-Frank Wall 

Street Reform and Consumer Protection Act (the Dodd-Frank Act or DFA) provisions regarding 

mortgage loan servicing. Specifically, this proposal implements Dodd Frank Act sections 

addressing initial rate adjustment notices for adjustable-rate mortgages (ARMs), periodic 

statements for residential mortgage loans, and prompt crediting of mortgage payments and 

response to requests for payoff amounts. The proposed revisions also amend current rules 

governing the scope, timing, content, and format of current disclosures to consumers occasioned 

by the interest rate adjustments of their variable-rate transactions. 

Published elsewhere in today’s Federal Register, the Bureau proposes companion 

regulations regarding mortgage servicing through amendments to Regulation X, which 

implements the Real Estate Settlement Procedures Act (RESPA). 

DATES: Comments must be received on or before October 9, 2012, except that comments on 

the Paperwork Reduction Act analysis in part IX of the Federal Register notice must be received 
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on or before [INSERT DATE THAT IS 60 DAYS FROM THE DATE OF PUBLICATION IN 

THE FEDERAL REGISTER]. 

ADDRESSES: You may submit comments identified by Docket No. CFPB-2012-0033 or RIN 

3170-AA14, by any of the following methods: 

 Electronic: http://www.regulations.gov. Follow the instructions for submitting 

comments. 

 Mail/Hand Delivery/Courier: Monica Jackson, Office of the Executive Secretary, 

Bureau of Consumer Financial Protection, 1700 G Street, NW, Washington, DC 20552. 

Instructions: All submissions must include the agency name and docket number or 

Regulatory Information Number (RIN) for this rulemaking. In general, all comments received 

will be posted without change to http://www.regulations.gov. In addition, comments will be 

available for public inspection and copying at 1700 G Street, NW, Washington, DC 20552 on 

official business days between the hours of 10 a.m. and 5 p.m. Eastern Time. You can make an 

appointment to inspect the documents by telephoning (202) 435-7275. 

 All comments, including attachments and other supporting materials, will become part of 

the public record and subject to public disclosure. Sensitive personal information, such as 

account numbers or social security numbers, should not be included. Comments will not be 

edited to remove any identifying or contact information. 

e-Rulemaking Initiative 

 The Bureau is working with the Cornell e-Rulemaking Initiative (CeRI) on a pilot 

project, Regulation Room, to use different web technologies and approaches to enhance public 

understanding and participation in Bureau rulemakings and to evaluate the advantages and 

disadvantages of these techniques. The TILA and RESPA proposed rulemakings on mortgage 
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servicing are the subject of the project. The Bureau has undertaken this project to increase 

effective public involvement in the rulemaking process and strongly encourages all parties 

interested in this rulemaking to visit the Regulation Room website, 

http://www.regulationroom.org, to learn about the Bureau’s proposed mortgage servicing rules 

and the rulemaking process, to discuss the issues in the rules with other persons and groups, and 

to participate in drafting a summary of that discussion that CeRI will submit to the Bureau. 

 Note that Regulation Room is sponsored by CeRI, and is not an official United States 

Government website. Participating in the discussion on that site will not result in individual 

formal comments that will be included in the Bureau’s rulemaking record. If you would like to 

add a formal comment, please do so through the means identified above. The Bureau anticipates 

that CeRI will submit to the Bureau’s rulemaking docket a summary of the discussion that occurs 

on the Regulation Room site and that participants will have a chance to review a draft and 

suggest changes before the summary is submitted. For questions about this project, please 

contact Whitney Patross, Attorney, Office of Regulations, at (202) 435-7700. 

FOR FURTHER INFORMATION CONTACT: 

Regulation Z (TILA): Whitney Patross, Attorney and Marta Tanenhaus, Senior Counsel at 

(202) 435-7700; Office of Regulations; Division of Research, Markets, and Regulations; Bureau 

of Consumer Financial Protection; 1700 G Street, NW; Washington, DC 20552. 

Regulation X (RESPA): Jane Gao, Mitchell E. Hochberg, and Michael Scherzer, Counsels at 

(202) 435-7700; Office of Regulations; Division of Research, Markets, and Regulations; Bureau 

of Consumer Financial Protection; 1700 G Street, NW; Washington, DC 20552. 

SUPPLEMENTARY INFORMATION: 

I. Overview 
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A. Background 

The recent financial crisis exposed pervasive consumer protection problems across major 

segments of the mortgage servicing industry. As millions of borrowers fell behind on their 

loans, many servicers failed to provide the level of service necessary to serve the needs of those 

borrowers. Many servicers simply had not made the investments in resources and infrastructure 

necessary to service large numbers of delinquent loans. Existing weaknesses in servicer 

practices, including inadequate recordkeeping and document management and lack of oversight 

of service providers, made it harder to sort out borrower problems to achieve optimal results. In 

addition, many servicers took short cuts that made things even worse. As one review of fourteen 

major servicers found, companies “emphasize[d] speed and cost efficiency over quality and 

accuracy” in their foreclosure processes.1

The Dodd-Frank Act (Public Law 111-203, July 21, 2010) adopts several new servicing 

protections.2 The Bureau has the authority to promulgate regulations to implement the new 

servicing protections. These changes will significantly improve disclosures to make it easier for 

consumers to monitor their mortgage loans and servicers’ activities. The changes also address 

critical servicer practices, including error resolution, prompt crediting of payments, and “forceplacing” insurance where borrowers have allowed their hazard insurance policies to lapse. 

The Dodd-Frank Act also gives the Bureau discretionary authority to develop additional 

servicing rules. The Bureau proposes to use this authority to adopt requirements relating to 

reasonable information management policies and procedures, early intervention with delinquent 

borrowers, continuity of contact, and procedures for evaluating and responding to loss mitigation 

 

1

 Federal Reserve System, Office of the Comptroller of the Currency, & Office of Thrift Supervision, Interagency 

Review of Foreclosure Policies and Practices, at 5 (Apr. 2011) (Interagency Foreclosure Report), available at 

http://www.occ.gov/news-issuances/news-releases/2011/nr-occ-2011-47a.pdf. 2 See Dodd-Frank Act sections 1418, 1420, 1463, and 1464. 
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applications when the servicer makes loss mitigation options available in the ordinary course of 

business. These proposals address fundamental problems that underlie many consumer 

complaints and recent regulatory and enforcement actions. The Bureau believes these changes 

will reduce avoidable foreclosures and improve general customer service. The proposals cover 

nine major topics, as summarized below. 

The Bureau’s proposal is split into two parts because Congress imposed some 

requirements under TILA and some under RESPA.3

 This proposed rule would amend 

Regulation Z, which implements TILA, to implement provisions concerning adjustable-rate 

mortgage (ARM) disclosures, payoff statements, and payment crediting under sections 1418, 

1420, and 1464 of the Dodd-Frank Act and to harmonize similar existing requirements. 

B. Scope of Coverage

The proposed rules generally apply to closed-end mortgage loans, with certain 

exceptions. Under the proposed amendments to Regulation X, open-end lines of credit and 

certain other loans, such as construction loans and business-purpose loans, are excluded. Under 

the proposed amendments to Regulation Z, the periodic statement and ARMs disclosure 

provisions apply only to closed-end mortgage loans, but the prompt crediting and payoff 

statement provisions apply both to open-end and closed-end mortgage loans. In addition, reverse 

mortgages and timeshares are excluded from the periodic statement requirement, and certain 

construction loans are excluded from the ARM disclosure requirements. As discussed below, the 

Bureau is seeking comment on whether to exempt small servicers from certain requirements or 

modify certain requirements for small servicers. 

C. Summary

 

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 Note that TILA and RESPA differ in their terminology. Consumers and creditors are the defined terms used in 

Regulation Z. Borrowers and lenders are the defined terms used in Regulation X. 
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The proposals cover nine major topics, summarized below. More details can be found in 

the proposed rules, which are split into two notices issued under the Truth in Lending Act 

(TILA) and Real Estate Settlement Procedures Act (RESPA), respectively. 

1. Periodic billing statements. The Dodd-Frank Act generally mandates that servicers of 

closed-end residential mortgage loans (other than reverse mortgages) must send a periodic 

statement for each billing cycle. These statements must meet the timing, form, and content 

requirements provided for in the rule. The proposal contains sample forms that servicers could 

use. The periodic statement requirement generally would not apply for fixed-rate loans if the 

servicer provides a coupon book, so long as the coupon book contains certain information 

specified in the rule and certain other information is made available to the consumer. The 

proposal also includes an exception for small servicers that service 1000 or fewer mortgage loans 

and service only mortgage loans that they originated or own. 

2. Adjustable-rate mortgage interest-rate adjustment notices. Servicers would have to 

provide a consumer whose mortgage has an adjustable rate with a notice 60 to 120 days before 

an adjustment which causes the payment to change. The servicer would also have to provide an 

earlier notice 210 to 240 days prior to the first rate adjustment. This first notice may contain an 

estimate of the rate and payment change. Other than this initial notice, servicers would no longer 

be required to provide an annual notice if a rate adjustment does not result in an increase in the 

monthly payment. The proposal contains model and sample forms that servicers could use. 

3. Prompt payment crediting and payoff payments. As required by the Dodd-Frank Act, 

servicers must promptly credit payments from borrowers, generally on the day of receipt. If a 

servicer receives a payment that is less than a full contractual payment, the payment may be held 

in a suspense account. When the amount in the suspense account covers a full installment of 
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principal, interest, and escrow (if applicable), the proposal would require the servicer to apply 

the funds to the oldest outstanding payment owed. A servicer also would be required to send an 

accurate payoff balance to a consumer no later than seven business days after receipt of a written 

request from the borrower for such information. 

4. Force-placed insurance. As required by the Dodd-Frank Act, servicers would not be 

permitted to charge a borrower for force-placed insurance coverage unless the servicer has a 

reasonable basis to believe the borrower has failed to maintain hazard insurance and has 

provided required notices. One notice to the borrower would be required at least 45 days before 

charging for forced-place insurance coverage, and a second notice would be required no earlier 

than 30 days after the first notice. The proposal contains model forms that servicers could use. 

If a borrower provides proof of hazard insurance coverage, then the servicer would be required to 

cancel any force-placed insurance policy and refund any premiums paid for periods in which the 

borrower’s policy was in place. In addition, if a servicer makes payments for hazard insurance 

from a borrower’s escrow account, a servicer would be required to continue those payments 

rather than force-placing a separate policy, even if there is insufficient money in the escrow 

account. The rule would also provide that charges related to forced place insurance (other than 

those subject to State regulation as the business of insurance or authorized by federal law for 

flood insurance) must relate to a service that was actually performed. Additionally, such charges 

would have to bear a reasonable relationship to the servicer’s cost of providing the service. 

5. Error resolution and information requests (RESPA proposal). Pursuant to the DoddFrank Act, servicers would be required to meet certain procedural requirements for responding to 

information requests or complaints of errors. The proposal defines specific types of claims 

which constitute an error, such as a claim that the servicer misapplied a payment or assessed an 
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improper fee. A borrower could assert an error either orally or in writing. Servicers could 

designate a specific phone number and address for borrowers to use. Servicers would be 

required to acknowledge the request or complaint within five days. The would have to correct or 

respond to the borrower with the results of the investigation, generally within 30 to 45 days. 

Further, servicers generally would be required to acknowledge borrower requests for information 

and either provide the information or explain why the information is not available within a 

similar amount of time. A servicer would not be required to delay a scheduled foreclosure sale 

to consider a notice of error unless the error relates to the servicer’s improperly proceeding with 

a foreclosure sale during a borrower’s evaluation for alternatives to foreclosure. 

6. Information management policies and procedures (RESPA proposal). Servicers would 

be required to establish reasonable information management policies and procedures. The 

reasonableness of a servicer’s policies and procedures would take into account the servicer’s 

size, scope, and nature of its operations. A servicer’s policies and procedures would satisfy the 

rule if the servicer regularly achieves the document retention and servicing file requirements, as 

well as certain objectives specified in the rule. Examples of such objectives include providing 

accurate and timely information to borrowers and the courts or enabling service personnel to 

have prompt access to documents and information submitted in connection with loss mitigation 

applications. In addition, a servicer must retain records relating to each mortgage until one year 

after the mortgage is discharged or servicing is transferred and must create a mortgage servicing 

file for each loan containing certain specified documents and information. 

7. Early intervention with delinquent borrowers (RESPA proposal). Servicers would be 

required to make good faith efforts to notify delinquent borrowers of loss mitigation options. If a 

borrower is 30 days late, the proposal would require servicers to make a good faith effort to 
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notify the borrower orally and to let the borrower know that loss mitigations options may be 

available. If the borrower is 40 days late, the servicer would be required to provide the borrower 

with a written notice with certain specific information, including examples of loss mitigation 

options available, if applicable, and information on how to obtain more information about loss 

mitigation options. The notice would also provide information to the borrower about the 

foreclosure process. The rule contains model language servicers could use for these notices. 

8. Continuity of contact with delinquent borrowers (RESPA proposal). Servicers would 

be required to provide delinquent borrowers with access to personnel to assist them with loss 

mitigation options where applicable. The proposal would require servicers to assign dedicated 

contact personnel for a borrower no later than five days after providing the early intervention 

notice. Servicers would be required to establish reasonable policies and procedures designed to 

ensure that the servicer personnel perform certain specified functions where applicable, such as 

access the borrower’s records and provide the borrower with information about how and when to 

apply for a loss mitigation option and about the status of the application. 

9. Loss mitigation procedures (RESPA proposal). Servicers that offer loss mitigation 

options to borrowers would be required to implement procedures to ensure that complete loss 

mitigation applications are reasonably evaluated before proceeding with a scheduled foreclosure 

sale. The proposal would require servicers to exercise reasonable diligence to secure information 

or documents required to make an incomplete loss mitigation application complete. In certain 

circumstances, this could include notifying the borrower within five days of receiving an 

incomplete application. Within 30 days of receiving a borrower’s complete application, the 

servicer would be required to evaluate the borrower for all available options, and, if the denial 

pertains to a requested loan modification, notify the borrower of the reasons for the servicer’s 
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decision, and provide the borrower with at least a 14-day period within which to appeal the 

decision. The proposal would require that appeals be decided within 30 days by different 

personnel than those responsible for the initial decision. A servicer that receives a complete 

application for a loss mitigation option could not proceed with a foreclosure sale unless (i) the 

servicer had denied the borrower’s application and the time for any appeal had expired; (ii) the 

servicer had offered a loss mitigation option which the borrower declined or failed to accept 

within 14 days of the offer; or (iii) the borrower failed to comply with the terms of a loss 

mitigation agreement. The proposal would require that deadlines for submitting an application 

for a loss mitigation option be no earlier than 90 days before a scheduled foreclosure sale. 

D. Small Servicers 

 As discussed below, the Bureau convened a Small Business Regulatory Enforcement 

Fairness Act (SBREFA) panel to assess the impact of the possible rules on small servicers and to 

help the Bureau determine to what extent it may be appropriate to consider adjusting these 

standards for small servicers, to the extent permitted by law. Informed by this process, the 2012 

TILA Servicing Proposal contains an exemption from the periodic statement requirement for 

certain small servicers. The Bureau seeks comment on whether other exemptions might be 

appropriate for small servicers. 

E. Effective Date 

As discussed below, the Bureau is seeking comment on when this final rule should be 

effective. Because the final rule will provide important benefits to consumers, the Bureau seeks 

to make it effective as soon as possible. However, the Bureau understands that the final rules 

will require servicers to make revisions to their software and to retrain their staff. In addition, 

some entities will be required to implement other Dodd-Frank Act provisions, which are subject 
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to separate rulemaking deadlines under the statute and will have separate effective dates. 

Therefore, the Bureau is seeking comment on how much time industry needs to make these 

changes. 

II. Background

A. Overview of the Mortgage Servicing Market and Market Failures 

The mortgage market is the single largest market for consumer financial products and 

services in the United States, with approximately $10.3 trillion in loans outstanding.4

 Mortgage 

servicers play a vital role within the broader market by undertaking the day-to-day management 

of mortgage loans on behalf of lenders who hold the loans in their portfolios or (where a loan has 

been securitized) investors who are entitled to the loan proceeds.5 Over 60% of mortgage loans 

are serviced by mortgage servicers for investors. 

Servicers’ duties typically include billing borrowers for amounts due, collecting and 

allocating payments, maintaining and disbursing funds from escrow accounts, reporting to 

creditors or investors, and pursuing collection and loss mitigation activities (including 

foreclosures and loan modifications) with respect to delinquent borrowers. Indeed, without 

 

4

 Inside Mortgage Finance, Outstanding 1-4 Family Mortgage Securities, Mortgage Market Statistical Annual 

(2012). For general background on the market and the recent mortgage crisis, see the 2012 TILA-RESPA Proposal 

available at http://www.consumerfinance.gov/knowbeforeyouowe/. 

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 As of the end of 2011, approximately 33% of outstanding mortgage loans were held in portfolio, 57% of mortgage 

loans were owned through mortgage-backed securities issued by government sponsored enterprises (GSEs), and 

11% of loans were owned through private label mortgage-backed securities. Inside Mortgage Finance, Issue 

2012:13, at 11 (March 30, 2012). A securitization results in the economic separation of the legal title to the 

mortgage loan and a beneficial interest in the mortgage loan obligation. In a securitization transaction, a 

securitization trust is the owner or assignee of a mortgage loan. An investor is a creditor of the trust and is entitled 

to cash flows that are derived from the proceeds of the mortgage loans. In general, certain investors (or an insurer 

entitled to act on behalf of the investors) may direct the trust to take action as the owner or assignee of the mortgage 

loans for the benefit of the investors or insurers. See, e.g., Adam Levitin & Tara Twomey, Mortgage Servicing, 28 

Yale J. on Reg., 1, 11 (2011) (Levitin & Twomey). 
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dedicated companies to perform these activities, it is questionable whether a secondary market 

for mortgage-backed securities would exist in this country.6

Several aspects of the mortgage servicing business make it uniquely challenging for 

consumer protection purposes. Given the nature of their activities, servicers can have a direct 

and profound impact on borrowers. However, industry compensation practices and the structure 

of the mortgage servicing industry create wide variations in servicers’ incentives to provide 

effective customer service to borrowers. Also, because borrowers cannot choose their own 

servicers, it is particularly difficult for them to protect themselves from shoddy service or 

harmful practices. 

Mortgage servicing is performed by banks, thrifts, credit unions, and non-bank servicers 

under a variety of business models. In some cases, creditors service mortgage loans that they 

originate or purchase and hold in portfolio. Other creditors sell the ownership of the underlying 

mortgage loan, but retain the mortgage servicing rights in order to retain the relationship with the 

borrower, as well as the servicing fee and other ancillary income. In still other cases, servicers 

have no role at all in origination or loan ownership, but rather purchase mortgage servicing rights 

on securitized loans or are hired to service a portfolio lender’s loans.7

 

These different servicing structures can create difficulties for borrowers if the servicer 

makes mistakes, fails to invest sufficient resources in its servicing operations, or does not 

properly service the borrower’s loan. Although the mortgage servicing industry has numerous 

participants, the industry is highly concentrated, with the five largest servicers servicing 

 

6 See, e.g., Levitin & Twomey at 11 (“All securitizations involved third-party servicers . . . [m]ortgage servicers 

provide the critical link between mortgage borrowers and the SPV and RMBS investors, and servicing arrangements 

are an indispensable part of securitization.”). 

7 See, e.g., Diane Thompson, Foreclosing Modifications: How Servicer Incentives Discourage Loan Modifications, 

86 Wash. L. Rev. 755, 763 (2011) (Thompson), available at: http://digital.law.washington.edu/dspacelaw/bitstream/handle/1773.1/1074/86WLR755.pdf. 
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approximately 55% percent of outstanding mortgage loans in this country.8

 Small servicers 

generally operate in discrete segments of the market, for example, by specializing in servicing 

delinquent loans, or by servicing loans that they originate.9 

Contracts between the servicer and the mortgage loan owner specify the rights and 

responsibilities of each party. In the context of securitized loans, the contracts may require the 

servicer to balance the competing interests of different classes of investors when borrowers 

become delinquent. Certain provisions in servicing contracts may limit the servicer’s ability to 

offer certain types of loan modifications to borrowers. Such contracts also may limit the 

circumstances under which investors can transfer servicing rights to a different servicer. 

Compensation structures vary somewhat for loans held in portfolio and securitized 

loans,10 but have tended to make pure mortgage servicing (where the servicer has no role in 

origination) a high-volume, low-margin business in which servicers have little incentive to invest 

in customer service. A servicer will expect to recoup its investment in purchasing mortgage 

servicing rights and earn a profit through a net servicing fee (which is expressed as a constant 

rate assessed on unpaid mortgage balances),11 fees assessed on borrowers, interest float on 

payment accounts between receipt and disbursement, and cross-marketing other products and 

 

8 See, e.g, Top Mortgage Servicers in 2011 (Inside Mortg. Fin., Bethesda, Md.), Mar. 30, 2012, at 12. As of the end 

of the fourth quarter of 2011, the top 5 largest servicers serviced $5.66 trillion of mortgage loans. See id. 9 See, e.g., Fitch Ratings, U.S. Residential and Small Balance Commercial Mortgage Servicer Rating Criteria, at 14-

15 (Jan. 31, 2011), available at www.fitchratings.com. 10 At securitization, the cash flow that was part of interest income is bifurcated between the loan and the mortgage 

servicing right (MSR). The MSR represents the present value of all the cash flows, both positive and negative, 

related to servicing a mortgage. Prime MSRs are largely created by the GSE minimum servicing fee rate, which is 

calculated as 25 basis points (bps) per annum. The servicing fee rate is typically paid to the servicer monthly and 

the monthly amount owed is calculated by multiplying the pro rata portion of the servicing fee rate by the stated 

principal balance of the mortgage loan at the payment due date. Accounting rules require that a capitalized asset be 

created if the “compensation” for servicing (including float/ancillary) exceeds “adequate compensation.” For loans 

held in portfolio, there is no bifurcation of the interest income from the loan. The owner of the loan simply 

negotiates pricing, terms, and standards with the servicer, which, at larger institutions, is typically a separate affiliate 

or subsidiary of the owner of the loans. PowerPoint Presentation, Keefe, Bruyette & Woods, Inc., KBW Mortgage 

Matters: Mortgage Servicing Primer, 3 (April 17, 2012). 11 See, e.g., Thompson, 86 Wash. L. Rev. 755, 767. 
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services to borrowers. Under this business model, servicers act primarily as payment collectors 

and processors, and provide minimal customer service to ensure profitability. Servicers also 

have an incentive to look for opportunities to impose fees on borrowers to enhance revenues and 

are generally not subject to market discipline because consumers have no opportunity to switch 

providers. Additionally, servicers may have financial incentives to foreclose rather than engage 

in loss mitigation.12

These attributes of the servicing market created problems for certain borrowers even prior 

to the national mortgage crisis. For example, borrowers experienced problems with mortgage 

servicers even during regional mortgage market downturns that preceded the mortgage crisis.13 

Borrowers were subjected to improper fees that servicers had no reasonable basis to impose on 

borrowers, improper force-placed insurance practices, and improper foreclosure and bankruptcy 

practices.14 

When the mortgage crisis erupted, many servicers were ill-equipped to handle the high 

volumes of delinquent mortgages, loan modification requests, and foreclosures they were 

required to process. These servicers lacked the infrastructure, trained staff, controls, and 

procedures needed to manage effectively the flood of delinquent mortgages they were forced to 

handle.15 

 

12 Why Servicers Foreclose When They Should Modify and Other Puzzles of Servicer Behavior, NCLC p.v (October 

2009), (“Servicers, unlike investors or homeowners, do not generally lose money on foreclosure. Servicers may 

even make money on a foreclosure.”), Diane Thompson, The Need for National Mortgage Servicing Standards (May 

12, 2011), at 15 (“...modification will also likely reduce future income, cost more in the present in staffing, and 

delay recovery of expenses. Moreover, the foreclosure process itself generates significant income for servicers.”)

13 See Problems in Mortgage Servicing from Modification to Foreclosure: Hearings Before the Comm. on Banking, 

Housing and Urban Affairs, S. Hrg. 111-987, 111th Cong. 53-54 (2010) (statement of Thomas J. Miller, Iowa 

Attorney General) (Miller Testimony). See also, Kurt Eggert, Limiting Abuse and Opportunism by Mortgage 

Servicers 15:3 Housing Policy Debate (2004), available at http://ssrn.com/abstract=992095 14 See Kurt Eggert, Limiting Abuse and Opportunism by Mortgage Servicers 15:3 Housing Policy Debate (2004), 

available at http://ssrn.com/abstract=992095 (collecting cases). 15 See, e.g., 
15 

Consumer harm has manifested in many different areas. Major servicers have violated 

applicable laws (including State foreclosure laws), ignored investor loss mitigation requirements, 

and breached investor servicing agreements.16 For example, Bank of America, Citibank, HSBC 

Bank, JPMorgan Chase Bank, N.A., Metlife Bank, N.A., PNC Bank, N.A., U.S. Bank N.A., and 

Wells Fargo Bank, N.A., which together account for almost 57% of all mortgage servicing have 

admitted that they (1) filed foreclosure documents that failed to comply with applicable law, (2) 

failed to devote sufficient financial, staffing and managerial resources to proper administration of 

foreclosures processes, (3) failed to devote to its foreclosure processes adequate oversight, 

internal controls, policies and procedures, compliance risk management, internal audit, third 

party management, and training, and (4) failed to sufficiently oversee outside counsel and other 

third-party providers handling foreclosure-related services.17 Congress has held significant 

detailed hearings on the issue of servicer “robo-signing” of foreclosure related documentation.18 

Servicers have also misled, or failed to communicate with, borrowers, lost or mishandled 

borrower-provided documents supporting loan modification requests, and generally provided 

inadequate service to delinquent borrowers. These problems became pervasive in broad 

segments of the mortgage servicing industry and had profound impacts on borrowers, 

particularly delinquent borrowers.19

 

16 Peter P. Swire, What the Fair Credit Reporting Act Should Teach Us About Mortgage Servicing, Ohio State 

Public Law Working Paper No. 160 (Nov. 16, 2011), available at SSRN: http://ssrn.com/abstract=1960644. 

17 OCC Press Release, OCC Takes Enforcement Action Against Eight Servicers for Unsafe and Unsound 

Foreclosure Practices (April 13, 2011), available at http://www.occ.treas.gov/news-issuances/news-releases/2011/nrocc-2011-47.html. In addition to eight servicers, the OCC obtained consent orders against two service providers: 

MERSCORP and LPS. 

18 See, e.g., Problems in Mortgage Servicing from Modification to Foreclosure: Hearings Before the Comm. on 

Banking, Housing and Urban Affairs, S. Hrg. 111-987, 111th Cong. 53-54 (2010) (statement of Diane E. Thompson, 

NCLC) (Thompson Testimony). 

19 See U.S. Government Accountability Office, Troubled Asset Relief Program: Further Actions Needed to Fully 

and Equitably Implement Foreclosure Mitigation Actions, at 14-16 (June 2010); Miller Testimony at 54. 
16 

The Bureau further understands from mortgage investors that there is a pervasive belief 

that servicers are making discretionary decisions based on the best interests of the servicer rather 

than to achieve results that will benefit owners or assignees of mortgages loans. When servicers 

hold a second lien that is behind a first lien owned by a different owner or assignee, one study 

has found a lower likelihood of liquidation and modification, and a higher likelihood of inaction 

by a servicer.20 Specifically, “liquidation and modification of securitized first mortgages are 

60% [to] 70% less likely respectively and no action is 13% more likely when the servicer of that 

securitized first mortgage holds on its portfolio the second lien attached to the first mortgage.”21 

These failures to take actions that may benefit both consumers and owners or assignees of first 

lien mortgage loans harm consumers. 

The mortgage servicing industry, however, is not monolithic. Some servicers provide 

high levels of customer service. Some of these servicers may be compensated by investors in a 

way that incentivizes them to provide high levels of customer service in order to optimize 

investor outcomes. Other servicers provide high levels of customer service because they rely on 

providing other products and services to consumers and thus have an interest in preserving their 

reputations and relationships with their consumers. For example, as discussed further below, 

small servicers that the Bureau consulted as part of a process required under SBREFA described 

their businesses as requiring a “high touch” model of customer service both to ensure loan 

performance and maintain a strong reputation in their local communities.22

B. Mortgage Servicing Consumer Protection Regulation Before the Recent Crisis 

 

20 Sumit Agarwal et. Al, Second Liens and the Holdup Problem in First Mortgage Renegotiation (December 2011), 

available at http://ssrn.com/abstract=2022501. 21 Id. 22 See U.S. Consumer Fin. Prot., Bureau, Final Report of the Small Business Review Panel on CFPB’s Proposals 

Under Consideration for Mortgage Servicing Rulemaking (June 11, 2012) (“SBREFA Final Report”), available at: 

http://www.consumerfinance.gov. 
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 Prior to the adoption of the Dodd-Frank Act, the mortgage servicing industry was subject 

to limited Federal consumer financial protection regulation. RESPA set forth basic protections 

with respect to mortgage servicing that were implemented by the U.S. Department of Housing 

and Urban Development (HUD). These included required disclosures at application concerning 

whether the lender intended to service the mortgage loan and disclosures upon an actual transfer 

of servicing rights.23 RESPA further imposed substantive and disclosure requirements for 

escrow account management and required servicers to respond to “qualified written requests” – 

written error resolution or information requests relating to a restricted definition of the 

“servicing” of the borrower’s mortgage loan.24 

TILA set forth requirements on creditors that were implemented by servicers, including 

disclosures regarding interest rate adjustments on adjustable rate mortgage loans. Regulation Z, 

which implements TILA, was amended by the Board of Governors of the Federal Reserve 

System (the Board) to include certain limited requirements directly on servicers, such as 

requirements to timely credit payments, provide payoff balances and prohibit pyramiding of late 

fees.25 Servicers also had some obligations under other Federal laws, including, for example, the 

Servicemembers Civil Relief Act.26

 Although TILA and RESPA did not impose many requirements on servicers, servicers 

were still required to navigate overlapping requirements governing their servicing 

responsibilities. In addition to Federal law, servicers were required to consider the impact of 

State and even local regulation on mortgage servicing. Servicers also had to comply with 

investor requirements to the extent they serviced loans owned or guaranteed by various types of 

 

23 See 12 U.S.C. 2605(a)-(e). 24 See 12 U.S.C. 2605(e) and 2609. 25 See 12 CFR 1026.36(c). 26 See 50 U.S.C. App. 501 et seq.
18 

entities. These include (1) servicing guidelines required by Federal National Mortgage 

Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), 

together known as the government-sponsored enterprises (GSEs), as well as servicing guidelines 

required by the Government National Mortgage Association (Ginnie Mae); (2) government 

insured program guidelines issued by the Federal Housing Administration (FHA), Department of 

Veterans Affairs (VA), and the Rural Housing Service; (3) contractual agreements with investors 

(such as pooling and servicing agreements and subservicing contracts); and (4) bank or 

institution policies. All those requirements remain in effect today and going forward. 

C. The National Mortgage Settlement and Other Regulatory Actions

In response to the unprecedented mortgage crisis and pervasive problems in mortgage 

servicing, including the systemic violation of State foreclosure laws by many of the largest 

servicers, State and Federal regulators have engaged in a number of individual servicing related 

enforcement and regulatory actions over the last few years and have begun discussions about 

comprehensive national standards. 

For example, 49 State attorneys general,27 joined by numerous Federal agencies including 

the Bureau, entered into a National Mortgage Settlement (National Mortgage Settlement) with 

the nation’s five largest servicers in February 2012.28 The National Mortgage Settlement applies 

to loans held in portfolio and serviced by the five largest servicers. Loans owned by GSEs, 

private investors, or smaller servicers are not covered by the settlement. 

Exhibit A to each of the settlements is a Settlement Term Sheet, which sets forth 

standards that each of the five largest servicers must follow to comply with the terms of the 

 

27 Oklahoma elected not to join the settlement. 

28 The National Mortgage Settlement is available at http://www.nationalmortgagesettlement.com/. 

The five servicers subject to the settlement are Bank of America, JP Morgan Chase, Wells Fargo, CitiMortgage, and 

Ally/GMAC. 
19 

settlement.29 The settlement standards contained in the Settlement Term Sheet are sub-divided 

into the following eight categories: (1) foreclosure and bankruptcy information and 

documentation; (2) third-party provider oversight; (3) bankruptcy; (4) loss mitigation; (5) 

protections for military personnel; (6) restrictions on servicing fees; (7) force-placed insurance; 

and (8) general servicer duties and prohibitions. 

In addition to the settlement, other Federal regulatory agencies have issued guidance on 

mortgage servicing and loan modifications,30 conducted coordinated reviews of the nation’s 

largest servicers,31 and taken enforcement actions against individual companies.32 The Bureau 

and other Federal agencies have also engaged since spring 2011 in informal discussions about 

the potential development of national mortgage servicing standards through regulations and 

guidance. 

The Bureau’s proposed rules under Regulation Z and X represent another important step 

towards establishing uniform minimum national standards. When adopted in final form, the 

Bureau’s rules will apply to all mortgage servicers, whether depository institutions or nondepository institutions, and to all segments of the mortgage market, regardless of the ownership 

 

29 See http://www.nationalmortgagesettlement.com/. 30 Office of the Comptroller of the Currency, Bulletin 2011-29 (June 30, 2011), available at: 

http://www.occ.gov/news-issuances/bulletins/2011/bulletin-2011-29.html; Letter from Edward J. DeMarco, Acting 

Director of FHFA, to Hon. Elijah E. Cummings, Ranking Member, Committee on Oversight and Government 

Reform, U.S. House of Representatives (Jan. 20, 2012), available at 

http://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdf; Guidance, Home Affordable Modification 

Program, available at: https://www.hmpadmin.com/portal/programs/guidance.jsp. 

FHFA, Frequently Asked Questions—Servicing Alignment Initiative, available at: 

http://www.fhfa.gov/webfiles/21191/FAQs42811Final.pdf. 31 See Interagency Foreclosure Report, a joint review of foreclosure processing of 14 federally regulated mortgage 

servicers during the fourth quarter of 2010 by the Federal Reserve System, Office of the Comptroller of the 

Currency, and Office of Thrift Supervision.. 

32 See Interagency Foreclosure Report at 5; Federal Reserve Board, Press Release (May 24, 2012), available at: 

http://www.federalreserve.gov/newsevents/press/enforcement/20120524a.htm; Federal Reserve Board, Press 

Release (February 27, 2012), available at: 

http://www.federalreserve.gov/newsevents/press/enforcement/20120227a.htm; Office of the Comptroller of the 

Currency, News Release 2011-47 (April 13, 2011), available at: http://www.occ.gov/news-issuances/newsreleases/2011/nr-occ-2011-47.html.
20 

of the loan. The proposals focus both on implementing the specific mortgage servicing 

requirements of the Dodd-Frank Act and on addressing broader systemic problems that the 

Bureau believes are critical to ensure that the mortgage servicing market functions to serve 

consumer needs. To that end, the proposed TILA and RESPA mortgage servicing rules 

incorporate elements from four categories of the National Mortgage Settlement—(1) foreclosure 

and bankruptcy information and documentation, (4) loss mitigation, (6) restrictions on servicing 

fees, and (7) force-placed insurance. In addition, the proposed requirement to maintain 

reasonable information management policies and procedures addresses oversight of service 

providers, which impacts category (2) of the settlement. 

The Bureau continues to consider whether to incorporate other settlement standards into 

rules or guidance, either alone or in conjunction with other Federal regulatory agencies; certain 

requests for comment in this proposal reflect these considerations. The Bureau is also continuing 

ongoing discussions with other regulators to ensure appropriate coordination of rulemaking and 

other initiatives relating to mortgage servicing issues. 

D. The Statutory Requirements and Additional Proposals

The Dodd-Frank Act mandates several protections for homeowners in the servicing of 

their loans. The Act requires new disclosures, specifically periodic statements (unless coupon 

books are provided in certain circumstances), notices prior to the reset of adjustable-rate 

mortgages, and force-placed insurance notices. These disclosures are designed to provide 

consumers with comprehensive and comprehensible information when they need it and in a form 

they can use, so they can better manage their obligations and avoid unnecessary problems. 

The Dodd-Frank Act also imposes new requirements on servicers to respond in a timely 

way to borrowers who assert that their servicer made an error. The statute also requires servicers 
21 

to respond in a timely way to borrower requests for information. 

The Dodd-Frank Act contains requirements relating to the prompt crediting of payments, 

so that consumers are not wrongly penalized with late fees or other fees because servicers did not 

credit their payments quickly. The statute also requires servicers to provide timely responses to 

consumer requests for payoff amounts, so consumers can get this information when they need it, 

such as when refinancing. 

 The Bureau is proposing additional standards to improve the way servicers treat all 

borrowers, including delinquent borrowers. Some servicers have made it very difficult for 

delinquent borrowers to explore and take advantage of potential alternatives to foreclosure. For 

example, servicers have frequently neglected to reach out or respond to such borrowers to 

discuss alternatives to foreclosure, lost or misplaced the documents of borrowers who have 

sought modifications or other relief, failed to keep track of borrower communications, and forced 

borrowers who have invested substantial time communicating with an employee of the servicer 

to repeat the process with a different employee.33 

To address these concerns, the Bureau is proposing new servicing standards in four areas. 

First, servicers would have to establish and maintain reasonable information management 

policies and procedures. These policies and procedures would have to be reasonably designed to 

achieve certain objectives and address certain obligations, including accessing and providing 

accurate information, evaluating borrowers for loss mitigation options, facilitating oversight of, 

and compliance by, service providers, and facilitating servicing transfers. 

Second, servicers would have to intervene early with delinquent borrowers to provide 

them with information about, and encourage them to explore, available alternatives to 

 

33 See, e.g., Larry Cordell et al., The Incentives of Mortgage Servicers: Myths and Realities, at 9 (Federal Reserve 

Board, Working Paper No. 2008-46, Sept. 2008). 
22 

foreclosure. 

Third, servicers would have to provide delinquent borrowers with a point of contact that 

provides continuity in the borrowers’ dealings with the servicer. At such point of contact, staff 

must have access to complete records about that borrower, including records of prior 

communications with the borrower, and be able to assist the borrower in pursuing loss mitigation 

options. 

Fourth, servicers that offer loss mitigation options in the ordinary course of business 

would be required to follow certain procedures to ensure that borrowers’ completed loss 

mitigation applications are evaluated in a timely manner, that borrowers are notified of the 

results, and that borrowers have a right to appeal the denial of a loan modification option. 

Servicers would also be required to provide borrowers who submit incomplete loss mitigation 

applications with timely notice about the additional documents or information needed to make a 

loss mitigation application complete. 

The Bureau recognizes that a one-size-fits-all approach may not be optimal with regard to 

either the mandated or additional requirements. As discussed below, the Bureau seeks comment 

on to what extent it may be appropriate to adjust these standards for small servicers. 

III. Summary of Statute and Rulemaking Process 

A. Overview of the Statute

The Dodd-Frank Act imposes certain new requirements related to mortgage servicing. 

Some of these new requirements are amendments to TILA addressed in this proposal and others 

are amendments to RESPA, addressed in the 2012 RESPA Servicing Proposal.

TILA amendments. There are three new mortgage servicing requirements under TILA. 

First, for closed-end credit transactions secured by a consumer’s principal residence, section 
23 

1418 of the Dodd-Frank Act adds a new section 128A to TILA. TILA section 128A states that, 

for hybrid ARMs with a fixed interest rate for an introductory period that adjusts or resets to a 

variable interest rate at the end of such period, a notice must be provided six months prior to the 

initial adjustment of the interest rate for closed-end credit transactions secured by a consumer’s 

principal residence. Section 1418 of the Dodd-Frank Act permits the Bureau to extend this 

requirement to ARMs that are not hybrid ARMs. 

Second, section 1420 of the Dodd-Frank Act, which adds section 128(f) to TILA, 

requires the creditor, assignee, or servicer of any residential mortgage loan to transmit to the 

borrower, for each billing cycle, a periodic statement that sets forth certain specified information 

in a conspicuous and prominent manner. The statute also gives the Bureau the authority to 

require additional content to be included in the periodic statement. The statute provides an 

exception to the periodic statement requirement for fixed-rate loans where the borrower is given 

a coupon book containing substantially the same information as the statement. 

Third, section 1464 of the Dodd-Frank Act adds sections 129F and 129G to TILA, which 

generally codify existing Regulation Z requirements for the prompt crediting of mortgage 

payments received by servicers in connection with consumer credit transactions secured by a 

consumer’s dwelling. The statute also generally codifies the Regulation Z requirement on 

accurate and timely responses to borrower requests for payoff amounts. 

RESPA amendments. Section 1463 of the Dodd-Frank Act imposes a number of new 

servicing related requirements under RESPA that broadly relate to: force-placed insurance and 

error resolution/responses to requests for information. First, the statute prohibits a servicer from 

obtaining force-placed hazard insurance, unless there is a reasonable basis to believe the 

borrower has failed to comply with the loan contract’s requirement to maintain property 
24 

insurance. A servicer may not impose any charge on any borrower for force-placed insurance 

with respect to any property secured by a federally related mortgage, unless the servicer sends, 

by first-class mail, two written notices to the borrower, at least 30 days apart. The notices must 

remind borrowers of their obligation to maintain hazard insurance on the property, alert 

borrowers to the servicer’s lack of evidence of insurance coverage, tell borrowers what they must 

do to demonstrate that they have coverage, and state that the servicer may obtain coverage at the 

borrower’s expense if the borrower fails to provide evidence of coverage. Servicers must 

terminate force-placed insurance coverage and refund to borrowers any premiums charged 

during any period when the borrower had private insurance coverage. The statute also provides 

that all charges imposed on the borrower related to force-placed insurance, apart from charges 

subject to State regulation as the business of insurance, must be bona fide and reasonable. 

Second, the statute prohibits certain acts and practices by servicers of federally related 

mortgages with regard to resolving errors and responding to requests for information. 

Specifically, the statute prohibits servicers of federally related mortgages from charging fees for 

responding to valid qualified written requests. The statute also provides that a servicer of a 

federally related mortgage must not fail to take timely action to respond to a borrower’s requests 

to correct errors relating to: allocation of payments, final balances for purposes of paying off the 

loan, avoiding foreclosure, or other standard servicer duties. 

Finally, the statue requires a servicer of a federally related mortgage to respond within 

ten business days to a request from a borrower to provide the identity, address, and other relevant 

contact information about the owner or assignee of the loan. The statue also reduces the amount 

of time that servicers of federally related mortgages have to correct errors and respond to 
25 

inquiries generally, as well as refund escrow accounts upon payoff.34 

In addition, the statute provides that a servicer of a federally related mortgage must 

“comply with any other obligation found by the Consumer Financial Protection Bureau, by 

regulation, to be appropriate to carry out the consumer protection purposes of this Act.”35 This 

provision gives the Bureau broad authority to adopt additional regulations to govern the conduct 

of servicers of federally related mortgage loans. In light of the systemic problems in the 

mortgage servicing industry, the Bureau is proposing to exercise this authority to require 

servicers of federally related mortgages to: establish reasonable information management 

policies and procedures; undertake early intervention with delinquent borrowers; provide 

delinquent borrowers with continuity of contact with staff equipped to assist them; and require 

servicers that offer loss mitigation options in the ordinary course of business to follow certain 

procedures when evaluating loss mitigation applications.

The statute also requires a creditor or servicer to send accurate and timely responses to 

borrower requests for payoff amounts for home loans. 

The statutory provisions with enumerated mortgage servicing requirements become 

effective on January 21, 2013, unless final rules are issued on or before that date. 

B. Outreach and Consumer Testing

 The Bureau has conducted extensive outreach in developing the mortgage servicing 

proposals. Bureau staff met with mortgage servicers, force-placed insurance carriers, industry 

trade associations, consumer advocates, other Federal regulatory agencies, and other interested 

parties to discuss various aspects of the statute and the servicing industry. 

 

34 Other changes in section 1463 of the Dodd-Frank Act relate to increases in penalties for violations. These 

provisions are not addressed in this rulemaking. 

35 12 U.S.C. 2605(k)(1)(E). 
26 

In preparing this proposed rule, the Bureau solicited input from small servicers through a 

Small Business Review Panel (SBREFA Panel) with the Chief Counsel for Advocacy of the 

Small Business Administration (SBA) and the Administrator of the Office of Information and 

Regulatory Affairs within the Office of Management and Budget (OMB).36 The Small Business 

Review Panel’s findings and recommendations are contained in the Final Report of the Small 

Business Review Panel on CFPB’s Proposals Under Consideration for Mortgage Servicing 

Rulemaking (SBREFA Final Report).37 

The Bureau also engaged in other meetings and roundtables with a variety of other 

stakeholders to gather factual information about the servicing industry and to discuss various 

elements of the Bureau’s proposals as they were being developed. As discussed above and in 

connection with section 1022 of the Dodd-Frank Act below, the Bureau has also consulted with 

relevant Federal regulators both regarding the Bureau’s specific proposals and the need for and 

potential contents of national mortgage servicing standards in general. As it considers public 

comment and works to develop final rules on mortgage servicing, the Bureau will continue to 

seek input from all interested parties. 

In addition, the Bureau engaged ICF Macro (Macro), a research and consulting firm that 

specializes in designing disclosures and consumer testing, to conduct one-on-one cognitive 

interviews regarding disclosures connected with mortgage servicing. During the first quarter of 

2012, the Bureau and Macro worked closely to develop and test disclosures that would satisfy 

the requirements of the Dodd-Frank Act and provide information to consumers in a manner that 

 

36 The Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) requires the Bureau to convene a 

Small Business Review Panel before proposing a rule that may have a substantial economic impact on a significant 

number of small entities. See Pub. L. 104-121, tit. II, 110 Stat. 847, 857 (1996) (as amended by Pub. L. 110-28, sec. 

8302 (2007)). 

37 See SBREFA Final Report, supra note 22. 
27 

would be understandable and useful. These disclosures related to the ARM notices, the forceplaced insurance notices, and the periodic statements. Macro conducted three rounds of one-onone cognitive interviews with a total of 31 participants in the Baltimore, Maryland metro area 

(Towson, Maryland), Memphis, Tennessee, and Los Angeles, California. Participants were all 

consumers who held a mortgage loan and represented a range of ages and education levels. 

Efforts were made to recruit a significant number of participants who had trouble making 

mortgage payments in the last two years. During the interviews, participants were shown 

disclosure forms for periodic statements, ARM interest rate adjustment notices for the new 

disclosures required by Dodd-Frank Act section 1418, and force-placed insurance notices. 

Participants were asked specific questions to test their understanding of the information 

presented in each of the disclosures, how easily they could find various pieces of information 

presented in each of the disclosures, as well as to learn about how they would use the 

information presented in each of the disclosures. The disclosures were revised after each round 

of testing. Specific findings from the consumer testing are discussed in detail throughout the 

SUPPLEMENTARY INFORMATION where relevant.38

C. Other Dodd-Frank Act Mortgage-Related Rulemakings 

 Including this proposal, the Bureau currently is engaged in seven rulemakings relating to 

mortgage credit to implement requirements of the Dodd-Frank Act:

 TILA-RESPA Integration: On July 9, 2012, the Bureau released proposed rules and 

forms combining the TILA mortgage loan disclosures with the Good Faith Estimate 

(GFE) and settlement statement required under RESPA, pursuant to DFA section 1032(f) 

 

38 ICF Macro International, Inc., Summary of Findings: Design and Testing of Mortgage Servicing Disclosures 

(Aug. 2012), available at: http://www.consumerfinance.gov/notice-and-comment/ (report on consumer testing 

submitted to the U.S. Consumer Fin. Prot. Bureau). 
28 

as well as sections 4(a) of RESPA and 105(b) of TILA, as amended by DFA sections 

1098 and 1100A, respectively. 12 U.S.C. 2603(a); 15 U.S.C. 1604(b) (the 2012 TILARESPA Proposal).39

 HOEPA: On July 9, 2012, the Bureau released proposed rules to implement Dodd-Frank 

Act requirements expanding protections for “high-cost” mortgage loans under HOEPA, 

pursuant to TILA sections 103(bb) and 129, as amended by DFA sections 1431 through 

1433. 15 U.S.C. 1602(bb) and 1639.40 Such loans have requirements on servicers related 

to payoff statements, late fees, prepayment penalties, and fees for loan modifications or 

deferrals. 

 Loan Originator Compensation: The Bureau is in the process of developing a proposal to 

implement provisions of the Dodd-Frank Act requiring certain creditors and mortgage 

loan originators to meet duty of care qualifications and prohibiting mortgage loan 

originators, creditors, and the affiliates of both from receiving compensation in various 

forms (including based on the terms of the transaction) and from sources other than the 

consumer, with specified exceptions, pursuant to TILA section 129B as established by 

DFA sections 1402 through 1405. 15 U.S.C. 1639b. 

 Appraisals: The Bureau, jointly with Federal prudential regulators and other Federal 

agencies, is in the process of developing a proposal to implement Dodd-Frank Act 

requirements concerning appraisals for higher-risk mortgages, appraisal management 

companies, and automated valuation models, pursuant to TILA section 129H as 

established by DFA section 1471, 15 U.S.C. 1639h, and sections 1124 and 1125 of the 

Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) as 

 

39 Available at http://www.consumerfinance.gov/notice-and-comment/. 

40 Id
29 

established by Dodd-Frank Act sections 1473(f), 12 U.S.C. 3353, and 1473(q), 12 U.S.C. 

3354, respectively. In addition, the Bureau is developing rules to implement section 

701(e) of the Equal Credit Opportunity Act (ECOA), as amended by DFA section 1474, 

to require that creditors provide applicants with a free copy of written appraisals and 

valuations developed in connection with applications for loans secured by a first lien on a 

dwelling (collectively, Appraisals Rulemaking). 15 U.S.C. 1691(e). 

 Ability to Repay: The Bureau is in the process of finalizing a proposal issued by the 

Board to implement provisions of the Dodd-Frank Act requiring creditors to determine 

that a consumer can repay a mortgage loan and establishing standards for compliance, 

such as by making a “qualified mortgage,” pursuant to TILA section 129C as established 

by Dodd-Frank Act sections 1411 and 1412 (ATR Rulemaking). 15 U.S.C. 1639c. 

 Escrows: The Bureau is in the process of finalizing a proposal issued by the Board to 

implement provisions of the Dodd-Frank Act requiring certain escrow account 

disclosures and exempting from the higher-priced mortgage loan escrow requirement 

loans made by certain small creditors, among other provisions, pursuant to TILA section 

129D as established by Dodd-Frank Act sections 1461 and 1462 (Escrows Rulemaking). 

15 U.S.C. 1639d. 

With the exception of the requirements being implemented in the 2012 TILA-RESPA 

Proposal, the Dodd-Frank Act requirements referenced above generally will take effect on 

January 21, 2013, unless final rules implementing those requirements are issued on or before that 

date and provide for a different effective date. To provide an orderly, coordinated, and efficient 

comment process, the Bureau is generally setting the deadlines for comments on this and other 

proposed mortgage rules based on the date the proposal is issued, instead of the date this notice is 
30 

published in the Federal Register. Therefore, the Bureau is providing 60 days for comment on 

those proposals, which will ensure that the Bureau receives comments with sufficient time 

remaining to issue final rules by January 21, 2013. Because the precise date this notice will be 

published cannot be predicted in advance, setting the deadlines based on the date of issuance will 

allow interested parties that intend to comment on multiple proposals to plan accordingly. 

The Bureau regards the foregoing rulemakings as components of a larger undertaking; 

many of them intersect with one or more of the others. Accordingly, the Bureau is coordinating 

carefully the development of the proposals and final rules identified above. Each rulemaking 

will adopt new regulatory provisions to implement the various Dodd-Frank Act mandates 

described above. In addition, each of them may include other provisions the Bureau considers 

necessary or appropriate to ensure that the overall undertaking is accomplished efficiently and 

that it ultimately yields a regulatory scheme for mortgage credit that achieves the statutory 

purposes set forth by Congress, while avoiding unnecessary burdens on industry. 

Thus, many of the rulemakings listed above involve issues that extend across two or more 

rulemakings. In this context, each rulemaking may raise concerns that might appear unaddressed 

if that rulemaking were viewed in isolation. For efficiency’s sake, however, the Bureau is 

publishing and soliciting comment on a proposed approach to certain issues raised by two or 

more of its mortgage rulemakings in whichever rulemaking is most appropriate, in the Bureau’s 

judgment, for addressing each specific issue. Accordingly, the Bureau urges the public to review 

this and the other mortgage proposals identified above, including those previously published by 

the Board, together. Such a review will ensure a more complete understanding of the Bureau’s 

overall approach and will foster more comprehensive and informed public comment on the 

Bureau’s several proposals, including provisions that may have some relation to more than one 
31 

rulemaking but are being proposed for comment in only one of them. 

D. Small Servicers 

 The small entity representatives (SERs) who provided feedback to the SBREFA panel 

generally emphasized that their business models required a “high touch” approach to customer 

service and that they did not engage in many of the practices that contributed to the mortgage 

market process. The SERs indicated that they take a proactive approach to providing consumer 

information, resolving errors and working with delinquent borrowers to find alternatives to 

foreclosure. Nevertheless, they indicated that some elements of the proposals under 

consideration were not consistent with their current business practices and expressed concern 

about the need to begin providing extensive documentation to prove compliance with the 

proposed standards. The SERs urged the Bureau to adopt standards that would allow small 

servicers to stay in the market and provide choices to consumers with the new compliance 

burdens.41 The SERs were particularly concerned about the costs and burdens of complying 

with the periodic statement requirements, as well as certain aspects of the process for resolving 

errors and responding to inquiries.42 

 Informed by this process, the Bureau is proposing in the 2012 TILA Servicing Proposal 

to exempt certain small servicers from the periodic statement requirement. The Bureau is also 

proposing that certain requirements, such as the requirement to maintain reasonable information 

management policies and procedures under Regulation X, should be applied in light of the scale 

of the servicer’s operations as well as other contextual factors. The Bureau does not believe that 

these provisions, described more fully below in the section-by-section analysis of the applicable 

proposal, would impair consumer protection. The Bureau is also seeking comment more broadly 

 

41 SBREFA Final Report, supra note 22, at 16, 21. 42 SBREFA Final Report, supra note 22, at 16-19, 21, and 23-24. 
32 

on whether other exemptions or adjustments for small servicers would be warranted to reduce 

regulatory burden while appropriately balancing consumer protections.

E. Request for Comment on Effective Date 

The Bureau specifically requests comment on the appropriate effective date for each of 

the servicing-related rules contained in this proposal and the 2012 TILA Servicing Proposed 

Rule. As discussed above, the Dodd-Frank Act servicing requirements take effect automatically 

on January 21, 2013, unless final rules are issued on or before that date.43 Where rules are 

required to be issued, the Dodd-Frank Act permits the Bureau to provide up to 12 months for 

implementation. For all other rules, the implementation period is left to the discretion of the 

Bureau. 

Given the significant consumer benefits offered by the proposals and the challenges faced 

by delinquent borrowers in dealing with their servicers, the Bureau generally believes that the 

final rules should be made effective as soon as possible. However, the Bureau understands that 

various elements of the final rules would require servicers to adopt or revise existing software to 

generate compliant disclosures, retrain staff, assess and revise policies and procedures, and/or 

take other implementation measures. The Bureau therefore seeks detailed comment on the 

nature and length of implementation process for each individual servicing rule and in light of 

interactions between the rules. The Bureau is particularly interested in analyzing the impacts on 

both consumers and servicers of a staggered implementation sequence as compared to imposing 

a single date by which all rules must be implemented. 

The Bureau also notes that some companies may also need to implement other new 

requirements under other parts of the Dodd-Frank Act, as described above. The Bureau believes 

 

43 Public Law 111-203, 124 Stat. 1376, section 1400(c) (2010). 
33 

based on conversations and analysis to date that there is more overlap and interaction among the 

various proposals relating to mortgage origination than there is between the servicing proposals 

and the origination proposals. However, the Bureau seeks comment specifically on this issue 

and on whether the general cumulative burden on entities that are subject to both sets of rules 

will complicate implementation. 

Finally, the Bureau seeks comment on any particular implementation challenges faced by 

small servicers, and on whether an extended implementation period would be appropriate or 

useful. For instance, to the extent that small servicers rely heavily on outside software vendors, 

the Bureau seeks comment on whether a delayed effective date would provide significant relief if 

the vendors will have to develop software solutions for larger servicers on a shorter timeline 

anyway. The Bureau also seeks comment on the impacts of delayed implementation on 

consumers and on other market participants. 

IV. Discussion of Major Proposed Revisions 

The proposed amendments to Regulation Z implement sections 1418 (initial ARM 

interest rate adjustment notice), 1420 (periodic statements) and 1464 (prompt crediting and 

provision of payoff statements) of the Dodd-Frank Act, which in turn amend TILA. The 

amendment also proposes to revise current Regulation Z ARM disclosure rules for consistency 

with DFA section 1418. The proposed revision eliminates the ARM interest rate adjustment 

notice required at least once each year during which an interest rate adjustment is implemented 

without resulting in a corresponding payment change. 

A. Current and Proposed Interest Rate Adjustment Disclosures 

To implement DFA section 1418, the Bureau is proposing to revise § 1026.20(d) to 

require that creditors, assignees, or servicers provide notices to consumers six to seven months 
34 

prior to the first time the interest rate of their adjustable-rate mortgages adjusts. In contrast to 

this one-time disclosure, Regulation Z currently requires notice to consumers regarding each 

adjustment of their adjustable-rate mortgages. 

Under current rule § 1026.20(c), creditors must provide consumers with a notice of 

interest rate adjustment for variable-rate transactions subject to § 1026.19(b) at least 25, but no 

more than 120, calendar days before a payment at a new level is due. For the reasons discussed 

below, the Bureau is proposing in § 1026.20(c), among other things, to change the minimum 

time for providing advance notice to consumers from 25 days to 60 days before payment at a 

new level is due. The maximum time for advance notice would remain the same: 120 days prior 

to the due date of the first payment at a new level. 

Current § 1026.20(c) also requires creditors to provide consumers with an adjustment 

notice at least once each year during which an interest rate adjustment is implemented without 

resulting in a corresponding payment change. The Bureau is proposing to eliminate this 

provision. As explained in more detail below in the section-by-section analysis, the Bureau 

believes that certain Dodd-Frank Act amendments to TILA and the Bureau’s proposed 

amendments that would implement those provisions provide consumers with much of the 

information contained in the annual notice, thereby greatly minimizing its value for consumers. 

In the interest of harmonizing the two proposed ARM disclosures, the coverage, content, 

and format of proposed § 1026.20(c) and (d) closely track one another and incorporate most of 

the content currently required by § 1026.20(c). 

Historic context of § 1026.20(c) rate adjustment disclosures. The Board adopted the rule 

that is current § 1026.20(c) in 1987, as part of a larger revision of Regulation Z.44 In 2009, the 

 

44 52 FR 48665 (Dec. 24, 1987). 
35 

Board proposed to revise regulations governing ARM disclosures as part of a larger revision of 

closed-end provisions in Regulation Z (2009 Closed-End Proposal). In that proposal, the Board 

said that, in 1987, it set the minimum time for providing notice of a rate adjustment at 25 days 

before payment at new level is due in order 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.45 It also noted that, as of 2009, neither the OCC nor any other Federal 

financial institution supervisory agency had any comprehensive disclosure requirements for 

ARMs.46

Since 1987, the popularity of ARMs has increased, especially during the period from 

2002 to 2007.47 Beginning in 2007, ARM growth began to slow as consumers experienced 

difficulty repaying such loans and concerns grew about the risk of payment shock that ARMs 

pose.48 According to Freddie Mac, “[i]n June 2004, ARMs hit a peak share of 40% of the homepurchase market but by early 2009, that share had fallen to just 3%, according to the Federal 

Housing Finance Agency.”49 Generally, ARMs are financing just over 10% of new homepurchase loans but are expected to rise to a 14% share of that market in 2012. 50 

For many consumers, the current era of declining interest rates has reduced the incidence 

of the significant payment increases that can accompany ARM interest rate adjustments. 

Anecdotal evidence from mortgage servicers with which the Bureau has conducted outreach 

supports this conclusion. To the extent interest rates rise in the future, ARM interest rate 

adjustments may result in significant payment increases for many consumers. The popularity of 

 

45 74 FR 43232, 43269 (Aug. 26, 2009) (citing 52 FR 48665, 48668 (Dec. 24, 1987)). 46 Id. at 43272. 47 Id. at 43269. 48 Id. 49 Press Release, Freddie Mac, Freddie Mac Releases 28th Annual ARM Survey Results (January 18, 2012), available 

at: http://freddiemac.mediaroom.com/index.php?s=12329&item=109996. 50 Id.
36 

adjustable-rate mortgages, which provide the opportunity for reduced interest rates, also may 

increase along with the advent of higher interest rates. 

Regardless of current market conditions, ARMs can pose a risk of payment shock. 

Therefore, it is critical that consumers receive advance notice of ARM payment changes so that, 

if their rates increase, they can prepare to make higher mortgage payments or pursue alternative 

plans, such as seeking to refinance their loans. 

Timing of current and proposed ARM regulations. DFA section 1418 requires that 

interest rate adjustment disclosures be provided to consumers six to seven months before the 

interest rate adjusts for the first time (which is equivalent to 210 to 240 days before payment at a 

new level is due). Generally, this much advance notice will require disclosure of an estimated 

new interest rate and payment instead of exact amounts. This is because ARM contracts 

generally require an index value published closer to the adjustment date to calculate the adjusted 

interest rate and new payment. Nevertheless, the consumer would be put on notice of upcoming 

changes and would have ample time to refinance or pursue other alternatives if the estimate 

indicates a potential increase in payments that the consumer cannot afford. 

Current § 1026.20(c) requires notice of rate adjustments resulting in a corresponding 

payment change at least 25 days prior to when payment at a new level is due. This notice, unlike 

the one required under DFA section 1418, provides the actual, not estimated, new interest rate 

and payment. Twenty-five days likely does not provide sufficient time for consumers to 

refinance, pursue other alternatives, or adjust their finances to make higher payments. Research 

conducted for the years 2004 through 2007 also suggested that a requirement to provide ARM 

adjustment disclosures 60, rather than 25, days before payment at a new level is due more closely 
37 

reflects the time needed for consumers to refinance a loan.51 In the current market, the nation’s 

biggest mortgage lenders take an average of more than 70 days to complete a refinance.52

For these reasons, proposed § 1026.20(c) revises the time frame for providing the ARM 

adjustment notice from the current 25 to 120 days to 60 to 120 days before payment at a new 

level is due. Under the proposed rule, consumers will know the actual amount of their new 

interest rate and payment at least 60 days before the new payment is due. Most existing ARMs 

will be able to comply with this proposed timing. The Bureau proposes grandfathering existing 

ARMs that contractually will not be able to comply with the new timing, i.e., those with lookback periods of less than 45 days. See section-by-section analysis for proposed § 1026.20(c) for 

a full discussion of timing and look-back periods. 

Content of current and proposed ARM regulations. The Bureau is generally proposing to 

retain the content required by current § 1026.20(c). Proposed § 1026.20(c) would require 

additional information such as a statement that the consumer’s interest rate is scheduled to 

adjust, the adjustment may change the mortgage payment, the time period the current interest 

rate has been in effect, and the dates of the future rate adjustments; the date when the new 

payment is due after the adjustment; any interest rate or payment limits; any unapplied carryover 

interest and the earliest date it could be applied; additional amortization information for 

negatively-amortizing and interest-only loans; and the amount and expiration date of any 

 

51 Robert B. Avery, Kenneth P. Brevoort, & Glenn B. Canner, The 2007 HMDA Data, 94 Fed. Reserve Bull. A107 

(Dec. 23, 2008). 

52 Nick Timiraos & Ruth Simon, Borrowers Face Big Delays in Refinancing Mortgages, Wall St. J., May 9, 2012, 

at A1, available at:http://online.wsj.com/article/SB10001424052702303459004577364102737025584.html.
38 

prepayment penalty. Much of this additional content was proposed by the Board’s 2009 ClosedEnd Proposal to amend Regulation Z’s payment change interest rate adjustment disclosures.53 

 The initial interest rate adjustment notices proposed by § 1026.20(d) include much of the 

same information listed above for proposed § 1026.20(c). The content of the two proposed 

notices in § 1026.20(c) and (d) closely track one another in order to promote consistency and 

simplify compliance. However, proposed § 1026.20(c), which applies to the ongoing disclosures 

at each interest rate adjustment that results in a corresponding payment change, would not 

require some of the disclosures mandated for the initial interest rate adjustment notices by DFA 

section 1418. These disclosures include a list of alternatives consumers may pursue, including 

refinancing, renegotiation of loan terms, payment forbearance, and pre-foreclosure sales; contact 

information for the appropriate State housing finance agency; and information on how to access 

a list of government-certified counseling agencies and programs. The Bureau believes it is not 

necessary to provide this information in § 1026.20(c) notices because much of it will be provided 

to consumers through other mortgage servicing measures implemented by the Dodd-Frank Act. 

For example, new TILA section 128(f), which would be implemented by proposed rule 

§ 1026.41 for periodic statements, each billing cycle would provide information on how to 

contact the appropriate State housing finance authority and how to access a list of governmentcertified counseling agencies and programs. Also, the early intervention provisions of the 2012 

RESPA Servicing Proposal would require this same information as well as examples of 

alternatives consumers may want to consider. Finally, consumers will have received this 

information pursuant to § 1026.20(d) the first time their adjustable-rate mortgages adjust. 

 

53 74 FR 43232, 43269-73 (Aug. 26, 2009).
39 

The model forms proposed for § 1026.20(c) and (d) closely track one another and 

disclose virtually the same information, except for the additional information proposed for 

§ 1026.20(d), as discussed above, and the reference to estimates in the proposed § 1026.20(d) 

notices. The Bureau believes that harmonizing the two proposed rules regarding ARM interest 

rate adjustment disclosures would ease the burden of compliance for creditors, assignees, and 

servicers while providing consumers with consistent information in similar notices. 

The Bureau is proposing model and sample forms54 for both § 1026.20(c) and (d). The 

Bureau worked with Macro to design and test the forms for § 1026.20(d), but did not specifically 

test § 1026.20(c) notices. See Part II.B above. Because of the similarity in the model forms for 

both proposed rules, the results of the testing of § 1026.20(d) forms is relevant for proposed 

§ 1026.20(c) as well. Thus, throughout the section-by-section analysis for § 1026.20(c), the 

Bureau refers to the testing results for § 1026.20(d) where the information and concepts tested 

are identical in the model forms for both proposed § 1026.20(c) and (d). 

B. Proposed Rule Regarding Prompt Crediting of Mortgage Payments and Response to 

Requests for Payoff Amounts 

DFA section 1464(a) codifies the existing Regulation Z requirements in 

§ 1026.36(c)(1)(i) on prompt crediting of payments. The proposed modifications to § 1026.36(c) 

would clarify the handling of partial payments. The proposal would limit application of the 

current prompt crediting provision, existing § 1026.36(c)(1)(i), to full contractual payments (as 

opposed to all payments), and add a new provision, § 1026.36(c)(1)(ii), to address the handing of 

partial payments (anything less than a full contractual payment). 

 

54 The Bureau proposes four model forms for the ARM adjustment notices: two forms for the § 1026.20(c) ARM 

payment change notices, one labeled a model form and the other a sample form and two forms for the § 1026.20(d) 

ARM initial interest rate adjustment notices, one labeled a model form and the other a sample form. See Appendix 

H-4(D)(1)-(4). 
40 

DFA section 1464(b) generally codifies the existing Regulation Z requirement in 

§ 1026.36(c)(3) to provide payoff statements, with modifications relating to the scope and timing 

of the requirement, and the need for the request to be written. Proposed modifications to 

§ 1026.36(c) reflect these changes. 

As part of implementing these changes, the Bureau is proposing a reorganization of the 

requirements in § 1026.36(c). 

C. Proposed Rule Regarding Periodic Statements 

DFA section 1420 establishes new TILA section 128(f), requiring periodic statements for 

residential mortgage loans to be provided each billing cycle. The statute requires that a creditor, 

assignee, or servicer disclose certain information in the periodic statement, along with “such 

other information as the Bureau may prescribe in regulations.”55 The statute requires the Bureau 

to develop and prescribe a standard form for this disclosure, taking into account that the required 

statements may be transmitted in writing or electronically.56 The statute also provides an 

exemption to the periodic statement requirement for fixed-rate loans where the creditor, assignee, 

or servicer provides the obligor with a coupon book which provides substantially the same 

information as the periodic statement.57

Proposed § 1026.41 contains the periodic statement requirement. Paragraph (a) 

establishes the general requirement for creditors, assignees, or servicers to provide a periodic 

statement. Paragraphs (b) – (d) establish requirements for the timing, form, content, and layout 

of the statement. Paragraph (e) sets forth exemptions from the periodic statement requirement. 

 

55 TILA section 128(f)(1)(H). 

56 TILA section 128(f)(2). 

57 TILA section 128(f)(3). 
41 

The periodic statement is designed to serve a variety of purposes, including informing 

consumers of their payment obligations, providing the consumer with information about their 

mortgage in an easily readable and understandable format, creating a record of the transaction to 

aid in error detection and resolution, and providing information to certain delinquent borrowers. 

The Bureau is proposing sample forms in accordance with TILA section 129(f)(2). The 

Bureau examined several forms used today by various servicers, considered how these forms met 

the needs of consumers, and identified changes that would benefit consumers. As discussed 

above in part II.B, the Bureau worked with Macro to design and test sample forms. 

The proposed periodic statement is designed to provide information to consumers in a 

format they can easily understand and use. As such, the proposed regulation would require 

certain related pieces of information to be grouped together. The proposed formatting 

requirements of the periodic statement are discussed in detail in the section-by-section analysis 

for proposed § 1026.41(d). 

The proposed periodic statement is also designed to provide additional information to 

consumers in several potentially confusing scenarios: partial payments, payment-option loans, 

and delinquency. First, the handling of partial payments would be clarified on the periodic 

statement, both on the transaction activity line and in the past payment breakdown. Additionally, 

if funds are held in a suspense or unapplied funds account, the proposed rule would require a 

message on what must be done to release the funds. Second, payments for payment-option loans 

would be clarified by listing the options in the Amount Due section, and providing details about 

each of the options in the Explanation of Amount Due section. Finally, delinquent consumers 

would receive information in several places on the periodic statement. The overdue amount 

would be stated in the Explanation of Amount Due section, and any fees would be listed in the 
42 

Transaction Activity section. The breakdown of past payments will help the consumer 

understand how past payments were applied, which can be confusing. Additionally, consumers 

who are more than 45 days delinquent will have a delinquency information included in the 

periodic statement providing specific information about their loan. These requirements are 

discussed in greater detail in the section-by-section analysis on proposed § 1026.41 below. 

 Finally, the proposal contains several exemptions from the periodic statement 

requirement. One exemption is for fixed-rate loans using coupon books that meet certain 

requirements, as set forth in TILA 128(f)(3). Another exemption clarifies that timeshares are not 

subject to the periodic statement requirement as per the definition of “residential mortgage 

loan.”58 The Bureau is also proposing exemptions for reverse mortgages and certain small 

servicers.

V. Legal Authority 

The Bureau is issuing this proposed rule pursuant to its authority under TILA and the 

Dodd-Frank Act. Section 1061 of the Dodd-Frank Act transferred to the Bureau the “consumer 

financial protection functions” previously vested in certain other Federal agencies, including the 

Board. The term “consumer financial protection function” is defined to include “all authority to 

prescribe rules or issue orders or guidelines pursuant to any Federal consumer financial law, 

including performing appropriate functions to promulgate and review such rules, orders, and 

guidelines.”59 TILA, Title X of the Dodd-Frank Act, and certain subtitles and provisions of Title 

XIV of the Dodd Frank Act, are Federal consumer financial laws.60 Accordingly, the Bureau has 

 

58 TILA section 103(cc)(5). 

59 12 U.S.C. 5581(a)(1). 

60 Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) (defining “Federal consumer financial law” to include the 

“enumerated consumer laws” and the provisions of title X of the Dodd-Frank Act); Dodd-Frank Act section 

1002(12), 12 U.S.C. 5481(12) (defining “enumerated consumer laws” to include TILA), Dodd-Frank section 
43 

authority to issue regulations pursuant to TILA, Title X, and the enumerated subtitles and 

provisions of Tile XIV, including to implement the additions and amendments to TILA’s 

mortgage servicing requirements made by Title XIV of the Dodd-Frank Act. 

Sections 1418, 1420 and 1464 of the Dodd-Frank Act create new requirements under 

TILA in new sections 128A, 128(f), and 129F and 129G, respectively. Section 1418 of the 

Dodd-Frank Act amends Regulation Z to require that certain disclosures be provided to 

consumers with hybrid adjustable-rate mortgages secured by the consumer’s principal residence 

the first time the interest resets or adjusts. Additionally, the savings clause in TILA section 

128A(c) allows the Bureau to require this notice for adjustable-rate mortgage loans that are not 

hybrid adjustable-rate loans. DFA section 1420 requires that a periodic statement be provided to 

consumers for each billing cycle of a consumer’s closed-end mortgage secured by a dwelling, 

except for fixed-rate loans with coupon books containing substantially the same information. 

The statute requires a list of specific information that must be included in the periodic statement. 

Additionally, pursuant to TILA section 128(f)(1)(H), the periodic statement must also include 

such information as the Bureau may require in regulations. DFA section 1464 generally requires 

the prompt crediting of mortgage payments in connection with consumer credit transactions 

secured by a consumer’s principal dwelling and an accurate timely response to requests for 

payoff amounts for home loans. In addition to proposing rules to implement these TILA 

provisions of the Dodd-Frank Act, the Bureau proposes amending current TILA interest rate 

adjustment disclosures required by § 1026.20(c) as proposed § 1026.20(c). 

 1400(b), 15 U.S.C. 1601 note (defining “enumerated consumer laws” to certain subtitles and provisions of Title 

XIV). 
44 

The proposed rule also relies on the rulemaking and exception authorities specifically 

granted to the Bureau by TILA and the Dodd-Frank Act, including the authorities discussed 

below: 

The Truth in Lending Act 

TILA section 105(a). As amended by the Dodd-Frank Act, TILA section 105(a), 

15 U.S.C. 1604(a), directs the Bureau to prescribe regulations to carry out the purposes of TILA, 

and provides that such regulations may contain additional requirements, classifications, 

differentiations, or other provisions, and may provide for such adjustments and exceptions for all 

or any class of transactions, that the Bureau judges are necessary or proper to effectuate the 

purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance. The 

purposes of TILA are “to assure a meaningful disclosure of credit terms so that the consumers 

will be able to compare more readily the various credit terms available and avoid the uninformed 

use of credit” and to protect consumers against inaccurate and unfair credit billing practices. 

TILA section 102(a); 15 U.S.C. 1601(a). 

Historically, TILA section 105(a) has served as a broad source of authority for rules that 

promote the informed use of credit and avoid unfair credit billing practices through required 

disclosures and substantive regulation of certain practices. Dodd-Frank Act section 1100A 

additionally clarifies the Bureau’s TILA section 105(a) authority by amending that section to 

provide express authority to prescribe regulations that contain “additional requirements” that the 

Bureau finds are necessary or proper to effectuate the purposes of TILA, to prevent 

circumvention or evasion thereof, or to facilitate compliance. This amendment clarified that the 

Bureau has the authority to exercise TILA section 105(a) to prescribe requirements beyond those 

specifically listed in the statute that meet the standards outlined in section 105(a). The Dodd-
45 

Frank Act also clarified the Bureau’s rulemaking authority over certain high-cost mortgages 

pursuant to section 105(a). As amended by the Dodd-Frank Act, TILA section 105(a) authority 

to make adjustments and exceptions to the requirements of TILA applies to all transactions 

subject to TILA, except with respect to the provisions of TILA section 12961 that apply to the 

high-cost mortgages referred to in TILA section 103(bb), 15 U.S.C. 1602(bb). 

For the reasons discussed in this notice, the Bureau is proposing regulations to carry out 

TILA’s purposes and is proposing such additional requirements, adjustments, and exceptions as, 

in the Bureau’s judgment, are necessary and proper to carry out the purposes of TILA, prevent 

circumvention or evasion thereof, or to facilitate compliance. In developing these aspects of the 

proposal pursuant to its authority under TILA section 105(a), the Bureau has considered the 

purposes of TILA, including ensuring meaningful disclosures, helping consumers avoid the 

uninformed use of credit, and protecting consumers against inaccurate and unfair credit billing 

practices. See TILA section 102(a); 15 U.S.C. 1601(a). 

TILA section 105(f). Section 105(f) of TILA, 15 U.S.C. 1604(f), authorizes the Bureau to 

exempt from all or part of TILA any class of transactions if the Bureau determines that TILA 

coverage does not provide a meaningful benefit to consumers in the form of useful information 

or protection. In exercising this authority, the Bureau must consider the factors identified in 

section 105(f) of TILA and publish its rationale at the time it proposes an exemption for public 

comment. Specifically, the Bureau must consider: 

(a) The amount of the loan and whether the disclosures, right of rescission, and other 

provisions provide a benefit to the consumers who are parties to such transactions, as 

determined by the Bureau; 

 

61 15 U.S.C. 1639. TILA section 129 contains requirements for certain high-cost mortgages, established by the 

Home Ownership and Equity Protection Act (HOEPA), which are commonly called HOEPA loans. 
46 

(b) The extent to which the requirements of this subchapter complicate, hinder, or make 

more expensive the credit process for the class of transactions; 

(c) The status of the borrower, including— 

(1) Any related financial arrangements of the borrower, as determined by the Bureau; 

(2) The financial sophistication of the borrower relative to the type of transaction; and 

(3) The importance to the borrower of the credit, related supporting property, and 

coverage under this subchapter, as determined by the Bureau; 

(d) Whether the loan is secured by the principal residence of the consumer; and 

(e) Whether the goal of consumer protection would be undermined by such an exemption. 

For the reasons discussed in this notice, the Bureau is proposing to exempt certain transactions 

from the requirements of TILA pursuant to its authority under TILA section 105(f). In 

developing this proposal under TILA section 105(f), the Bureau has considered the relevant 

factors and determined that the proposed exemptions may be appropriate. 

The Dodd-Frank Act

Dodd-Frank Act section 1022(b). Section 1022(b)(1) of the Dodd-Frank Act authorizes 

the Bureau to prescribe rules “as may be necessary or appropriate to enable the Bureau to 

administer and carry out the purposes and objectives of the Federal consumer financial laws, and 

to prevent evasions thereof[.]” 12 U.S.C. 5512(b)(1). Section 1022(b)(2) of the Dodd-Frank Act 

prescribes certain standards for rulemaking that the Bureau must follow in exercising its 

authority under section 1022(b)(1). 12 U.S.C. 5512(b)(2). As discussed above, TILA is a 

Federal consumer financial law. Accordingly, the Bureau proposes to exercise its authority 

under DFA section 1022(b) to prescribe rules under TILA that carry out the purposes and 

prevent evasion of those laws. 
47 

Dodd-Frank Act section 1032. Section 1032(a) of the Dodd-Frank Act governs 

disclosures and provides that the Bureau “may prescribe rules to ensure that the features of any 

consumer financial product or service, both initially and over the term of the product or service, 

are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers 

to understand the costs, benefits, and risks associated with the product or service, in light of the 

facts and circumstances.” 12 U.S.C. 5532(a). The authority granted to the Bureau in DFA 

section 1032(a) is broad, and empowers the Bureau to prescribe rules regarding the disclosure of 

the “features” of consumer financial products and services generally. Accordingly, the Bureau 

may prescribe rules containing disclosure requirements even if other Federal consumer financial 

laws do not specifically require disclosure of such features. 

Dodd-Frank Act section 1032(c) provides that, in prescribing rules pursuant to DFA 

section 1032, the Bureau “shall consider available evidence about consumer awareness, 

understanding of, and responses to disclosures or communications about the risks, costs, and 

benefits of consumer financial products or services.” 12 U.S.C. 5532(c). Accordingly, in 

developing proposed rules under Dodd-Frank Act section 1032(a) for this proposal, the Bureau 

has considered available studies, reports, and other evidence about consumer awareness, 

understanding of, and responses to disclosures or communications about the risks, costs, and 

benefits of consumer financial products or services. For the reasons discussed in this notice, the 

Bureau is proposing portions of this rule pursuant to its authority under Dodd-Frank Act section 

1032(a). 

In addition, DFA section 1032(b)(1) provides that “any final rule prescribed by the 

Bureau under this [section 1032] requiring disclosures may include a model form that may be 

used at the option of the covered person for provision of the required disclosures.” 12 U.S.C. 
48 

5532(b)(1). Any model form issued pursuant to that authority shall contain a clear and 

conspicuous disclosure that, at a minimum, uses plain language that is comprehensible to 

consumers, using a clear format and design, such as readable type font, and succinctly explains 

the information that must be communicated to the consumer. DFA section 1032(b)(2); 

12 U.S.C. 5532(b)(2). As discussed in the section-by-section analysis for proposed 

§§ 1026.20(d) and 1026.41, the Bureau is proposing model forms for ARM interest rate 

adjustment notices and periodic statements. As discussed in this notice, the Bureau is proposing 

these model forms pursuant to its authority under DFA section 1032(b)(1) . 

Dodd-Frank Act section 1405(b). Section 1405(b) of the Dodd-Frank Act provides that, 

“[n]otwithstanding any other provision of [title 14 of the Dodd-Frank Act], in order to improve 

consumer awareness and understanding of transactions involving residential mortgage loans 

through the use of disclosures, the Bureau may, by rule, exempt from or modify disclosure 

requirements, in whole or in part, for any class of residential mortgage loans if the Bureau 

determines that such exemption or modification is in the interest of consumers and in the public 

interest.” 15 U.S.C. 1601 note. Section 1401 of the Dodd-Frank Act, which amends TILA 

section 103(cc), 15 U.S.C. 1602(cc), generally defines residential mortgage loan as any 

consumer credit transaction that is secured by a mortgage on a dwelling or on residential real 

property that includes a dwelling other than an open-end credit plan or an extension of credit 

secured by a consumer’s interest in a timeshare plan. Notably, the authority granted by section 

1405(b) applies to “disclosure requirements” generally, and is not limited to a specific statute or 

statutes. Accordingly, DFA section 1405(b) is a broad source of authority to modify the 

disclosure requirements of TILA. 
49 

In developing proposed rules for residential mortgage loans under Dodd-Frank Act 

section 1405(b) for this proposal, the Bureau has considered the purposes of improving consumer 

awareness and understanding of transactions involving residential mortgage loans through the 

use of disclosures, and the interests of consumers and the public. For the reasons discussed in 

this notice, the Bureau is proposing portions of this rule pursuant to its authority under DoddFrank Act section 1405(b). 

See the section-by-section analysis for each proposed section for further elaboration on 

legal authority. 

VI. Section-by-Section Analysis 

A. Regulation Z 

Section 1026.17 General Disclosure Requirements 

17(a) Form of Disclosures 

17(a)(1)

Section 1026.17(a)(1) contains form requirements generally applicable to disclosures 

under subpart C. The Bureau proposes to make certain modifications to these requirements as 

applicable to the ARM interest rate adjustment payment change notices under proposed 

§ 1026.20(c) and the initial ARM interest rate adjustment notices under proposed § 1026.20(d). 

Section 1026.17(a) requires, among other things, that certain disclosures contain only 

information directly related to that disclosure. Current § 1026.20(c) is not included in the list of 

disclosures subject to this requirement. Further, commentary to § 1026.17(a)(1) states that the 

disclosures required by current § 1026.20(c) are not subject to the general segregation 

requirements under § 1026.17(a)(1). 
50 

The payment change notice proposed by § 1026.20(c) is intended to inform consumers of 

upcoming changes to their interest rate and mortgage payments and to give them time to explore 

alternatives. The Bureau does not believe that the form requirements applicable to current 

§ 1026.20(c) notices are sufficient to highlight and emphasize important information consumers 

need to make decisions about their adjustable-rate mortgages. Presenting information to 

consumers separate from other information enhances consumers’ awareness of the material. 

Therefore, the Bureau proposes to amend § 1026.17(a)(1) and comment 17(a)(1)-2.ii to add 

proposed § 1026.20(c) to the enumerated disclosures required to contain only information 

directly related to the disclosure and to require that proposed § 1026.20(c) disclosures be 

grouped together and segregated from everything else. 

Other § 1026.17(a)(1) requirements, such as that disclosures be clear and conspicuous, in 

writing, and provided electronically subject to compliance with Electronic Signatures in Global 

and National Commerce Act (E-Sign Act)(15 U.S.C. 7001 et seq.), would continue to apply to 

§ 1026.20(c). 

TILA section 128A provides that the initial ARM interest rate adjustment notices, which 

the Bureau proposes to implement in proposed § 1026.20(d), be “separate and distinct from all 

other correspondence to the consumer.” Accordingly, the Bureau proposes to revise 

§ 1026.17(a), to make clear that the proposed § 1026.20(d) disclosures are not subject to the 

general segregation requirement under that section but rather, pursuant to proposed § 1026.20(d), 

are required to be separate and distinct from all other correspondence. See comment 20(d) for 

further discussion of the separate and distinct requirement. Other requirements of § 1026.17(a), 

such as that disclosures be clear and conspicuous, in writing, and provided electronically subject 

to compliance with the E-Sign Act, would apply to the proposed § 1026.20(d) disclosures. 
51 

The proposed application of § 1026.17(a)(1), as modified, to proposed § 1026.20(c) and 

(d) is authorized, in part, under TILA section 122, which requires that disclosures under TILA be 

clear and conspicuous, in accordance with regulations of the Bureau. The requirements are 

further authorized under TILA section 105(a) because the Bureau believes that the proposed 

form requirements are necessary and proper to effectuate the purposes of TILA to assure a 

meaningful disclosure of credit terms, avoid the uninformed use of credit, and protect consumers 

against inaccurate and unfair credit billing practices by ensuring that consumers understand the 

content of the proposed ARM notices. Moreover, as discussed below, the disclosures proposed 

under § 1026.20(c) are authorized, among other provisions, under TILA section 128(f)(2), which 

authorizes the Bureau to develop and prescribe a standard form for the disclosures required under 

TILA section 128(f). 

As to proposed § 1026.20(d) disclosures, DFA section 1418, TILA section 128A(b) 

specifically provides that the disclosures shall be in writing, separate and distinct from all other 

correspondence. In addition, the Bureau believes, consistent with DFA section 1032(a), that the 

proposed application of § 1026.17(a)(1), as modified, to § 1026.20(d) will ensure that the 

features of ARM loans are effectively disclosed to consumers in a manner that allows consumers 

to understand the information disclosed. The Bureau further believes, consistent with DFA 

section 1405(a), that it is proper to modify DFA section 1418 to apply the form requirements in 

proposed § 1026.17(a)(1) to improve consumer awareness and understanding of ARM 

adjustments. 

17(b) Time of Disclosures 

 The Bureau is proposing to revise § 1026.17(b) to add proposed § 1026.20(d) to the list 

of variable-rate disclosure provisions with special timing requirements. This proposed 
52 

amendment would alert creditors, assignees, and servicers that, as with proposed § 1026.20(c) 

payment adjustment notices, there are timing requirements particular to the proposed 

§ 1026.20(d) initial interest rate adjustment notices. 

17(c) Basis of Disclosures and Use of Estimates 

17(c)(1) 

 Section 1026.17(c)(1) requires disclosures to reflect the terms of the legal obligation 

between the parties. Current comment 17(c)(1)-1 provides that, under this requirement, 

disclosures generally must reflect the credit terms to which the parties are legally bound as of the 

outset of the transaction, but that in the case of disclosures required under § 1026.20(c), the 

disclosures shall reflect the credit terms to which the parties are legally bound when the 

disclosures are provided. The Bureau proposes revising comment 17(c)(1)-1 to make clear that 

the disclosures required under proposed § 1026.20(d), like those under proposed § 1026.20(c), 

shall reflect the credit terms to which the parties are legally bound when the disclosures are 

provided, rather than at the outset of the transaction. 

Section 1026.18 Content of Disclosures 

18(f) Variable Rate 

18(f)-1 

 Current comment 18(f)-1 clarifies that creditors electing to substitute § 1026.19(b) 

disclosures for § 1026.18(f)(1) disclosures, as permitted by § 1026.18(f)(1) and (3), may, but 

need not, also provide disclosures required by current § 1026.20(c). Under current § 1026.20(c), 

disclosures are permissive in such cases because the § 1026.19(b) substitution is only permitted 

for variable-rate transactions not secured by the consumer’s principal dwelling or variable-rate 

transactions secured by the consumers’ principal dwelling, but with a term of one year or less. 
53 

These transactions are not covered by current § 1026.20(c). Thus, current comment 18(f)-1 does 

not alter the legal requirements applicable to creditors. The clarification was, however, helpful 

because current § 1026.20(c) cross-references § 1026.19(b) and applies to transactions covered 

by § 1026.19(b). 

 The Bureau proposes to delete this reference to § 1026.20(c) from the comment because 

it is no longer helpful since neither proposed § 1026.20(c) nor (d) cross-references § 1026.19(b) 

and those proposed provisions define their scope of coverage without reference to § 1026.19(b). 

Moreover, proposed § 1026.20(c) or (d) apply to some ARMs with terms of one year or less such 

that applying the current comment would create an unwarranted exception to the requirement to 

provide ARM notices to consumers with those types of ARMs. For these reasons, the Bureau 

proposes to delete the reference to § 1026.20(c) in comment 18(f)-1. 

Section 1026.19 Certain Mortgage and Variable-Rate Transactions 

19(b) Certain Variable Rate Transactions 

19(b)-4 Other Variable-Rate Regulations 

The Bureau proposes revising comment 19(b)-4 to delete reference to current 

§ 1026.20(c) and (d). Current comment 19(b)-4 explains that 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 § 1026.20(c) by virtue 

of current § 1026.20(d). Consistent with the proposed deletion of current § 1026.20(d), the 

Bureau proposes revising comment 19(b)-4 to delete reference to current § 1026.20(c) and (d). 

19(b)-5.i.C Certain Mortgage and Variable-Rate Transactions 

The Bureau proposes revising comment 19(b)-5.i.C to cross-reference other commentary 

that makes clear that proposed § 1026.20(c) and (d) do not apply to “price-level-adjusted 
54 

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. 

19(b)(2)(xi)-1 Adjustment Notices 

Pursuant to current § 1026.19(b)(2)(xi), disclosures regarding the type of information that 

will be provided in notices of interest rate adjustments and the timing of such notices must be 

provided to consumers applying for variable-rate transactions secured by the consumer’s 

principal dwelling with a term greater than one year. Current comment 19(b)(2)(xi)-1 clarifies 

that these disclosures include information regarding the content and timing of disclosures 

consumers will receive pursuant to current § 1026.20(c). The Bureau proposes adding reference 

to proposed § 1026.20(d) to the comment, since those disclosures would be provided to 

consumers under the Bureau’s proposed rule. The proposed comment also makes conforming 

changes to the text suggested for describing the ARM notices to reflect the timing and content of 

the disclosures proposed by § 1026.20(c) and (d). 

Section 1026.20 Subsequent Disclosure Requirements 

20(c) Rate Adjustments 

 Current § 1026.20(c) requires that disclosures be provided to consumers with variablerate mortgages each time an adjustment results in a corresponding payment change and at least 

once each year during which an interest rate adjustment is implemented without a corresponding 

payment change. 

The current rule does not differentiate between the content required for the annual notice 

and the notices required each time the interest rate adjustment results in a corresponding payment 

change. Current § 1026.20(c) requires that adjustment notices disclose the following: (1) the 

current and prior interest rates for the loan; (2) the index values upon which the current and prior 
55 

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. 

The Bureau proposes two major changes to § 1026.20(c). First, the Bureau proposes 

eliminating the annual notice sent each year during which an interest rate adjustment is 

implemented without a corresponding payment change. As explained in more detail below, the 

Bureau believes that Dodd-Frank Act amendments to TILA, and the Bureau’s proposed 

amendments to Regulation Z that would implement those provisions, would provide consumers 

with much of the information contained in the annual notice thereby greatly minimizing the need 

for its protections. Second, the proposal updates current § 1026.20(c) by adding disclosures that 

the Bureau believes will enhance protections for consumers with ARMs. The proposed revisions 

to § 1026.20(c) also harmonize with the requirements the Bureau is proposing for the initial 

ARM interest rate adjustment notice under § 1026.20(d), thereby promoting consistency between 

the Regulation Z ARM provisions. 

Elimination of annual disclosure. First, proposed § 1026.20(c) eliminates the annual 

notice requirement under the current rule. The Bureau believes that consumers who receive the 

current annual notice, such as consumers with ARMs with payment caps, would receive much of 

the same information in the periodic statement under proposed § 1026.41, discussed below. The 

proposed periodic statement would provide consumers with comprehensive information about 

their mortgages each billing cycle. The periodic statement would include some of the same key 

information provided to consumers under the current § 1026.20(c) annual notice, such as the 
56 

current interest rate and the date after which that rate would adjust. It also would provide other 

information that may be useful to consumers who would receive the § 1026.20(c) annual ARM 

notice, including the existence and amount of any prepayment penalty; allocation of the 

consumer’s payment by principal, interest, and escrow; the amount of the outstanding principal; 

contact information for the State housing finance authority; and information to access a list of 

Federally-certified housing counselors. 

In light of the amount, type, and frequency of the information the Bureau proposes to 

provide in the periodic statement to consumers with ARMs that are subject to the current 

§ 1026.20(c) annual ARM interest rate notice, the Bureau proposes to eliminate the requirement 

for the annual notice as duplicative and as potentially contributing to information overload that 

could deflect consumer attention away from the information such consumers would receive in 

other required disclosures. The Bureau solicits comments on the need, value, or use of retaining 

the annual notice required under current § 1026.20(c) for consumers whose ARM interest rates 

adjust during the course of a year without resulting in corresponding payment changes. 

The Bureau proposes to delete comments 20(c)(1)-1 and 20(c)(4)-1 which, among other 

things, address the content of the § 1026.20(c) annual notice the Bureau is proposing to 

eliminate. Current comment 20(c)(1)-1 also explains, among other things, the meaning of the 

terms “current” and “prior” rates and that in disclosing all other rates that applied during the 

period between notices, the creditor may disclose a range of the highest and lowest rates during 

that year period. Current comment 20(c)(4)-1, among other things, defines the term loan 

“balance” and explains that a “contractual effect” of a rate adjustment includes disclosure of any 

change in the term or maturity of the loan if the change resulted from the rate adjustment. The 

Bureau also proposes deletion of these current comments as they relate to the recurring 
57 

disclosures that would be required by proposed § 1026.20(c) for interest rate adjustments 

resulting in a corresponding payment change. The Bureau proposes to replace these comments 

with the new commentary discussed below. 

Amendment of payment change disclosure. Second, proposed § 1026.20(c) would amend 

existing § 1026.20(c) as it relates to interest rate adjustments that result in a corresponding 

payment change. The proposal retains much of the content required in the current notice and 

also would require disclosure of additional information that the Bureau believes would help 

consumers better understand and manage their adjustable-rate mortgages. The proposed 

revisions to current § 1026.20(c) harmonize with the initial ARM interest rate adjustment notice 

proposed by § 1026.20(d). The Bureau believes that promoting consistency between the ARM 

disclosure provisions of § 1026.20(c) and (d) would reduce compliance burdens on industry and 

minimize consumer confusion. 

Creditors, assignees, and servicers. The Bureau also proposes to amend § 1026.20(c) to 

provide that it applies to creditors, assignees, and servicers. Current § 1026.20(c) applies to 

creditors and existing comment 20(c)-1 clarifies that the requirements of § 1026.20(c) also apply 

to subsequent holders, i.e., assignees. The Bureau’s proposal provides that § 1026.20(c) would 

apply to servicers, as well as to creditors and assignees. Proposed comment 20(c)-1 clarifies that 

a creditor, assignee, or servicer that no longer owns the mortgage loan or the mortgage servicing 

rights is not subject to the requirements of § 1026.20(c). 

As discussed below, proposed § 1026.20(c) is authorized under, among other authorities, 

TILA section 128(f), which applies to creditors, assignees, and servicers. The proposal is 

consistent with proposed § 1026.20(d) such that both proposed § 1026.20(c) and (d) would apply 

to creditors, assignees and servicers. 
58 

The Bureau believes that applying § 1026.20(c) to creditors and assignees, but not 

servicers, would compromise consumers’ recourse in the case of a violation of § 1026.20(c). 

Many creditors and assignees do not service the loans they own and instead sell the mortgage 

servicing rights to a third party. The servicer is the party with which consumers have contact on 

an ongoing basis regarding their mortgages. Consumers send their payments to the servicer and 

communicate with the servicer regarding any questions or problems with their mortgage that 

may arise. Where the owner and the servicer are different entities, consumers may not know the 

identity of the owner and may not even realize that the servicer is not the owner of their 

mortgage. Moreover, it can be difficult for consumers to ascertain the identity of the creditor or 

assignee, even though servicers would be required to identify the owner of a mortgage under 

rules proposed pursuant to DFA section 1463. Thus, in the case of a violation of proposed 

§ 1026.20(c), consumers should be able to seek relief against the servicer as the primary party 

from whom they receive service and with whom they maintain communication regarding their 

mortgages. See below, section 20(d), for a discussion of application of proposed § 1026.20(d) 

initial ARM interest rate adjustment notices to assignees. The same rationale applies to proposed 

§ 1026.20(c) ARM payment adjustment notices. 

Proposed comment 20(c)-1 explains that any provision of subpart C that applies to the 

disclosures required by § 1026.20(c) also applies to creditors, assignees, and servicers. This is 

the case even where the other provisions of subpart C refer only to creditors. For the reasons 

discussed above, the Bureau proposes that the requirements of other regulations that apply to the 

§ 1026.20(c) ARM payment adjustment notices apply to servicers as well as to creditors and 

assignees. 
59 

The proposal also would delete current comment 20(c)-1, which, among other things, 

refers to subsequent holders, in favor of consistent usage of the term assignee in proposed 

§ 1026.20(c) and (d). It would also delete comment 20(c)-3 as duplicative of the § 1026.17(c)(1) 

requirement that the disclosures reflect the terms of the parties’ legal obligations. 

Conversions. Proposed § 1026.20(c) also applies to ARMs converting to fixed-rate 

mortgages when the adjustment to the interest rate results in a corresponding payment change. 

Providing this notice would alert consumers to their new interest rate and payment following 

conversion from an ARM to a fixed-rate mortgage. Proposed comment 20(c)-2 explains that, in 

the case of an open-end account converting to a closed-end adjustable-rate mortgage, 

§ 1026.20(c) disclosures are not required until the implementation of the first interest rate 

adjustment that results in a corresponding payment change post-conversion. Under the proposed 

rule, this conversion is analogous to consummation. Thus, like other ARMs subject to the 

requirements of proposed § 1026.20(c), disclosures for these types of converted ARMs would 

not be required until the first interest rate adjustment following the conversion which results in a 

corresponding payment change. The proposed rule is consistent with existing commentary and 

proposed § 1026.20(d) regarding conversions. See current comment 20(c)-1. 

Authority. The Bureau proposes to amend § 1026.20(c) pursuant to its authority under 

TILA section 105(a). For the reasons discussed in the section-by-section analysis for each of the 

proposed amendments to § 1026.20(c), the Bureau believes that the proposed amendments are 

necessary and proper to effectuate the purposes of TILA to assure a meaningful disclosure of 

credit terms, avoid the uninformed use of credit, and protect consumers against inaccurate and 

unfair credit billing practices. Proposed § 1026.20(c) also is authorized under TILA section 

128(f), which requires that certain information enumerated in the statute be provided to 
60 

consumers every billing cycle in a periodic statement and also confers on the Bureau the 

authority to require periodic disclosure of “[s]uch other information as the Bureau may prescribe 

in regulations.” Proposed § 1026.20(c) is further authorized under DFA section 1405(b), which 

permits the Bureau to modify disclosure requirements where such modification is in the interest 

of consumers and the public. 

Although TILA section 128(f) authorizes the Bureau to require that the content for the 

§ 1026.20(c) ARM notices be included in the periodic statement, the Bureau believes, for the 

reasons set forth above and below, that consumers would be better served if this information was 

provided as a separate disclosure. Under proposed § 1026.17(a), the proposed § 1026.20(c) 

ARM payment adjustment notice would have to be provided separate and distinct from the 

periodic statement. The disclosures required by proposed § 1026.20(c), however, may be 

provided to consumers together with the periodic statement, depending on the mode of delivery, 

in the same envelope or as an additional attachment to the e-mail. The Bureau also believes that 

the interest of consumers and the public interest would be better served by receiving the 

§ 1026.20(c) ARM notice, within the time frame discussed below, each time the ARM interest 

rate adjusts resulting in a corresponding payment change, rather than with each billing cycle. 

20(c)(1) Coverage of Rate Adjustment Disclosures 

20(c)(1)(i) In General 

Proposed § 1026.20(c)(1) defines an adjustable-rate mortgage, for purposes of 

§ 1026.20(c), as a closed-end consumer credit transaction secured by the consumer’s principal 

dwelling in which the annual percentage rate may increase after consummation. Current 

§ 1026.20(c) requires disclosures only for adjustments to the interest rate in variable-rate 

transactions subject to § 1026.19(b), which is limited to loans secured by the consumer’s 
61 

principal dwelling with a term of greater than one year. The Bureau proposes deleting the crossreference to § 1026.19(b), thereby expanding the scope of proposed § 1026.20(c) to include 

loans with terms of one year or less. Proposed § 1026.20(c)(1)(i) would replace current 

§ 1026.20(c) and comment 20(c)-1 with regard to which loans are subject to the interest rate 

adjustment disclosures. 

There is one type of short-term ARM that the Bureau proposes to except from the 

requirements of § 1026.20(c): construction loans with terms of one year or less. See section 

20(c)(1)(ii) below for a full discussion of this proposed exception for construction ARMs with 

terms of one year or less. The Bureau solicits comment on whether there are other ARMs with 

terms of less than one year and whether the proposed 60-day minimum notice period is 

appropriate for such loans. See section 20(c)(2) below for a full discussion of the timing 

proposed for § 1026.20(c). If the 60-day period is not appropriate, the Bureau solicits comment 

on what period would be appropriate that would also provide consumers with sufficient notice of 

a payment change. This proposal regarding coverage is consistent with the statutory 

requirements of TILA section 128A and proposed § 1026.20(d) in that those provisions generally 

apply to all ARMs, regardless of term length. Thus, the proposal to expand § 1026.20(c) to 

ARMs with terms of one year or less would harmonize the coverage of the two types of ARM 

adjustment notices, thereby ensuring that both § 1026.20(d) notices and § 1026.20(c) notices, 

when required, are provided to the same consumers. 

The Bureau proposes using the terms “adjustable-rate mortgage” or “ARM” to replace 

the term “variable-rate transaction” in current § 1026.20(c). Proposed comment 20(c)(1)(i)-1 

clarifies that the term “variable-rate transaction,” as used in § 1026.19(b) and elsewhere in 

Regulation Z, is synonymous with the term “adjustable-rate mortgage” or “ARM”, except where 
62 

specifically distinguished. The Bureau proposes this revision because “adjustable-rate 

mortgage” or “ARM” are the terms commonly used for mortgages covered by current and 

proposed § 1026.20(c). 

Proposed comment 20(c)(1)(i)-1 also clarifies that the requirements of § 1026.20(c)(1)(i) 

are not limited to transactions financing the initial acquisition of the consumer’s principal 

dwelling, but also would apply to other closed-end ARM transactions secured by the consumer’s 

principal dwelling, consistent with current comment 19(b)-1 and current § 1026.20(c). 

20(c)(1)(ii) Exceptions 

Proposed § 1026.20(c)(1)(ii) sets forth two exceptions to the disclosure requirements of 

§ 1026.20(c). These exceptions apply to: (1) construction loans with terms of one year or less; 

and (2) the first adjustment to an ARM if the first payment at the adjusted level is due within 210 

days after consummation and the actual, not estimated, new interest rate was disclosed at 

consummation, in the initial ARM interest rate adjustment notice that would be required by 

proposed § 1026.20(d). Proposed comments 20(c)(1)(ii)-1 and -2 provide further explanation. 

Proposed § 1026.20(d) also would except the same construction loans. 

As discussed in more detail below in connection with the notice required for an initial 

ARM interest rate adjustment under § 1026.20(d), the Bureau also considered, but decided 

against, permitting or requiring small creditors, assignees, and servicers to include in the periodic 

statement the information required for the first payment change notice under proposed 

§ 1026.20(c). The Bureau also considered this option with regard to all notices that small entities 

would be required to provide to consumers under proposed § 1026.20(c). As discussed further 

below, the Bureau solicits comments from small entities -- and from creditors, assignees, and 

servicers in general -- as to whether small entities or all creditors, assignees, and servicers should 
63 

be permitted or required to provide the information required in the first payment change notices 

under proposed § 1026.20(c) in the periodic statement instead of as a separate ARM notice and 

whether this should be done for all § 1026.20(c) notices. 

Regarding the first exception the Bureau proposes, construction loans generally have 

short terms of six months to one year and are subject to frequent interest rate adjustments, 

usually monthly or quarterly. The construction period usually involves several disbursements of 

funds at times and in amounts that are unknown at the beginning of that period. The consumer 

generally pays only accrued interest until construction is completed. The creditor, assignee, or 

servicer, in addition to disbursing payments in stages, closely monitors the progress of 

construction. Generally, at the completion of the construction, the construction loan is converted 

into permanent financing in which the loan amount is amortized just as in a standard mortgage 

transaction. See comment 17(c)(6)-2 for additional information on construction loans. 

The frequent interest rate adjustments, multiple disbursements of funds, short loan term, 

and on-going communication between the creditor, assignee, or servicer and consumer, 

distinguish construction loans from other ARMs. These loans are meant to function as bridge 

financing until construction is completed and permanent financing can be put in place. 

Consumers with construction ARM loans are not at risk of payment shock like other ARMs 

where interest rates change less frequently. Moreover, given the frequency of interest rate 

adjustments on construction loans, creditors, assignees, or servicers would have difficulty 

complying with the proposed requirement to provide the notice to consumers 60 to 120 days 

before payment at a new level is due for each adjustment resulting in a corresponding payment 

change. For these reasons, providing notices under § 1026.20(c) for these loans would not 

provide a meaningful benefit to the consumer nor improve consumers’ awareness and 
64 

understanding of their construction loans with terms of one year or less. Proposed comment 

20(c)(1)(i)-1 applies the standards in comment 19(b)-1 for determining the term of a construction 

loan. 

The second exception, for the first adjustment to an ARM causing a payment change if 

the first payment at the adjusted level is due within 210 days after consummation, would apply 

only if the exact interest rate, not an estimate, is disclosed at consummation. For ARMs 

adjusting within six months of consummation, i.e., 210 days before the first payment is due at the 

new level, the disclosures proposed by § 1026.20(d) must be provided at consummation. The 

recency of consummation obviates the need for the § 1026.20(c) notice in this circumstance 

because consumers would have been apprised of the upcoming adjustment and payment change 

just months prior to its occurrence and their mortgages would be so new as to not require the 

alerts in the notice regarding pursuing alternatives. Thus, providing § 1026.20(c) disclosures in 

these circumstances would be duplicative, not contribute to consumer awareness and 

understanding, and not provide a meaningful benefit to consumers. 

Proposed comment 20(c)(1)(ii)-3 discusses other loans to which the proposed rule does 

not apply. Proposed comment 20(c)(1)(ii)-3 is consistent with proposed comment 20(d)(1)(ii)-2 

with regard to the loans which are not subject to the proposed ARM disclosure rules. Certain 

Regulation Z provisions treat some of these loans as variable-rate transactions, even if they are 

structured as fixed-rate transactions. The proposed comment clarifies that, for purposes of 

§ 1026.20(c), the following loans, if fixed-rate transactions, are not ARMs and therefore not 

subject to ARM notices pursuant to § 1026.20(c): shared-equity or shared-appreciation 

mortgages; price-level adjusted 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 
65 

measuring prices or inflation; graduated-payment mortgages or step-rate transactions; renewable 

balloon-payment instruments; and preferred-rate loans. The particular features of these types of 

loans may trigger interest rate or payment changes over the term of the loan or at the time the 

consumer pays off the final balance. However, these changes are based on factors other than a 

change in the value of an index or a formula. Because the enumerated loans are not ARMs they 

are not covered by proposed § 1026.20(c) and require no disclosures under this section. 

Proposed and current § 1026.20(c) are generally consistent with regard to the ARMs to 

which they do not apply. The principal difference is that current § 1026.20(c) does apply to 

renewable balloon-payment instruments and preferred-rate loans, even if they are structured as 

fixed-rate transactions while proposed § 1026.20(c) would not apply to such loans. See

§ 1026.19(b) and comment 19(b)-5.i.A and B. Also, as discussed above, current § 1026.20(c) 

does not apply to loans with terms of one year or less. This category includes construction loans, 

which are excepted from coverage under proposed § 1026.20(c). Logically, the Bureau’s 

proposed exception for initial § 1026.20(c) ARM adjustments if the first payment at the adjusted 

level is due within 210 days of consummation is inapplicable to the current rule since proposed 

§ 1026.20(d) is not yet implemented to replace the current § 1026.20(c) disclosures provided at 

consummation. 

Like proposed comment 20(c)(1)(ii)-3, current comment 20(c)-2 clarifies that 

§ 1026.20(c) does not apply to shared-equity or shared-appreciation mortgages or to price-level 

adjusted or other such indexed mortgages. The current rule cross-references § 1026.19(b) and 

applies to all variable-rate transactions covered by that rule. Comment 19(b)-4 explains that 

graduated-payment mortgages and step-rate transactions without variable-rate features are not 
66 

subject to § 1026.19(b). Therefore, like the proposed rule, such loans are not subject to current 

§ 1026.20(c). 

The current rule does not mention renewable balloon-payment instruments and preferredrate loans, but current § 1026.20(c) applies to these loan products through the rule’s crossreference to § 1026.19(b) and therefore to comment 19(b)-5.i.A and B. As discussed above, 

these loans are not adjustable-rate mortgages and the Bureau does not believe that it is 

appropriate to require the disclosures in proposed § 1026.20(c) for such loans. The particular 

features of these types of loans may trigger interest rate or payment changes over the term of the 

loan or at the time the consumer pays off the final balance. However, these changes are based on 

factors other than a change in the value of an index or a formula. For example, whether or when 

the interest rate will adjust for a preferred-rate loan with a fixed interest rate is likely not 

knowable to the creditor, assignee, or servicer 60 to 120 days in advance of the due date for the 

first payment at a new level after the adjustment. This is because the loss of the preferred rate is 

based on factors other than a formula or change in the value of an index agreed to at 

consummation. Like the Bureau’s proposed rule, the Board also proposed to remove renewable 

balloon-payment instruments and preferred-rate loans from coverage under § 1026.20(c) in its 

2009 Closed-End Proposal.62

20(c)(2) Timing and Content of Rate Adjustment Disclosures 

 Proposed § 1026.20(c)(2) would require that ARM disclosures be provided to consumers 

60 to 120 days before payment at a new level is due. Under current § 1026.20(c), notices must 

be provided to consumers 25 to 120 days before payment at a new level is due. Thus, the 

proposed rule would increase the minimum advance notice to consumers from 25 to 60 days 

 

62 74 FR 43232, 43264, 43387 (Aug. 26, 2009). 
67 

before a new payment amount is due. There are two circumstances under which the rule 

proposes a different time frame, which are discussed below. Proposed comment 20(c)(2)-1 

would replace current comment 20(c)-1 regarding timing. 

Current and proposed § 1026.20(c) disclosures provide consumers with their actual new 

interest rate and payment. The disclosures proposed by § 1026.20(d) likely would provide 

estimates of these amounts. The longer time frame proposed by the rule is intended to give 

consumers adequate time to refinance or take other actions based on these exact amounts, if they 

are not able to make higher payments. The current minimum time of 25 days does not give 

consumers sufficient time to pursue meaningful alternatives such as refinancing, home sale, loan 

modification, forbearance, or deed in lieu of foreclosure. In the current market, “it now takes the 

nation’s biggest mortgage lenders an average of more than 70 days to complete a refinance.63 

Even if consumers elect not to refinance or pursue other alternatives, the proposed rule would 

give them more time to adjust their finances to the actual amount of an increase in their mortgage 

payments. 

The Bureau believes that for most adjustable-rate mortgages, the proposed 60-day 

minimum time frame would provide sufficient time for creditors, assignees, and servicers to 

comply with the proposed rule. Through outreach to servicers of adjustable-rate mortgages it 

appears that, for most ARMs, servicers know the index value from which the new interest rate 

and payment are calculated at least 45 days before the date of the interest rate adjustment. 

Because interest generally is paid one month in arrears, this mean that, for most ARMs, servicers 

know the index value approximately 75 days before the due date of the first new payment, 

 

63 Timiraos & Simon, supra note 52. 
68 

depending on the number of days in the month during which interest begins accruing at the new 

rate. 

Creditors, assignees, and servicers generally refer to the date the adjusted interest rate 

goes into effect as the “change date.” The “look-back period” is the number of days prior to the 

change date on which the index value will be selected which serves as the basis for the new 

interest rate and payment. In general, interest rate change dates occur on the first of the month to 

correspond with payment due dates. Thus, the due date for the new payment generally falls on 

the first of the month following the change date. 

Based on outreach conducted by the Bureau, it appears that small servicers often send out 

the payment change notices required by § 1026.20(c) on the same day the index value is selected. 

In that case, for a loan with a 45-day look-back period, the notice is ready 45 days before the 

change date and, with an approximately 30-day billing cycle between the change date and the 

date payment at the new level is due, the interest rate adjustment notice can be provided to the 

consumer approximately 75 days before the new payment is due. Under these circumstances, the 

servicer could comfortably comply with a rule requiring that notice be provided to consumers 60 

days before the payment at a new level is due. 

On the other hand, many large creditors, assignees, or servicers conduct what is referred 

to as a “verification period” before sending out the notices required by § 1026.20(c). This 

verification period generally takes anywhere from three to ten days and involves confirming the 

index rate and other quality control measures to insure the notices are correct.64 In these cases, 

for a loan with a 45-day look-back period, the payment change notices can be provided between 

approximately 42 and 35 days prior to the change date, which is either 70 to 73 or 63 to 66 days 

 

64 No creditor, assignee, or servicer contacted by the Bureau used a system employing an automatic feed of 

information from the publisher of an index source. All data was entered and verified manually. 
69 

before the new payment is due, depending on the verification period used and the length of the 

billing cycle. Under these circumstances, payment change notices could be provided to 

consumers within the 60-day period, even assuming a verification period of up to thirteen days. 

For loans with the shortest verification period of three days, the payment change notice could be 

provided to consumers within 70 days prior to payment due at a new level. 

In sum, it appears that for most ARMs, creditors, assignees, or servicers could comply 

with the 60-day time period proposed by the Bureau. The Bureau solicits comment about this 

proposed timing of the § 1026.20(c) notice. 

Some ARMs have look-back periods shorter than 45 days. For example, ARMs backed 

by the FHA and VA often have look-back periods of 15 or 30 days. For some ARMs, the 

calculation date is the first business day of the month that precedes the effective date of the 

interest rate change. Since the first day of that month may not fall on a business day, the lookback period may be less than 30 days, excluding any verification period. 

In two circumstances, the Bureau is proposing a different time period from the proposed 

60 to 120 days. The Bureau proposes that existing ARMs with look-back periods of less than 45 

days that were originated before a specified date provide the notices required under this proposed 

rule within 25 to 120 days before payment at a new level is due. The Bureau proposes that the 

specified date be July 21, 2013. The Bureau understands that the creditors, assignees, or 

servicers of such loans would not be able to comply with the 60- to 120-day time frame proposed 

in § 1026.20(c). Although this time frame would shorten the advance notice provided to some 

consumers, the Bureau is proposing to grandfather these ARMs in order to prevent altering 

existing contractual agreements regarding the look-back period. Thus, going forward, ARMs 

must be structured to permit compliance with the proposed 60- to 120-day time frame. The 
70 

Bureau solicits comment on whether it should grandfather existing ARMs with look-back 

periods of less than 45 days. The Bureau also seeks comment on whether July 21, 2013 is an 

appropriate time frame for grandfathering existing ARMs with look-back periods of less than 45 

days or if another time period would be more appropriate and why. If not, the Bureau seeks 

comment on what would be an appropriate time frame for the expiration of the grandfathering 

period. The Bureau also solicits comments on whether other adjustable-rate mortgages should be 

allowed to continue with a 25- to 120- day period. 

The Bureau also proposes to alter the timing requirements for ARMs that adjust for the 

first time within 60 days of consummation where the actual, not estimated, new interest rate was 

not disclosed at consummation. (If the actual interest rate was disclosed at consummation, such 

loans would be excepted from the rule pursuant to proposed § 1026.20(c)(1)(ii)). The creditors, 

assignees, or servicers of such loans would not be able to comply with the proposed 60-day time 

frame. For such loans, the disclosures proposed by § 1026.20(c) must be provided to consumers 

as soon as practicable, but not less than 25 days before a payment at a new level is due. 

 The Bureau solicits comment about the feasibility of applying the proposed 60-day period 

to ARMs that have look-back period of less than 45 days. The Bureau solicits comments about 

whether a look-back period of 45 days or longer is feasible going forward for loans that currently 

use shorter look-back periods and, if not, why not. The Bureau solicits comments on the extent, 

if any, to which the relative length of the look-back period may affect the interest rate risk for the 

creditor, assignee, or servicer. 

For all ARMs, the Bureau solicits comments on the operational changes that would be 

required to provide § 1026.20(c) notices at least 60 days before payment at a new level is due. 

Comment is requested on any factors that would hinder compliance with this time frames. In 
71 

light of technological and other advances since the promulgation of current § 1026.20(c) in 1987, 

the Bureau also solicits comment on whether, and if so why, lengthy verification periods are 

necessary and on the feasibility of reducing the length of these verification periods. 

20(c)(2)(i) Statement Regarding Changes to Interest Rate and Payment 

For interest rate adjustments resulting in corresponding payment changes, proposed 

§ 1026.20(c)(2)(i)(A) would inform consumers that, under the terms of their adjustable-rate 

mortgage, the specific period in which their interest rate stayed the same will end on a certain 

date and that their interest rate and mortgage payment will change on that date. This disclosure 

is similar to the pre-consummation disclosures provided to consumers pursuant to current 

§ 1026.19(b)(2)(i) and § 1026.37(i) as recently proposed by the 2012 TILA-RESPA Proposal. 

Under proposed § 1026.20(c)(2)(i)(B), the creditor, assignee, or servicer must include in 

the disclosure the date of the impending and future interest rate adjustments. Proposed 

§ 1026.20(c)(2)(i)(C) would require disclosure of any other changes to the loan taking place on 

the same day of the rate adjustment, such as changes in amortization caused by the expiration of 

interest-only or payment-option features. 

The first ARM model form tested did not contain the proposed statement informing 

consumers of impending and future changes to their interest rate and the basis for these changes. 

Although participants understood that their interest rate was adjusting and this would affect their 

payment, they did not understand that these changes would occur periodically subject to the 

terms of their mortgage contract. Inclusion of this statement in the second round of testing 

successfully resolved this confusion. All but one consumer tested in round two and three of 
72 

testing understood that, under the scenario presented to them, their interest rate would change 

annually.65

20(c)(2)(ii) Table with Current and New Interest Rates and Payments 

 Proposed § 1026.20(c)(2)(ii) would require disclosure of the following information in the 

form of a table: (A) the current and new interest rates; (B) the current and new periodic payment 

amounts and the date the first new payment is due; and (C) for interest-only or negativelyamortizing payments, the amount of the current and new payment allocated to interest, principal, 

and property taxes and mortgage-related insurance, as applicable. The information in this table 

would appear within the larger table containing all the required disclosures. 

This table would follow the same order as, and have headings and format substantially 

similar to, those in the table in Forms H-4(D)(1) and (2) in Appendix H of subpart C. The 

Bureau learned through consumer testing that, when presented with information in a logical 

order, consumers more easily grasped the complex concepts contained in the proposed 

§ 1026.20(c) notice. For example, the form begins by informing consumers of the basic purpose 

of the notice: their interest rate is going to adjust, when it will adjust, and the adjustment will 

change their mortgage payment. This introduction is immediately followed by a visual 

illustration of this information in the form of a table comparing consumers’ current and new 

interest rates. Based on consumer testing, the Bureau believes that consumer understanding is 

enhanced by presenting the information in a simple manner, grouped together by concept, and in 

a specific order that allows consumers the opportunity to build upon knowledge gained. For 

these reasons, the Bureau proposes that creditors, assignees, or servicers disclose the information 

in the table as set forth in Forms H-4(D)(1) and (2) in Appendix H. 

 

65 Macro Report, supra note 38, at vii. 
73 

 Proposed § 1026.20(c)(2)(ii) replaces current § 1026.20(c)(1) and (4), but retains the 

obligation to disclose the current and new interest rates and the amount of the new payment. 

Proposed § 1026.20(c)(2)(ii)(A) also would require disclosure of the date when the consumer 

must start paying the new payment and proposed comment § 1026.20(c)(2)(ii)(A)-1 clarifies that 

the new interest rate must be the actual rate, not an estimate. Proposed rule § 1026.20(c)(2)(ii) 

also replaces the language “prior” and “current” in the current rule with the terms “current” and 

“new,” respectively, and deletes comment 20(c)(2)-1 which, among other things, uses the terms 

“prior” and “current.” This change is designed to make clear that “current” means the interest 

rate and payment in effect prior to the interest rate adjustment and “new” means the interest rate 

and payment resulting from the interest rate adjustment. 

Proposed comment 20(c)(2)(ii)(A)-1 defines the term “current” interest rate as the one in 

effect on the date of the disclosure. This more succinct definition replaces the lengthy definition 

of “prior interest rates” in current comment 20(c)(1) as the interest rate disclosed in the last 

notice, as well as all other interest rates applied to the transaction in the period since the last 

notice, or, if there had been no prior adjustment notice, the interest rate applicable at 

consummation and all other interest rates applied to the transaction in the period since 

consummation. 

In all rounds of testing, consumers were presented with model forms with tables 

depicting a scenario in which the interest rate and payment would increase as a result of the 

adjustment. All participants in all rounds of testing understood that their interest rate and 

payment were going to increase and when these changes would occur.66 

 

66 Id. 
74 

 Current ARM notices are not required to show the allocation of payments among 

principal, interest, and escrow accounts for any ARM. The Bureau proposes including this 

information in the table for interest-only and negatively-amortizing ARMs. The Bureau believes 

this information would help consumers better understand the risk of these products by 

demonstrating that their payments would not reduce the principal. The Bureau also believes 

providing the payment allocation would help consumers understand the effect of the interest rate 

adjustment, especially in the case of a change in the ARM’s features coinciding with the interest 

rate adjustment, such as the expiration of an interest-only or payment-option feature. Since 

payment allocation may change over time, the proposed rule would require disclosure of the 

expected payment allocation for the first payment period during which the adjusted interest rate 

would apply. 

The allocation of payment disclosure was tested in the third round of testing. The rate 

adjustment notice tested showed the following scenario: the first adjustment of a 3/1 hybrid 

ARM -- an ARM with a fixed interest rate for three years followed by annual interest rate 

adjustments -- with interest-only payments for the first three years. On the date of the 

adjustment, the interest-only feature would expire and the ARM would become amortizing. 

Only about half of participants understood that their payments were changing from interest-only 

to amortizing. Participants generally understood the concept of allocation of payments but were 

confused by the table in the notice that broke out principal and interest for the current payment, 

but combined the two for the new amount. As a result, this table was revised so that separate 

amounts for principal and interest were shown for all payments. 67 

 

67 Id. at vii- viii. This revision to the allocation disclosure, which is identical in the proposed § 1026.20(c) and (d) 

notices, was made after the third round of testing of the § 1026.20(d) notice, and therefore was not tested with 

consumers. 
75 

The Bureau recognizes that certain Dodd-Frank Act amendments to TILA will restrict 

origination of non-amortizing and negatively-amortizing loans. For example, TILA section 

129C and the 2011 ATR (Ability to Repay) Proposal which would implement that provision, 

generally require creditors to determine that a consumer can repay a mortgage loan and include a 

requirement that these determinations assume a fully-amortizing loan. Thus, this law and 

regulation, when finalized, will restrict the origination of risky mortgages such as interest-only 

and negatively-amortizing ARMs. 

Other Dodd-Frank amendments to TILA, such as the proposed periodic statement 

provisions discussed below, will provide payment allocation information to consumers for each 

billing cycle. Thus, consumers who currently have interest-only or negatively-amortizing loans 

or may obtain such loans in the future will receive information about the interest-only or 

negatively-amortizing features of their loans through the payment allocation information in the 

periodic statement. Also, as noted above, consumer testing showed that participants were 

confused by the allocation table. Since the Bureau was not able to test a revised version of the 

model form to see if it rectified the confusion caused by the allocation table or if the concepts of 

interest-only and negatively-amortizing ARMs themselves are the source of the confusion, the 

Bureau is uncertain of the value of disclosing this information to consumers in the ARM interest 

rate adjustment notice. In view of these changes to the law and the outcome of consumer testing, 

the Bureau solicits comments on whether to include allocation information for interest-only and 

negatively-amortizing ARMs in the table proposed above. 

20(c)(2)(iii) Explanation of How the Interest Rate is Determined

Proposed § 1026.20(c)(2)(iii) would require the ARM disclosures to explain how the 

interest rate is determined. Consumer testing revealed that consumers generally have difficulty 
76 

understanding the relationship of the index, margin, and interest rate.68 Therefore, the Bureau is 

proposing a relatively brief and simple explanation that the new interest rate is calculated by 

taking the published index rate and adding a certain number of percentage points, called the 

“margin.” Proposed § 1026.20(c)(2)(iii) would also require disclosure of the specific amount of 

the margin. 

The proposed explanation of how the consumer’s new interest rate is determined, such as 

adjustment of the index by the addition of a margin, mirrors the pre-consummation disclosure 

required around the time of application by current § 1026.19(b)(2)(iii) and TILA section 128A 

requirements for initial interest rate disclosures. It also parallels the pre-consummation 

disclosure of the index and margin proposed in the 2012 TILA-RESPA Proposal. Proposed 

§ 1026.20(c) also would require disclosure of the name and published source of the index or 

formula, as required in other disclosures by § 1026.19(b)(2)(ii) and TILA section 128A. 

The proposed rule would replace the current § 1026.20(c)(2) required disclosure of the 

index values upon which the “current” and “prior” interest rates are based. The Bureau believes 

that providing consumers with index values is less valuable than providing them with their actual 

interest rates. Current comment 20(c)(2)-1, which addresses the requirement to disclose current 

and prior interest rate, would also be deleted. 

Consumer testing indicated that the explanation helped consumers better understand the 

relationship between interest rate, index, and margin. It also helped dispel the notion held by 

many consumers in the initial rounds of testing that lenders subjectively determined their new 

interest rate at each adjustment.69 The Bureau believes that its proposed rule and forms strike an 

appropriate balance between providing consumers with key information necessary to understand 

 

68 Id. at viii. 69 Id.
77 

the basic interest rate adjustment of their adjustable-rate mortgages without overloading 

consumers with complex and confusing technical information. 

20(c)(2)(iv) Rate Limits and Unapplied Carryover Interest 

Proposed § 1026.20(c)(2)(iv) would require the disclosure of any limits on the interest 

rate or payment increases at each adjustment and over the life of the loan. It also would require 

disclosure of the extent to which the creditor has foregone any increase in the interest rate due to 

a limit, called unapplied carryover interest. Disclosure of rate limits is not required by the 

current rule. The Bureau believes that knowing the limitations of their ARM rates and payments 

would help consumers understand the consequences of interest rate adjustments and weigh the 

relative benefits of pursuing alternatives. For example, if an adjustment causes a significant 

increase in the consumer’s payment, knowing how much more the interest rate or payment could 

increase could help inform a consumer’s decision on whether or not to seek alternative financing. 

Both proposed § 1026.20(c)(2)(iv) and current § 1026.20(c)(3) require disclosure of any 

foregone interest rate increase. Unlike the current rule, the proposed rule would require an 

explanation in the ARM payment change notice that the additional interest was not applied due 

to a rate limit and provide the earliest date such foregone interest may be applied. 

Proposed comment 20(c)(2)(iv)-1 regarding unapplied interest closely parallels, and 

would replace, current comment 20(c)(3)-1. The proposed comment explains that disclosure of 

foregone interest would apply only to transactions permitting interest rate carryover. It further 

explains that the amount of the interest increase foregone is the amount that, subject to rate caps, 

can be added to future interest rate adjustments to increase, or offset decreases in, the rate 

determined according to the index or formula. 
78 

Consumers had difficulty understanding the concept of interest rate carryover when it 

was introduced during the third round of testing. This difficulty may have been due to the 

simultaneous introduction of other complex notions, such as interest-only or negativelyamortizing features and the allocation of interest, principal, and escrow payments for such loans. 

In response, the Bureau has simplified the explanation of carryover interest.70 

The Bureau recognizes that the disclosure of rate limits and unapplied carryover interest 

provide information that may help consumers better understand their ARMs. However, the 

Bureau is considering whether the help this information may provide outweighs its distraction 

from other more key information. Also, as explained above, consumers had difficulty 

understanding the concept of carryover interest and the Bureau does not want this difficulty to 

diminish the effectiveness of the proposed § 1026.20(c) disclosures. The Bureau solicits 

comment on whether to include rate limits and unapplied carryover interest in the proposed 

§ 1026.20(c) disclosures. 

20(c)(2)(v) Explanation of How the New Payment is Determined 

Proposed § 1026.20(c)(2)(v) would require ARM disclosures to explain how the new 

payment is determined, including (A) the index or formula, (B) any adjustment to the index or 

formula, such as by addition of the margin or application of previously foregone interest, (C) the 

loan balance, and (D) the length of the remaining loan term. This explanation is consistent with 

the disclosures provided at the time of application pursuant to § 1026.19(b)(2)(iii). It is also 

consistent with the TILA section 128A requirement to disclose the assumptions upon which the 

new payment is based, which the Bureau proposes to implement in proposed § 1026.20(d), and 

thus promotes consistency among Regulation Z ARM disclosures. 

 

70 Id. at viii-ix. 
79 

The current rule, as explained in comment 20(c)(4)-1, which the proposed rule would 

delete, requires disclosure of the contractual effects of the adjustment. This includes the 

payment due after the adjustment is made and whether the payment has been adjusted. The 

proposed rule would require disclosure of this information as well as the name of the index and 

any specific adjustment to the index, such as the addition of a margin or an adjustment due to 

carryover interest. Proposed comment 20(c)(2)(v)(B)-1 explains that a disclosure regarding the 

application of previously foregone interest is required only for transactions permitting interest 

rate carryover. The proposed comment further explains that foregone interest is any percentage 

added or carried over to the interest rate because a rate cap prevented the increase at an earlier 

adjustment. As discussed above, the Bureau found that this explanation helped consumers better 

understand how the index or formula and margin determine their new payment and dispelled the 

notion held by many consumers in the initial rounds of testing that the lender subjectively 

determined their new interest rate, and thus the new payment, at each adjustment. 

The proposal would require disclosure of both the loan balance and the remaining loan 

term expected on the date of the interest rate adjustment. The current rule requires disclosure of 

the loan balance but not the remaining loan term. The date on which the balance is taken differs 

slightly in proposed § 1026.20(c) from the current rule. Current comment 20(c)(4)-1 explains 

that the balance disclosed is the one that serves as the basis for calculating the new adjusted 

payment while the Bureau proposes disclosure of a more current balance, i.e., the one expected 

on the date of the adjustment. Both the proposed rule and the current rule, as explained in 

current comment 20(c)(4)-1, provide for disclosure of any change in the term or maturity of the 

loan caused by the adjustment. 
80 

Disclosure of the four key assumptions upon which the new payment is based provides a 

succinct overview of how the interest rate adjustment works. It also demonstrates that factors 

other than the index can increase consumers’ interest rates and payments. Disclosures of these 

factors would provide consumers with a snapshot of the current status of their adjustable-rate 

mortgages and with basic information to help them make decisions about keeping their current 

loan or shopping for alternatives. 

Current comment 20(c)(4)-1 requires disclosure of certain information related to loans 

that are not fully amortizing. Disclosure of similar information is proposed in 

§ 1026.20(c)(2)(vi), discussed below. 

20(c)(2)(vi) Interest-Only and Negative-Amortization Statement and Payment 

Proposed § 1026.20(c)(2)(vi) would require § 1026.20(c) notices to include a statement 

regarding the allocation of payments to principal and interest for interest-only or negativelyamortizing loans. If negative amortization occurs as a result of the interest rate adjustment, the 

proposed rule would require disclosure of the payment necessary to fully amortize such loans at 

the new interest rate over the remainder of the loan term. As explained in proposed comment 

20(c)(2)(vi)-1, for interest-only loans, the statement would inform the consumer that the new 

payment covers all of the interest but none of the principal owed and, therefore, will not reduce 

the loan balance. For negatively-amortizing ARMs, the statement would inform the consumer 

that the new payment covers only part of the interest and none of the principal, and therefore the 

unpaid interest will add to the balance or increase the term of the loan. The current rule, 

clarified by current comment 20(c)(5)-1, requires disclosure of the payment necessary to fully 

amortize loans that become negatively-amortizing as a result of the adjustment but does not 

require the statement regarding amortization. Proposed § 1026.20(c)(2)(vi) and proposed 
81 

comments 20(c)(2)(vi)-1 and 20(c)(2)(vi)-2 would replace the current rule and current comment 

20(c)(5)-1. 

Both current § 1026.20(c) and the Board’s 2009 Closed-End Proposal to revise 

§ 1026.20(c) include, for ARMs that become negatively amortizing as a result of the interest rate 

adjustment, disclosure of the payment necessary to fully amortize those loans at the new interest 

rate over the remainder of the loan term. However, the Bureau believes there are countervailing 

considerations regarding whether to include this information in proposed § 1026.20(c). 

The Bureau recognizes that certain Dodd-Frank Act amendments to TILA will restrict 

origination of non-amortizing and negatively-amortizing loans. For example, TILA section 

129C and the 2011 ATR Proposal that would implement that provision, generally require 

creditors to determine that a consumer can repay a mortgage loan and include a requirement that 

these determinations assume a fully-amortizing loan. Thus, this law and regulation, when 

finalized, will restrict the origination of risky mortgages such as interest-only and negativelyamortizing ARMs. 

Other Dodd-Frank amendments to TILA, such as the periodic statement proposed by 

§ 1026.41, will include information about non-amortizing and negatively-amortizing loans in 

each billing cycle, such as an allocation of payments. Thus, consumers who currently have 

interest-only and negatively-amortizing ARMs or may obtain such loans in the future will 

receive certain information about the interest-only or negatively-amortizing features of their 

loans in another disclosure, although this will not include the payment required to fully amortize 

negatively-amortizing loans. Disclosure of the payment necessary to fully amortize negativelyamortizing loans was not consumer tested but testing of the table showing the payment allocation 

of interest-only and negatively-amortizing ARMs indicated that consumers were confused by the 
82 

concept of amortization. Thus, the Bureau is weighing the value of disclosing specific 

information regarding amortization, such as the payment needed to fully amortize negativelyamortizing ARMs. In view of these changes to the law and the outcome of consumer testing, the 

Bureau solicits comments on whether to include the payment required to amortize ARMs that 

became negatively amortizing as a result of an interest rate adjustment. 

20(c)(2)(vii) Prepayment Penalty 

 Proposed § 1026.20(c)(2)(vii) would require disclosure of the circumstances under which 

any prepayment penalty may be imposed, such as selling or refinancing the principal residence, 

the time period during which such penalty would apply, and the maximum dollar amount of the 

penalty. The current rule does not have this requirement. The proposed rule cross-references the 

definition of prepayment penalty in subpart E, § 1026.41(d)(7)(iv), in the proposed rule for 

periodic statements. 

Interest rate adjustments may cause payment shock or require consumers to pay their 

mortgage at a rate they may no longer be able to afford, prompting them to consider alternatives 

such as refinancing. In order to fully understand the implications of such actions, the Bureau 

believes that consumers should know whether prepayment penalties may apply. Such 

information should include the maximum penalty in dollars that may apply and the time period 

during which the penalty may be imposed. The dollar amount of the penalty, as opposed to a 

percentage, is more meaningful to consumers. 

The Bureau also proposes disclosure of any prepayment penalty in § 1026.20(d) ARM 

rate adjustment notices and in the periodic statements proposed by § 1026.41. Consumer testing 

of the periodic statement included a scenario in which a prepayment penalty applied. Most 

participants understood that a prepayment penalty applied if they paid off the balance of their 
83 

loan early, but some participants were unclear whether it applied to the sale of the home, 

refinancing, or other alternative actions consumers could pursue in lieu of maintaining their 

adjustable-rate mortgages.71 For this reason, the Bureau proposes to clarify the circumstances 

under which a prepayment penalty would apply. The proposed forms would alert consumers that 

a prepayment penalty may apply if they pay off their loan, refinance, or sell their home before 

the stated date. 

The Bureau recognizes that Dodd-Frank Act amendments to TILA, such as 129C and the 

2011 ATR Proposal that would implement that provision, would significantly restrict a lender’s 

ability to impose prepayment penalties. Other Dodd-Frank amendments to TILA, such as the 

proposed periodic statement, would provide consumers with information about their prepayment 

penalties for each billing cycle. Thus, consumers who currently have ARMs with prepayment 

penalty provisions or may obtain such loans in the future would generally receive information 

about them at frequent intervals in another disclosure. In view of these changes to the law, the 

Bureau solicits comments on whether to include information regarding prepayment penalties in 

proposed § 1026.20(c). 

20(c)(3) Format of Disclosures 

As discussed above, the Bureau proposes to make § 1026.20(c) subject to certain of the 

§ 1026.17(a)(1) form requirement to which § 1026.20(c) disclosures are currently not subject. 

These requirements include grouping the disclosures together, segregating them from everything 

else, and prohibiting inclusion of any information not directly related to the § 1026.20(c) 

 

71 Id. at vi. 
84 

disclosures.72 As discussed above in connection with Section 17(a)(1), this revises the current 

rule but the Bureau believes the revision is necessary to effectively highlight information for 

consumers about changes to their ARM interest rates and payments. 

20(c)(3)(i) All Disclosures in Tabular Form 

Proposed § 1026.20(c)(3)(i) would require that the ARM adjustment disclosures be 

provided in the form of a table and in the same order as, and with headings and format 

substantially similar to, Forms H-4(D)(1) and (2) in Appendix H to subpart C for interest rate 

adjustments resulting in a corresponding payment change. 

The proposed ARM adjustment notice contains complex concepts challenging for 

consumers to understand. For example, consumer testing revealed that participants generally had 

difficulty understanding the relationship among index, margin, and interest rate.73 They also had 

difficulty with the concepts of amortization and interest rate carryover.74 As a starting point, the 

Bureau looked at the model forms developed by the Board for its 2009 Closed-End Proposal to 

amend §1026.20(c). The Bureau then conducted its own consumer testing. 

The Bureau’s testing showed that consumers can more readily understand these concepts 

when the information is presented to them in a simple manner and in the groupings contained in 

the model forms. The Bureau also observed that consumers more readily understood the 

concepts when they were presented in a logical order, with one concept presented as a foundation 

to understanding other concepts. For example, the form begins by informing consumers of the 

purpose of the notice: that their interest rate is going to adjust, when it will adjust, and that the 

 

72 Other § 1026.17(a)(1) form requirements that currently apply to § 1026.20(c) would continue to apply, such as the 

option of providing the disclosures to consumers in electronic form, subject to compliance with consumer consent 

and other applicable provisions of the E-Sign Act. 

73 Macro Report, supra note 38, at viii. 74 Id. at viii-ix. 
85 

adjustment will change their mortgage payment. This introduction is immediately followed by a 

table visually showing consumers’ current and new interest rates. In another example, the 

proposed notice informs consumers about their index rate and margin before explaining how the 

new payment is calculated based on those factors, as well as other factors such as the loan 

balance and remaining loan term. 

Based on consumer testing, the Bureau believes that consumer understanding is enhanced 

by presenting the information in a simple manner, grouped together by concept, and in a specific 

order that allows consumers the opportunity to build upon knowledge gained. For these reasons, 

the Bureau proposes that creditors, assignees, or servicers disclose the information required by

proposed § 1026.20(c) with headings, content, and format substantially similar to Forms H4(D)(1) and (2) in Appendix H to this part.

Over the course of consumer testing, participant comprehension improved with each 

successive iteration of the model form. As a result, the Bureau believes that displaying the 

information in tabular form focuses consumer attention and lends to greater understanding. 

Similarly, the Bureau found that the particular content and order of the information, as well as 

the specific headings and format used, presented the information in a way that consumers both 

could understand and from which they could benefit. 

20(c)(3)(ii) Format of Interest Rate and Payment Table 

Proposed § 1026.20(c)(3)(ii) would require tabular format for ARM payment change 

notices of: the current and new interest rates, the current and new payments, and the date the first 

new payment is due. For interest-only and negatively-amortizing ARMs, the table would also 

include the allocation of payments. This table would be located within the table proposed by 

§ 1026.20(c)(3)(i). This table is substantially similar to the one tested by the Board for its 2009 
86 

Closed-End Proposal to revise § 1026.20(c). The proposal would require the table to follow the 

same order as, and have headings, content, and format substantially similar to, Forms H-4(D)(1) 

and (2) in Appendix H of subpart C. 

Disclosing the current interest rate and payment in the same table allows consumers to 

readily compare those rates with the adjusted rate and new payment. Consumer testing revealed 

that nearly all participants were readily able to identify the table and understand the content.75 

The new interest rate and payment and date the first new payment is due is key information the 

consumer must know in order to commence payment at the new rate. For these reasons, the 

Bureau proposes locating this information prominently in the disclosure. 

20(d) Initial Rate Adjustments 

Elimination of current § 1026.20(d). Current § 1026.20(d) permits creditors to substitute 

information provided in accordance with variable-rate subsequent disclosure regulations of other 

Federal agencies for the disclosures required by § 1026.20(c). In the 2009 Closed-End Proposal, 

the Board proposed amending the regulation that is now § 1026.20, including deleting the 

provision that is current § 1026.20(d). The Board stated that, as of August 2009, there were 

“[n]o comprehensive disclosure requirements for variable-rate mortgage transactions . . . in 

effect under the regulations of the other Federal financial institution supervisory agencies.”76 

The Board explained that when it originally adopted the provision in 1987, as footnote 45c of 

§ 226.20(c) of Regulation Z,77 the regulations of other financial institution supervisory agencies -

 

75 Id. at vii. 76 74 FR 43232, 43272 (Aug. 26, 2009). 

77 Regulation Z was previously implemented by the Board at 12 CFR 226. In light of the general transfer of the 

Board’s rulemaking authority for TILA to the Bureau, the Bureau adopted an interim final rule recodifying the 

Board’s Regulation Z at 12 CRF 1026. 
87 

- namely the OCC, the Federal Home Loan Bank Board (the FHLBB), and HUD -- contained 

subsequent disclosure requirements for ARMs.78 

 The Bureau proposes deleting the current content of § 1026.20(d) because it is not aware 

of any other Federal financial institution supervisory agency rules requiring comprehensive 

disclosure requirements for ARMs. The Bureau solicits comment on whether there is any reason 

to retain this provision. The Bureau solicits comments, for example, on whether this proposed 

regulatory change would have implications for rights under the Alternative Mortgage 

Transaction Parity Act (AMTPA). For the reasons discussed above with respect to proposed 

§ 1026.20(c), the Bureau proposes this deletion pursuant to its authority under TILA sections 

105(a) and 128(f)(1)(H) and DFA section 1405(b). 

New initial ARM interest rate adjustment disclosures. In the section that would be left 

vacant by the proposed deletion of § 1026.20(d), the Bureau proposes to implement the initial 

ARM adjustment notice mandated by TILA section 128A. Proposed § 1026.20(d) would require 

disclosure to consumers with certain adjustable-rate mortgages, approximately six months prior 

to the initial interest rate adjustment, of key information about the upcoming adjustment, 

including the new rate and payment and options for pursuing alternatives to their adjustable-rate 

mortgage. This initial ARM adjustment notice would harmonize with the ARM payment change 

notice that would be required under the proposed revisions to § 1026.20(c). The Bureau believes 

that promoting consistency between the ARM disclosure provisions of proposed § 1026.20(c) 

and (d) would reduce compliance burdens on industry and minimize consumer confusion. 

Form of delivery. As required under TILA section 128A(b), proposed § 1026.20(d) 

would require that the initial ARM interest rate adjustment notices be provided to consumers in 

 

78 74 FR 43232, 43273 (citing 52 FR 48665, 48671 (Dec. 24, 1987)). 
88 

writing, separate and distinct from all other correspondence. Proposed comment 20(d)-2 

explains that to satisfy this requirement, the notices must be mailed or delivered separately from 

any other material. For example, in the case of mailing the disclosure, there should be no 

material in the envelope other than the initial interest rate adjustment notice. In the case of 

emailing the disclosure, the only attachment should be the initial interest rate adjustment notice. 

This requirement contrasts with proposed § 1026.20(c), which would be subject to the less 

stringent segregation requirements of § 1026.17(a)(1), as amended by the Bureau’s proposal. 

The proposed comment further explains that the notices proposed by § 1026.20(d) may be 

provided to consumers in electronic form with consumer consent, pursuant to the requirements of 

§ 1026.17(a)(1). The Bureau solicits comments on whether consumer protection would be 

compromised by providing § 1026.20(d) notices on a separate piece of paper but in the same 

envelope or as email correspondence with other messages from the creditor, assignee, or 

servicer. 

Creditors, assignees, and servicers. Proposed § 1026.20(d) applies to creditors, 

assignees, and servicers. Proposed comment 20(d)-1 clarifies that a creditor, assignee, or 

servicer that no longer owns the mortgage loan or the mortgage servicing rights is not subject to 

the requirements of § 1026.20(c). This proposed language tracks, in part, the requirements of 

TILA section 128Athat creditors and servicers must provide the initial ARM interest rate 

adjustment notices, but adds assignees to the list of covered persons. The Bureau believes that 

holding creditors, but not assignees, liable under the regulation would result in inconsistent 

levels of consumer protection and an unlevel playing field for owners of mortgages. 

It is a common practice for creditors to sell many or all of the loans they originate rather 

than hold them in portfolio. If the creditor were to sell the ARM, the consumer would have no 
89 

recourse against the subsequent holder for violations of § 1026.20(d) if assignees were not made 

subject to § 1026.20(d). Shielding assignees from liability under the proposed rule would have 

particularly deleterious effects on consumers seeking relief against a servicer to whom an 

assignee sold the ARM’s mortgage servicing rights, if that servicer had insufficient resources to 

satisfy a judgment the consumer may obtain for violations of § 1026.20(d). Consumers who 

happen to have ARMs sold by the original creditor to a subsequent holder would have less 

protection under the regulation than consumers with ARMs that are retained in portfolio by the 

creditor originating the loan. It also would create an unfair advantage for assignees. The Bureau 

believes that the protections afforded under proposed § 1026.20(d) should not be determined by 

the happenstance of loan ownership or favor one sector of the mortgage market over another. 

For these reasons, the Bureau proposes to make assignees, along with creditors and servicers, 

subject to the requirements § 1026.20(d). 

Proposed comment 20(d)-1 explains that any provision of subpart C that applies to the 

disclosures required by § 1026.20(d) also applies to creditors, assignees, and servicers. This is 

the case even where the other provisions of subpart C refer only to creditors. For the reasons 

discussed above, the Bureau proposes that the requirements of other regulations that apply to the 

§ 1026.20(d) initial ARM interest rate adjustment notices apply to assignees as well as to 

creditors and servicers. 

The extension of the requirement to assignees is authorized under TILA section 105(a) 

because, for the reasons discussed above, it is necessary and proper to effectuate the purposes of 

TILA, including to assure a meaningful disclosure of credit terms and protect the consumer 

against unfair credit billing practices, and to prevent circumvention or evasion of TILA. The 

Bureau also proposes to use its authority under DFA section 1405(b) to extend the applicability 
90 

of the initial ARM adjustment notices under TILA section 128A to assignees. As discussed 

above, this extension would serve the interest of consumers and the public interest. Application 

of proposed § 1026.20(d) to assignees is consistent with current § 1026.20(c) commentary 

applying that disclosure requirement to subsequent holders. Application of proposed 

§ 1026.20(d) to creditors, assignees, and servicers also promotes consistency with proposed 

§ 1026.20(c) and the periodic statement proposed by § 1026.41, which also apply to creditors, 

assignees, and servicers. 

Timing. Proposed § 1026.20(d) generally follows the statutory requirement in TILA 

section 128A that the initial interest rate adjustment notice must be provided to consumers during 

the one-month period that ends six months before the date on which the interest rate in effect 

during the introductory period ends. Thus, the disclosure must be provided six to seven months 

before the initial interest rate adjustment. The § 1026.20(d) disclosures are designed to avoid 

payment shock so as to put consumers on notice of upcoming changes to their adjustable-rate 

mortgages that may result in higher payments. The six to seven month advance notice allows 

sufficient time for consumers to consider their alternatives if the notice discloses an increase in 

payment that they cannot afford. One alternative consumers might consider is refinancing their 

home. In the current market, “it now takes the nation’s biggest mortgage lenders an average of 

more than 70 days to complete a refinance . . . . ”79 

In the interest of consistency within Regulation Z, proposed § 1026.20(d) ties its timing 

requirement to the date the first payment at a new level is due rather than the date of the interest 

rate adjustment. This is consistent with the time frame for both current and proposed 

§ 1026.20(c). Since interest generally is paid in arrears, for most ARMs, this adds another 

 

79 Timiraos & Simon, supra note 52.
91 

approximately 30 days to the time frame for delivery of the disclosures. Thus, the notices 

proposed by § 1026.20(d) must be provided to consumers seven to eight months in advance of 

payment at the adjusted rate. Measured in days, the initial interest rate adjustment disclosures 

are due at least 210, but not more than 240, days before the first payment at the adjusted level is 

due. By tying the timing of the disclosure to the date payment at a new level is due and 

calculating it in days rather than months, proposed § 1026.20(d) is more precise, since months 

can vary in length, and maintains consistency with the timing requirements of proposed 

§ 1026.20(c). 

Pursuant to TILA section 128A, for ARMs adjusting for the first time within six months 

after consummation, the proposed § 1026.20(d) initial interest rate adjustment notices must be 

provided at consummation. The proposed rule states that when this occurs, the disclosure must 

be provided 210 days before the first date payment at a new level is due. The proposed rule ties 

the timing of this requirement to days rather than months, thereby ensuring both internal 

consistency and consistency with § 1026.20(c). 

 Proposed comment 20(d)-2 explains that the timing requirements exclude any grace 

period. It also explains that the date the first payment at the adjusted level is due is the same as 

the due date of the first payment calculated using the adjusted interest rate. 

SBREFA. The small entity representatives (SERs) that advised the SBREFA panel on the 

mortgage servicing rules under consideration by the Bureau expressed doubt as to the value of 

the § 1026.20(d) notices because providing the notices so many months in advance of the interest 

rate adjustment would require disclosure of an estimated, rather than the actual, interest rate and 

payment due.80 Several SERS expressed concern that the estimates would confuse consumers. 

 

80 See SBREFA Final Report, supra note 22, at 20-21, 29-30. 
92 

They also noted that, in addition to the requirement to provide initial interest rate adjustment 

notices under § 1026.20(d), servicers would remain obliged to also provide a later notice in the 

case of a payment change, pursuant to § 1026.20(c), for the initial rate adjustments in order to 

apprise consumers of the actual amount of their interest rate and payment resulting from the 

adjustment. They expressed concerns about the one-time development costs and on-going costs 

associated with providing both the initial ARM adjustment notices and the recurring notices 

under § 1026.20(c).81 

Consistent with this recommendation, after conclusion of the SBREFA process, the 

Bureau conducted further policy analysis of a possible exemption for small creditors, assignees, 

and servicers. After additional consideration, however, the Bureau decided to propose that 

notices under both § 1026.20(c) and § 1026.20(d) be provided. The Bureau believes that the two 

notices serve related but distinct purposes, such that eliminating the § 1026.20(c) notice could 

harm consumers. In particular, the § 1026.20(d) notice is designed to provide consumers with 

very early warning that their rates are about to change, so that consumers can begin exploring 

other options. If the consumer chooses not to do so or has not completed that process, a notice 

closer to the adjustment date that reflects the actual rather than estimated change in payment is 

still valuable to the consumer as both a second warning and budgeting tool. While the ARM 

interest rate adjustment information proposed for the first payment change notice required by 

proposed § 1026.20(c) could be provided in the periodic statement that would be provided to 

consumers under proposed § 1026.41, discussed below, rather than as a standalone notice under 

§ 1026.20(c), the Bureau notes that that might require greater programming complexity in 

 

81 Id. 
93 

connection with the periodic statements. In addition, the Bureau is proposing to exempt certain 

small servicers from the periodic statement requirement. 

The Bureau also believes that the amount of burden reduction for servicers from an 

exemption from providing a § 1026.20(c) notice in connection with an initial interest rate 

adjustment would be extremely minimal, given that servicers would have to maintain systems to 

generate § 1026.20(c) notices for each subsequent interest rate adjustment resulting in a 

corresponding payment change. Thus, excepting small servicers from providing the first 

§ 1026.20(c) notice would not provide a significant reduction in burden. 

The Bureau also considered whether to except small servicers, creditors, and assignees 

from the initial ARM interest rate notice required by § 1026.20(d). The SERs expressed concern 

that consumers would be confused by receiving estimates, rather than their actual new interest 

rate and payment, in the § 1026.20(d) notice.82 However, the Bureau believes the best approach 

to address this concern is to clarify the contents of the notice, rather than eliminate it entirely. 

Congress has made a specific policy judgment that an early notice has value to consumers. 

Creating an exemption for small creditors, assignees, and servicers would deprive certain 

consumers of the benefits that Congress intended, specifically advance notice seven to eight 

months before payment at a new level is due after the initial interest rate adjustment to allow 

consumers time to weigh the potential impacts of a rate change and to explore alternative 

actions. An exception would also deprive certain consumers of the information provided in the 

§ 1026.20(d) notice about alternatives and how to contact their State housing finance authority 

and access a list of government-certified counseling agencies and programs. 

 

82 Id. at 21. 
94 

On balance, the Bureau does not believe that the § 1026.20(d) notice imposes a 

significant burden on small entities because it is a one-time notice. Moreover, the notice is 

designed to be consistent with the § 1026.20(c) notice in order to, among other things, reduce the 

burden on industry. For these reasons, the Bureau proposes generally to require all creditors, 

assignees, and servicers to provide the ARM interest rate adjustment notices required by 

proposed § 1026.20(c) and (d). However, the Bureau seeks comment on the issues raised by the 

two sets of disclosures, particularly whether the burden imposed on small entities by the 

requirements of § 1026.20(d) outweighs the consumer protection benefits afforded by the early 

notice of the initial ARM interest rate adjustment. 

The Bureau also solicits comment on whether small servicers (or creditors, assignees, and 

servicers in general) that provide a periodic statement to a consumer with an ARM should be 

permitted or required to provide the information required by § 1026.20(c), for an initial interest 

rate adjustment for which a notice under § 1026.20(d) is required, in a periodic statement 

provided to consumers 60 to 120 days before payment at a new level is due. The Bureau further 

solicits comment on whether to permit or require all § 1026.20(c) notices required by the 

proposed rule to be incorporated into periodic statements in lieu of providing a separate notice. 

Conversions. Proposed comment 20(d)-3 explains that in the case of an open-end 

account converting to a closed-end adjustable-rate mortgage, § 1026.20(d) disclosures are not 

required until the implementation of the initial interest rate adjustment post-conversion. Under 

the proposed rule, the conversion is analogous to consummation. Thus, like other ARMs subject 

to the requirements of proposed § 1026.20(d), disclosures for these converted ARMs would not 

be required until the first interest rate adjustment following the conversion. This proposal is 
95 

consistent with the § 1026.20(c) proposal for open-end accounts converting to closed-end 

adjustable-rate mortgages. 

20(d)(1) Coverage of the Initial Rate Adjustment Disclosures 

20(d)(1)(i) In General 

 Proposed § 1026.20(d)(1)(i) defines an adjustable-rate mortgage or ARM as a closed-end 

consumer credit transaction secured by the consumer’s principal dwelling in which the annual 

percentage rate may increase after consummation. The proposed rule uses the wording from the 

definitions of “adjustable-rate” and “variable-rate” mortgage in subpart C of Regulation Z. It 

does this to promote consistency within the regulation. Proposed comment 20(d)(1)(i)-1 

explains that the definition of ARM means variable-rate mortgage as that term is used elsewhere 

in subpart C of Regulation Z, except as provided in proposed comment 20(d)(1)(ii)-2. 

Applicability to closed-end transactions. The Bureau believes that TILA section 128A 

and the implementing disclosures in proposed 1026.20(d) primarily benefit consumers with 

closed-end adjustable-rate mortgages. In contrast, open-end credit transactions secured by a 

consumer’s dwelling (home equity plans) with adjustable-rate features are subject to distinct 

disclosure requirements under TILA and subpart B of Regulation Z that substitute for the 

proposed § 1026.20(c) and (d) disclosures. Therefore, as discussed below, the Bureau proposes 

to use its authority under TILA section 105(a) and (f) to exempt adjustable-rate home equity 

plans from the requirements of proposed § 1026.20(d). 

Section 127A of TILA and § 1026.40(b) and (d) of Regulation Z require the disclosure of 

specific information about home equity plans at the time an application is provided to the 

consumer. These disclosures include specific information about variable or adjustable-rate 

plans, including, among other things, the fact that the plan has a variable or adjustable-rate 
96 

feature, the index used in making adjustments and a source of information about the index, an 

explanation of how the index is adjusted such as by the addition of a margin, and information 

about frequency of and limitations to changes to the applicable rate, payment amount, and index. 

See § 1026.40(d)(12). The required account opening disclosures for home equity plans also must 

include information about any variable or adjustable-rate feature, including the circumstances 

under which rates may increase, limitations on the increase, and the effect of any increase. See

§ 1026.6(a)(1)(ii) and (3)(vii). 

Thus, Regulation Z already contains a comprehensive scheme for disclosing to 

consumers the variable or adjustable-rate features of home equity plans. The Bureau believes 

that requiring servicers to provide information about the index and an explanation of how the 

interest rate and payment would be determined, as required by TILA section 128A and proposed 

by § 1026.20(d), in connection with home equity plans would be inconsistent with, and largely 

duplicative of, the current disclosure regime and would be confusing and unhelpful for 

consumers. Moreover, unlike closed-end adjustable-rate mortgages, consumers with home 

equity plans generally may draw from the adjustable-rate feature on the account at any time. 

Thus, providing the good faith estimate of the amount of the monthly payment that would apply 

after the interest rate adjustment, as required by TILA section 128A and proposed by 

§ 1026.20(d), would not be useful because the estimate would be based on the outstanding loan 

balance at the time the notice is given, which would change after the notice is given anytime the 

consumer withdraws funds. Finally, the alerts to consumers required by TILA section 128A and 

proposed by §1026.20(d) would not provide a benefit to consumers with home equity plans with 

adjustable-rate features. Generally, introductory periods for adjustable-rate features on home 
97 

equity plans tend to last less than six months. The Bureau believes it is unlikely consumers 

would consider pursuing alternatives so close in time to opening their home equity plans. 

Two other factors also support the Bureau’s use of the TILA section 105(a) exemption 

authority to exclude home equity plans from the requirements of proposed § 1026.20(d). First, 

use of the term “consummation” in TILA section 128A supports the application of proposed 

§1026.20(d) only to closed-end transactions. Regulation Z generally requires disclosures for 

closed-end credit transactions to be provided “before consummation of the transaction.” By 

contrast, Regulation Z generally requires account opening disclosures for open-end credit 

transactions to be provided “before the first transaction is made under the plan.” See

§ 1026.17(b) and § 1026.5(b)(1)(i). Because Regulation Z uses the term “consummation” in 

connection with closed-end credit transactions, use of the word “consummation” in DFA section 

1418 supports the Bureau’s proposed exemption for open-end home equity plans from the 

requirements of §1026.20(d). Second, DFA section 1418 is codified in TILA section 128A. The 

adjacent and similarly numbered provision, TILA section 128, is entitled and applies only to 

“Consumer Credit not under Open End Credit Plans.” Congress’s placement of the new ARM 

disclosure requirement in a segment of TILA that applies only to closed-end credit transactions 

further supports the Bureau’s decision to exempt open-end credit transactions, in this case 

variable or adjustable-rate home equity plans, from the requirements of that section. 

For the reasons discussed above, exempting home equity plans from the requirements of 

§1026.20(d) is necessary and proper under TILA section 105(a) to further the consumer 

protection purposes of TILA and facilitate compliance. As discussed above, the Bureau believes 

that the information contained in the notice proposed by § 1026.20(d) would not be meaningful 

to consumers with home equity plans that have adjustable-rate features and could lead to 
98 

information overload and confusion for those consumers. The Bureau further proposes the 

exemption for open-end transactions pursuant to its authority under TILA section 105(f). As 

discussed above, because open-end transactions are subject to their own regulatory scheme, are 

not structured in such a way as to garner benefit from the disclosures proposed by §1026.20(d), 

and the placement of 128A in TILA indicates congressional intent to limit its coverage to closedend transactions, the Bureau believes, in light of the factors in TILA section 105(f)(2), that 

requiring the proposed § 1026.20(d) notice for open-end accounts that have adjustable-rate 

features would not provide a meaningful benefit to consumers. Specifically, the Bureau 

considers that the exemption is proper irrespective of the amount of the loan or the status of the 

borrower (including related financial arrangements, financial sophistication, and the importance 

to the borrower of the loan). The Bureau further notes, in light of TILA section 105(f)(2)(D), 

that the requirements in § 1026.20(d) would only apply to loans secured by the consumer’s 

principal dwelling. 

Savings Clause. Regarding other categories of loans to which proposed § 1026.20(d) 

would apply, the statute’s provisions apply to hybrid ARMs, which it defines as “consumer 

credit transaction[s] secured by the consumer’s principal residence with a fixed interest rate for 

an introductory period that adjusts or resets to a variable interest rate after such period.”83 The 

statute, however, has a “savings clause,” that allows the Bureau to require the initial interest rate 

adjustment notice for loans that are not hybrid ARMs. The Bureau proposes to use this authority 

generally to extend the disclosure requirements of proposed § 1026.20(d) to ARMs that are not 

hybrid. The Bureau believes this approach is necessary because both hybrid ARMs and those 

 

83 TILA section 128A. For example, a 3/1 hybrid ARM has a three-year introductory period with a fixed interest 

rate, after which the interest rate adjusts annually. ARMs that are not hybrid, on the other hand, have no period with 

a fixed rate of interest. Such ARMs start out with a rate that adjusts at set intervals, such as 3/3 (adjusts every three 

years), 5/5 (adjusts every five years), etc. 
99 

that are not hybrid may subject consumers to the same payment shock that the advance notice of 

the first interest rate adjustment is designed to address. For example, both 3/1 hybrid ARMs, 

where the initial interest rate is fixed for three years and then adjusts every year after that, and 

3/3 ARMs, where the initial interest rate adjusts after three years and then every three years after 

that, adjust for the first time after three years and present the same potential payment shock to 

consumers holding either mortgage. The same is true for 5/1 hybrid ARMs and 5/5 ARMs, 7/1 

hybrid ARMs and 7/7 ARMs, 10/1 hybrid ARMs and 10/10 ARMs, etc. In sum, conventional 

ARMs and hybrid ARMs can have the same initial periods without an interest rate adjustment 

and thus, the same potential jump in their interest rates at the time of the first interest rate 

adjustment. 

Proposed comment 20(d)(1)(i)-1 clarifies that the initial ARM adjustment notice are not 

limited to transactions financing the initial acquisition of the consumer’s principal dwelling but 

also would apply to other closed-end ARM transactions secured by the consumer’s principal 

dwelling, consistent with current comment 19(b)-1 and proposed § 1026.20(c). 

20(d)(1)(ii) Exceptions 

Proposed § 1026.20(d)(1)(ii) excepts construction loans with terms of one year or less 

from the disclosure requirements of § 1026.20(d). Proposed § 1026.20(c) includes the same 

exception. Proposed comment 20(d)(1)(ii)-1 applies the standards in comment 19(b)-1 for 

determining the term of a construction loan. 

Construction loans generally have short terms of six months to one year and are subject 

to frequent interest rate adjustments, usually monthly or quarterly. The construction period 

usually involves several disbursements of funds at times and in amounts that are unknown at the 

beginning of that period. The consumer generally pays only accrued interest until construction is 
100 

completed. The creditor, assignee, or servicer, in addition to disbursing payments in stages, 

closely monitors the progress of construction. Generally, at the completion of the construction, 

the construction loan is converted into permanent financing in which the loan amount is 

amortized just as in a standard mortgage transaction. See comment 17(c)(6)-2 for additional 

information on construction loans. 

The frequent interest rate adjustments, multiple disbursements of funds, the short loan 

term, and on-going communication between the creditor, assignee, or servicer and consumer 

distinguish construction loans from other ARMs. These loans are meant to function as bridge 

financing until construction is completed and permanent financing can be put in place. 

Consumers with construction ARM loans are not at risk of payment shock like other ARM where 

interest rates change less frequently. Moreover, given the frequency of interest rate adjustments 

on construction loans, creditors, assignees, or servicers would have difficulty complying with the 

proposed requirement to provide the notice to consumers 210 to 240 days before the first 

payment at the adjusted level is due. For these reasons, providing notices under § 1026.20(d) for 

these loans would not provide a meaningful benefit to the consumer nor improve consumers’ 

awareness and understanding of their construction loans with terms of less than one year. 

Authority. Accordingly, the Bureau proposes to use its authority under TILA section 

105(a) to except construction loans with terms of one year or less from the requirements of 

proposed § 1026.20(d). As explained above, the disclosure requirements of § 1026.20(d) would 

be confusing and difficult to comply with in the context of a short-term construction loan. Thus, 

exempting such loans is necessary and proper under TILA section 105(a) to further the consumer 

protection purposes of TILA and facilitate compliance. The Bureau further proposes the 

exemption for construction loans pursuant to its authority under TILA section 105(f). For the 
101 

reasons discussed above, the Bureau believes, in light of the factors in TILA section 105(f)(2), 

that requiring the § 1026.20(d) notice for construction loans with terms of one year or less would 

not provide a meaningful benefit to consumers. Specifically, the Bureau considers that the 

exemption is proper irrespective of the amount of the loan or the status of the borrower 

(including related financial arrangements, financial sophistication, and the importance to the 

borrower of the loan). The Bureau further notes, in light of TILA section 105(f)(2)(D), that the 

requirements in § 1026.20(d) would only apply to loans secured by the consumer’s principal 

dwelling. 

The Bureau solicits comment on whether there are other ARMs with terms of less than 

one year, and whether such ARMs should be excepted from the requirements of § 1026.20(d). If 

the time period of the advance notice for consumers required by § 1026.20(d) is not appropriate 

for these short-term ARMs, the Bureau solicits comment on what period would be appropriate 

that would also provide consumers with sufficient notice of the estimated initial adjusted interest 

rate and any new payment. 

Proposed comment 20(d)(1)(ii)-2 discusses other loans to which the proposed rule does 

not apply. Proposed comment 20(d)(1)(ii)-2 is consistent with proposed comment 20(c)(1)(ii)-3 

with regard to the loans which are not subject to the proposed ARM disclosure rules. Certain 

Regulation Z provisions treat some of these loans as variable-rate transactions, even if they are 

structured as fixed-rate transactions. The proposed comment clarifies that, for purposes of 

proposed § 1026.20(d), the following loans, if fixed-rate transactions, are not ARMs and 

therefore are not subject to ARM notices pursuant to § 1026.20(d): shared-equity or sharedappreciation mortgages; price-level adjusted 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 
102 

in an index measuring prices or inflation; graduated-payment mortgages or step-rate transactions; 

renewable balloon-payment instruments; and preferred-rate loans. The particular features of 

these types of loans may trigger interest rate or payment changes over the term of the loan or at 

the time the consumer pays off the final balance. However, these changes are based on factors 

other than a change in the value of an index or a formula. For example, whether or when the 

interest rate will adjust for the first time for a preferred-rate loan with a fixed interest rate is 

likely not knowable six to seven months in advance of the adjustment. This is because the loss 

of the preferred rate is based on factors other than a formula or change in the value of an index 

agreed to at consummation. Because the enumerated loans are not ARMs they are not covered 

by TILA section 128A or proposed § 1026.20(d) and require no disclosures under this rule. 

20(d)(2) Content of Initial Rate Adjustment Disclosures 

Statutorily-required content. TILA section 128A requires that the following content be 

included in the § 1026.20(d) initial rate adjustment notice: (1) any index or formula used in 

adjusting or resetting the interest rate and a source of information about the index or formula; (2) 

an explanation of how the new rate and payment would be determined, including how the index 

may be adjusted, such as by the addition of a margin; (3) a good faith estimate, based on 

accepted industry standards, of the amount of the resulting monthly payment after the adjustment 

or reset and the assumptions on which the estimate is based; (4) a list of alternatives that the 

consumers may pursue, including refinancing, renegotiation of loan terms, payment forbearance, 

and pre-foreclosure sales, and descriptions of actions the consumer must take to pursue these 

alternatives; (5) contact information for HUD- or State housing agency- approved housing 

counselors or programs reasonably available; and (6) contact information for the State housing 

finance authority for the State where the consumer resides. 
103 

The Bureau interprets the explanation of how the interest rate and payments will be 

determined set forth in (2) above to require disclosure of any adjustment to the index, for 

example, the amount of any margin and an explanation of what a margin is; the loan balance; the 

length of the remaining term of the loan; and any change in the term or maturity of the loan 

caused by the interest rate adjustment. 

The Bureau interprets the good faith estimate, required under (3) above, to require 

disclosure, when available, of the exact amount of the new monthly payment after the interest 

rate adjustment. As discussed below, the Bureau believes that in most cases the lengthy advance 

notice required by proposed § 1026.20(d) will necessitate disclosure in the initial ARM interest 

rate adjustment notices of estimates of the new interest rate and payment, rather than exact 

amounts. The Bureau believes, however, that a good faith estimate would require disclosure of 

the exact amount of the new monthly payment, if known, rather than an estimate. The Bureau 

interprets the assumptions on which the good faith estimate is based to require disclosure, among 

other things, of the current interest rate and payment, as well as the amount of the new interest 

rate after the adjustment, if known, or an estimate if the exact amount of the new interest rate is 

not known. As with the new payment amount, the Bureau believes that generally only an 

estimate of the new interest rate will be available at the time the notice is provided, but interprets 

the statute to require disclosure of the exact amount of the new interest rate, if this amount is 

available. Even if this content were not contemplated under the statute, the Bureau believes it 

would be appropriate to use its adjustment authority to require disclosure of such information for 

the reasons discussed below. 

Additional content. In addition to the content explicitly required under the statute, the 

Bureau proposes, as discussed in more detail below, to require the ARM initial interest rate 
104 

notices to include the date of the disclosures; the telephone number of the creditor, assignee, or 

servicer; statements specifying that the consumer’s interest rate is scheduled to adjust pursuant to 

the terms of the loan, that the adjustment may effect a change in the mortgage payment, the 

specific time period the current interest rate has been in effect, the dates of the upcoming and 

future interest rate adjustments, and any other changes to loan terms, features, or options taking 

effect on the same date as the interest rate adjustment; the due date of the first payment after the 

adjustment; for interest-only or negatively-amortizing payments, the amount of the current and 

new payment allocated to principal, interest, and taxes and insurance in escrow, as applicable; a 

statement regarding payment allocation for interest-only and negatively-amortizing loans, 

including the payment required to fully amortize an ARM that becomes negatively-amortizing as 

a result of the interest rate adjustment; any interest rate or payment limits and any foregone 

interest; if the new interest rate or new payment provided is an estimate, a statement that another 

disclosure containing the actual new interest rate and payment will be provided within a 

specified time period -- if the actual interest rate adjustment results in a corresponding payment 

change; and the amount and expiration date of any prepayment penalty and the circumstances 

under which such penalty might apply. 

The proposed additional content, including the content that the Bureau interprets to be 

required under the statute, is authorized under TILA section 105(a). As further discussed below, 

the proposed additional content is necessary and proper to assure that consumers understand the 

consequences of the upcoming ARM rate adjustments and have sufficient time to adjust their 

behavior accordingly, thereby avoiding the uninformed use of credit and protecting consumers 

against inaccurate and unfair credit billing practices. The proposed additional content is further 

authorized under DFA section 1032 by assuring that the key features of consumers’ adjustable-
105 

rate mortgage, over the term of the ARM, are “fully, accurately, and effectively disclosed to 

consumers in a manner that permits consumers to understand [its] costs, benefits, and risks.” 

The proposed additional information better informs consumers of the implications of interestrate adjustments before they happen and thus enables them to weigh their options going forward. 

For the same reasons, the Bureau believes, consistent with DFA section 1405(b), that the 

proposed additional content would improve consumer awareness and understanding of their 

residential ARM loans and is thus in the interest of consumers and the public interest. The 

proposed additional content is also consistent with TILA section 128A(b) itself, which provides a 

non-exclusive list of required content, thereby statutorily contemplating additional content. 

Good faith estimate. As noted above, TILA section 128A provides that the § 1026.20(d) 

interest rate adjustment disclosures should include “[a] good faith estimate, based on accepted 

industry standards . . . of the amount of the monthly payment that will apply after the date of the 

adjustment or reset, and the assumptions on which the estimate is based.” ARM contracts 

generally provide that the calculation of the new interest rate and payment be based on an index 

value published closer to the date of the interest rate adjustment than those available during the 

time frame within which creditors, assignees, and servicers must provide the initial ARM interest 

rate adjustments pursuant to § 1026.20(d). 20(c)(2) above for a full discussion of the time frame 

generally required for ascertaining the index rate used to calculate the adjusted interest rate and 

new payment. Thus, it is unlikely creditors, assignees, and servicers will be able to disclose the 

actual new interest rate and payment in the initial ARM interest rate notices. For this reason, 

consistent with the language of the statute regarding estimates, proposed § 1026.20(d)(2) 

provides that if the new interest rate or any other calculation using the new interest rate is not 

known as of the date of the disclosure, use of an estimate, labeled as such, is permissible. The 
106 

Bureau interprets the statutory good faith standard to require disclosure of the actual amounts if 

they are available at the time the creditor, assignee, or servicer provides the initial ARM interest 

rate adjustment notices to consumers pursuant to the time frame required by proposed 

§ 1026.20(d). Since the notice is designed to alert consumers to upcoming changes to their 

mortgage and to provide consumers with the time needed to take ameliorative actions should the 

new interest rate and payment be too high, providing the actual new payment would benefit 

consumers. Across all rounds of consumer testing, most participants shown notices containing 

estimates of the new rate and payment understood that these amounts were estimates that could 

change before payment at a new level was due.84

To implement the requirements of TILA section 128A that the good faith estimate of the 

new payment be based on accepted industry standards, proposed § 1026.20(d) would require that 

any estimate be calculated using the index figure disclosed in the source of information described 

in proposed § 1026.20(d)(2)(iii)(A) within fifteen business days prior to the date of the 

disclosure. Linking the date of the notice to the date of the index value used to estimate the new 

interest rate and payment would prevent consumer confusion as to the recency of the index 

value. As discussed above under Section 20(c)(2), the fifteen-day period allows creditors, 

assignees, and servicers sufficient time to calculate the estimates and perform any necessary 

quality control measures before providing the § 1026.20(d) notices to consumers. 

20(d)(2)(i) Date of the Disclosure 

Proposed § 1026.20(d)(2)(i) would require that the initial ARM adjustment notice include 

the date of the disclosure. In order to group together all data regarding the ARM, proposed 

 

84 Macro Report, supra note 38, at viii. 
107 

§ 1026.20(d)(3)(ii) would require that the date appear outside of and above the table described in 

proposed § 1026.20(d)(3)(i). 

Proposed comment 20(d)(2)(i)-1 explains that the date would be the date the creditor, 

assignee, or servicer generates the notice. It also must be within fifteen business days after 

publication of the index level used to calculate the adjusted interest rate and new payment, if it is 

an estimate and not the actual adjusted interest rate and new payment.85 Because the disclosures 

must be provided to consumers so far in advance, the Bureau expects estimates will be used in 

most cases. Tying the date of the disclosure to the date of the index level should prevent 

consumer confusion as to the recency of the index value upon which the estimated interest rate 

and new payment are based. 

20(d)(2)(ii) Statement Regarding Change to Interest Rate and Payment 

Proposed § 1026.20(d)(2)(ii)(A) would require the initial ARM interest rate adjustment 

notices to include a statement alerting consumers that, under the terms of their adjustable-rate 

mortgage, the specific period in which their interest rate stayed the same will end on a certain 

date, that their interest rate may change on that date, and that any change in their interest rate 

may result in a change to their mortgage payment. This information is similar to the information 

required to be disclosed in the pre-consummation disclosures provided to consumers pursuant to 

current § 1026.19(b)(2)(i) and § 1026.37(i), recently proposed in the 2012 TILA-RESPA 

Proposal. Proposed comment 20(d)(2)(ii)(A)-1 clarifies that the current interest rate is the one in 

effect on the date of the disclosure. 

Proposed § 1026.20(d)(2)(ii)(B) would require the proposed initial ARM interest rate 

adjustment notices to include the dates of the impending and future interest rate adjustments and 

 

85 See proposed § 1026.20(d)(2). 
108 

inform consumers that these changes are dictated by the terms of their adjustable-rate mortgages. 

Proposed § 1026.20(d)(2)(ii)(C) also would require the § 1026.20(d) disclosures to inform 

consumers of any other loan changes taking place on the same day as the adjustment, such as 

changes in amortization caused by the expiration of interest-only or payment-option features. 

The first ARM model form tested did not contain the statement required by proposed 

§ 1026.20(d)(2)(ii) informing consumers of impending and future changes to their interest rate 

and the basis for these changes. Although participants understood that their interest rate was 

adjusting and their payment might change as a result, they did not understand that these changes 

would occur periodically subject to the terms of their mortgage contract. Inclusion of this 

statement in the second round of testing successfully resolved this confusion. All but one 

consumer tested in rounds two and three of testing understood that, under the scenario presented 

to them, their interest rate would change on an annual basis.86

20(d)(2)(iii) Table with Current and New Interest Rates and Payments 

 Proposed § 1026.20(d)(2)(iii) would require disclosure of the following information in 

the form of a table: (A) the current and new interest rates; (B) the current and new periodic 

payment amounts and the date the first new payment is due; and (C) for interest-only or 

negatively-amortizing payments, the amount of the current and estimated new payment allocated 

to interest, principal, and property taxes and mortgage-related insurance, as applicable. The 

information in this table would appear within the larger table containing the other required 

disclosures, except for the date of the disclosure. 

This table would follow the same order as, and have headings and format substantially 

similar to, those in the table in Forms H-4(D)(3) and (4) in Appendix H of subpart C. The 

 

86 Macro Report, supra note 38, at vii. 
109 

Bureau learned through consumer testing that, when presented with information in a logical 

order, consumers more easily grasped the complex concepts contained in the proposed 

§ 1026.20(d) notice. For example, the form begins by informing consumers of the basic purpose 

of the notice: their interest rate is going to adjust, when it will adjust, and the adjustment will 

change their mortgage payment. This introduction is immediately followed by a visual 

illustration of this information in the form of a table comparing the consumers’ current and new 

interest rates. Based on consumer testing, the Bureau believes that consumer understanding is 

enhanced by presenting the information in a simple manner, grouped together by concept, and in 

a specific order that allows consumers the opportunity to build upon knowledge gained. For 

these reasons, the Bureau proposes that creditors, assignees, or servicers disclose the information 

in the table as set forth in Forms H-4(D)(3) and (4) in Appendix H. 

In all rounds of testing, consumers were presented with model forms with tables 

depicting a scenario in which the interest rate and payment would increase as a result of the 

adjustment. All participants in all rounds of testing understood that their interest rate and 

payment were going to increase and when these changes would occur.87 

The Bureau proposes including allocation information in the table for interest-only and 

negatively-amortizing ARMs. The Bureau believes this information would help consumers 

better understand the risk of these products by demonstrating that their payments would not 

reduce the loan principal. The Bureau also believes providing the payment allocation would help 

consumers understand the effect of the interest rate adjustment, especially in the case of a change 

in the ARM’s features coinciding with the interest rate adjustment, such as the expiration of an 

interest-only or payment-option feature. Since payment allocation may change over time, the 

 

87 Id. 
110 

proposed rule would require disclosure of the expected payment allocation for the first payment 

period during which the adjusted interest rate will apply. 

The allocation of payment disclosure was tested in the third round of testing. The notice 

tested showed the scenario of a 3/1 hybrid ARM with interest-only payments for the first three 

years of the loan adjusting for the first time. On the date of the adjustment, the interest-only 

feature would expire and the ARM would become amortizing. Only about half of participants 

understood that their payments would be changing from interest-only to amortizing. Participants 

generally understood the concept of allocation of payments but were confused by the table in the 

notice that broke out principal and interest for the current payment, but combined the two for the 

new amount. As a result, this table was revised so that separate amounts for principal and 

interest were shown for all payments.88 

The Bureau recognizes that certain Dodd-Frank Act amendments to TILA will restrict 

origination of non-amortizing and negatively-amortizing loans. For example, TILA section 

129C and the 2011 ATR Proposal that would implement that provision, generally require 

creditors to determine that a consumer can repay a mortgage loan and include a requirement that 

these determinations assume a fully-amortizing loan. Thus, this law and regulation, when 

finalized, will restrict the origination of risky mortgages such as interest-only and negativelyamortizing ARMs. 

Other Dodd-Frank amendments to TILA, such as the proposed periodic statement 

provisions discussed below, will provide payment allocation information to consumers for each 

billing cycle. Thus, consumers who currently have interest-only or negatively-amortizing loans 

or may obtain such loans in the future will receive information about the interest-only or 

 

88 Id. at vii-viii. This revision was made after the third round of testing, and therefore was not tested with 

consumers. 
111 

negatively-amortizing features of their loans through the payment allocation information in the 

periodic statement. Also, as noted above, consumer testing showed that participants were 

confused by the allocation table. Since the Bureau was not able to test a revised version of the 

form to see if it rectified the confusion caused by the allocation table or if the concepts of nonamortizing and negatively-amortizing ARMs themselves are the source of the confusion, the 

Bureau questions the value of disclosing this information to consumers in the ARM interest rate 

adjustment notice. In view of these changes to the law and the outcome of consumer testing, the 

Bureau solicits comments on whether to include allocation information for interest-only and 

negatively-amortizing ARMs in the table proposed above. 

20(d)(2)(iv) Explanation of How the Interest Rate is Determined 

TILA section 128A mandates that the initial interest rate adjustment notices include any 

index or formula used in making adjustments to or resetting the interest rate, and a source of 

information about the index or formula. Accordingly, proposed § 1026.20(d)(2)(iv)(A) would 

require disclosure of the name and published source of the index or formula. This disclosure 

requirement is consistent with the pre-consummation disclosure requirements of current rule 

§ 1026.19(b)(2)(iii). Proposed § 1026.37(i), part of the 2012 TILA-RESPA Proposal, likewise 

would require disclosure of the index name prior to consummation. 

TILA section 128A also mandates that the initial interest rate disclosures include an 

explanation of how the new interest rate and payment would be determined, including an 

explanation of how the index was adjusted, such as by the addition of a margin. Proposed 

§ 1026.20(d)(2)(iv) would require § 1026.20(d) notices to include an explanation of how the new 

interest rate is determined. This disclosure requirement is consistent with the pre-consummation 

disclosure requirements of current rule § 1026.19(b)(2)(iii). The 2012 TILA-RESPA Proposal’s 
112 

proposed 1026.37(i) likewise would require disclosure prior to consummation of the amount of 

the margin expressed as a percentage. 

Consumer testing revealed that consumers generally have difficulty understanding the 

relationship of the index, margin, and interest rate.89 Therefore, the Bureau is proposing a 

relatively brief and simple explanation that the new interest rate is calculated by taking the 

published index rate and adding a certain number of percentage points, called the “margin.” 

Proposed § 1026.20(d)(2)(iii) also includes the specific amount of the margin. 

Consumer testing indicated that the explanation helped consumers better understand the 

relationship between the interest rate, index, and margin. It also helped dispel the notion held by 

many of the consumers in the initial rounds of testing that the lender subjectively determined 

their new interest rate at each adjustment.90 The Bureau believes that its proposed rule and forms 

strike an appropriate balance between providing consumers with key information necessary to 

understand the basic interest rate adjustment of their adjustable-rate mortgages without 

overloading consumers with complex and confusing technical information. 

20(d)(2)(v) Rate Limits 

Proposed rule § 1026.20(d)(2)(v) would require the disclosure of any limits on the 

interest rate or payment increases at each adjustment and over the life of the loan. The Bureau 

believes that knowing the limitations of their ARM rates and payments would help consumers 

understand the consequences of each interest rate adjustment and weigh the relative benefits of 

the alternatives that would be required to be disclosed under proposed § 1026.20(d)(2)(viii). For 

example, if an adjustment might cause a significant increase in the consumer’s payment, 

 

89 Id. at viii. 90 Id. 
113 

knowing how much more the interest rate or payment could increase could help inform a 

consumer’s decision on whether or not to seek alternative financing. 

Proposed § 1026.20(d)(2)(v) also requires disclosure of the extent to which the creditor, 

assignee, or servicer has foregone any increase in the interest rate. If there is foregone interest, it 

would require disclosure that the additional interest was not applied due to a rate limit and 

include the earliest date such foregone interest may be applied. Proposed comment 20(d)(2)(iv)-

 1 explains that disclosure of foregone interest would apply only to transactions permitting 

interest rate carryover. It further explains that the amount of increase foregone at the initial 

adjustment is the amount that, subject to rate caps, can be added to future interest rate 

adjustments to increase, or offset decreases in, the rate determined according to the index or 

formula. 

Consumers had difficulty understanding the concept of interest rate carryover when it 

was introduced during the third round of testing. This difficulty may have been due to the 

simultaneous introduction of other complex notions, such as interest-only or negativelyamortizing features and the allocation of interest, principal, and escrow payments for such loans. 

In response, the Bureau has simplified the explanation of carryover interest.91

The Bureau recognizes that the disclosure of rate limits and unapplied carryover interest 

provide information that may help consumers better understand their ARMs. However, the 

Bureau is considering whether the help this information would provide outweighs its distraction 

from other more key information. Also, as explained above, consumers had difficulty 

understanding the concept of carryover interest and the Bureau is concerned this difficulty might 

diminish the effectiveness of the proposed § 1026.20(d) disclosures. The Bureau solicits 

 

91 Id. at viii-ix. 
114 

comment on whether to include rate limits and unapplied carryover interest in the proposed 

§ 1026.20(d) disclosures. 

20(d)(2)(vi) Explanation of How the New Payment is Determined 

TILA section 128A mandates that the initial interest rate notices include an explanation 

of how the new interest rate and payment would be determined, including an explanation of how 

the index was adjusted, such as by the addition of a margin. Proposed § 1026.20(d)(2)(vi) would 

implement this statutory provision by requiring the content discussed below. This proposed 

disclosure is consistent with the disclosures required at the time of application pursuant to 

current§ 1026.19(b)(2)(iii). It is also consistent with content required under proposed 

§ 1026.20(c) and thus promotes consistency in Regulation Z ARM disclosures. 

The disclosure required under proposed § 1026.20(d)(2)(vi) explains that the new 

payment is based on (A) the index or formula, (B) any adjustment to the index or formula, such 

as by addition of the margin, (C) the loan balance, (D) the length of the remaining loan term, 

and, (E) if the new interest rate or new payment provided is an estimate, a statement that another 

disclosure containing the actual new interest rate and new payment will be provided to the 

consumer 2 to 4 months prior to the date the first new payment is due, if the interest rate 

adjustment causes a corresponding change in payment, pursuant to section 1026.20(c). 

The proposal would require disclosure of both the loan balance and the remaining loan 

term expected on the date of the interest rate adjustment. The proposed rule also would require 

disclosure of any change in the term or maturity of the loan caused by the adjustment. 

As discussed in proposed § 1026.20(d)(2)(iv) above, the Bureau found that this 

explanation helped consumers better understand how the index or formula and margin determine 

their new payment and dispelled the notion held by many consumers in the initial rounds of 
115 

testing that, at each adjustment, the lender subjectively determined their new interest rate, and 

thus the new payment. Disclosure of the four key assumptions upon which the new payment is 

based provides a succinct overview of how the interest rate adjustment works. It also 

demonstrates that factors other than the index can increase consumers’ interest rates and 

payments. Disclosures of these factors would provide consumers with a snapshot of the current 

status of their adjustable-rate mortgages and with basic information to help them make decisions 

about keeping their current loan or shopping for alternatives. If an estimated new interest rate 

and new payment is used, the statement that the consumer will receive another disclosure with 

the actual new interest rate and new payment, if the interest rate adjustment results in a 

corresponding payment change, notifies consumers that the creditor, assignee, or servicer will 

inform them of the actual rate and payment two to four months in advance of the date their first 

new payment is due. 

20(d)(2)(vii) Interest-Only and Negative-Amortization Statement and Payment 

 Proposed § 1026.20(d)(2)(vii) would require § 1026.20(d) notices to include a statement 

regarding the allocation of payments to principal and interest for interest-only or negativelyamortizing loans. If negative amortization occurs as a result of the interest rate adjustment, the 

proposed rule would require disclosure of the payment necessary to fully amortize such loans at 

the new interest rate over the remainder of the loan term. As explained in proposed comment 

20(d)(2)(vii)-1, for interest-only loans, the statement would inform the consumer that the new 

payment covers all of the interest but none of the principal owed and, therefore, will not reduce 

the loan balance. For negatively-amortizing ARMs, the statement would inform the consumer 

that the new payment covers only part of the interest and none of the principal, and therefore the 

unpaid interest will add to the balance or increase the term of the loan. 
116 

Both current § 1026.20(c) and the Board’s 2009 Closed-End Proposal to revise 

§ 1026.20(c) include, for ARMs that become negatively amortizing as a result of the interest rate 

adjustment, disclosure of the payment necessary to fully amortize loans at the new interest rate 

over the remainder of the loan term. However, the Bureau believes there are countervailing 

considerations regarding whether to include this information in proposed § 1026.20(d). 

The Bureau recognizes that certain Dodd-Frank Act amendments to TILA will restrict 

origination of non-amortizing and negatively-amortizing loans. For example, TILA section 

129C and the 2011 ATR Proposal that would implement that provision, generally require 

creditors to determine that a consumer can repay a mortgage loan and include a requirement that 

these determinations assume a fully-amortizing loan. Thus, this law and regulation, when 

finalized, will restrict the origination of risky mortgages such as interest-only and negativelyamortizing ARMs. 

Other Dodd-Frank Act amendments to TILA, such as the periodic statement proposed by 

§ 1026.41, will include information about non-amortizing and negatively-amortizing loans in 

each billing cycle, such as an allocation of payments. Thus, consumers who currently have 

interest-only and negatively-amortizing ARMs or may obtain such loans in the future will 

receive certain information about the interest-only or negatively-amortizing features of their 

loans in another disclosure, although this will not include the payment required to fully amortize 

negatively-amortizing loans. The payment necessary to fully amortize these loans was not 

consumer tested but testing of the table showing the payment allocation of interest-only and 

negatively-amortizing ARMs indicated that consumers were confused by this concept. Thus, the 

Bureau is weighing the value of disclosing specific information regarding amortization, such as 

the payment needed to fully amortize negatively-amortizing ARMs. In view of these changes to 
117 

the law and the outcome of consumer testing, the Bureau solicits comments on whether to 

include the payment required to amortize ARMs that became negatively amortizing as a result of 

an interest rate adjustment. 

20(d)(2)(viii) List of Alternatives 

TILA section 128A mandates that the initial interest rate adjustment notices include a list 

of alternatives consumers may pursue before adjustment or reset and descriptions of the actions 

consumers must take to pursue these alternatives. These alternatives include refinancing, 

renegotiation of loan terms, payment forbearance, and pre-foreclosure sales. Proposed 

§ 1026.20(d)(2)(viii) would require disclosure in § 1026.20(d) initial ARM interest rate notices 

of the four alternatives set forth in the statute. The Bureau proposes to use simpler, commonly 

used terms in the model forms to describe the alternatives when possible. 

The proposed model forms present the list as possibilities for consumers seeking 

alternatives to the upcoming changes to their interest rate and payment. The proposed forms also 

explain that most of the alternatives are subject to approval by the lender. All participants tested 

in the first and second round of testing were able to identify the list of alternatives.92

The list of alternatives generally and concisely describes the actions consumers must take 

to pursue these alternatives, such as contacting their lender or another lender. Another action 

consumers may take to pursue these alternatives is contacting government organizations. 

Proposed § 1026.20(d)(2)(xi) would require disclosure in the initial ARM interest rate 

adjustment notice of information on how to contact such agencies, including the contact 

information for the State housing finance authority for the State in which the consumer resides 

and the website and telephone number to access the most current list of homeownership 

 

92 Id. at viii. 
118 

counselors or counseling organizations either made available by the Bureau or maintained by 

HUD. The Bureau proposes to require disclosure of this concise list of alternatives in lieu of a 

more detailed account of actions consumers may take in order to maximize the effectiveness of 

the disclosure without weighing it down with information that may not add significant value. 

20(d)(ix) Prepayment Penalty 

Proposed § 1026.20(c)(d)(ix) would require disclosure of the circumstances under which 

any prepayment penalty may be imposed, such as selling or refinancing the principal dwelling, 

the time period during which such penalty would apply, and the maximum dollar amount of the 

penalty. The proposed rule cross-references the definition of prepayment penalty in subpart E 

under § 1026.41(d)(7)(iv) in the proposed rule for periodic statements. 

Interest rate adjustments may cause payment shock or require consumers to pay their 

mortgage at a rate they may no longer be able to afford, prompting them to consider alternatives 

such as refinancing. In order to fully understand the implications of such actions, the Bureau 

believes that consumers should know whether prepayment penalties may apply. Such 

information should include the maximum penalty (in dollars) that may apply and the time period 

during which the penalty may be imposed. The dollar amount of the penalty, as opposed to a 

percentage, is more meaningful to consumers. 

The Bureau also proposes disclosure of any prepayment penalty in § 1026.20(c) ARM 

payment change notices and the periodic statements proposed by § 1026.41. Consumer testing 

of the periodic statement included a scenario in which a prepayment penalty applied. Most 

participants understood that a prepayment penalty applied if they paid off the balance of their 

loan early, but some participants were unclear whether it applied to the sale of the home, 

refinancing, or other alternative actions consumers could pursue in lieu of maintaining their 
119 

adjustable-rate mortgages.93 For this reason, the Bureau proposes to clarify the circumstances 

under which a prepayment penalty would apply. The proposed forms alert consumers that a 

prepayment penalty may apply if they pay off their loan, refinance, or sell their home before the 

stated date. 

The Bureau recognizes that Dodd-Frank Act amendments to TILA, such as 129C and the 

2011 ATR Proposal proposing to implement that provision, would significantly restrict a 

lender’s ability to impose prepayment penalties. Other Dodd-Frank amendments to TILA, such 

as the proposed periodic statement, would provide consumers with information about their 

prepayment penalty for each billing cycle. Thus, consumers who currently have ARMs with 

prepayment penalty provisions or may obtain such loans in the future would generally receive 

information about them at frequent intervals in another disclosure. In view of these changes to 

the law, the Bureau solicits comments on whether to include information regarding prepayment 

penalties in proposed § 1026.20(d). 

20(d)(2)(x) Telephone Number of Creditor, Assignee, or Servicer 

 Proposed § 1026.20(d)(2)(x) would require disclosure of the telephone number of the 

creditor, assignee, or servicer for consumers to call if they anticipate having problems paying the 

new payment. 

20(d)(2)(xi) Contact Information for Government Agencies and Counseling Agencies or 

Programs 

 TILA section 128A mandates that the initial interest rate adjustment notices include the 

name, mailing and internet address, and telephone number of the State housing finance authority 

(as defined in § 1301 of the Financial Institutions Reform, Recovery, and Enforcement Act of 

 

93 Id. at vi. 
120 

1989) for the State in which the consumer resides. Proposed § 1026.20(d)(2)(xi) would 

implement this statutory mandate by requiring inclusion of this information in the § 1026.20(d) 

initial interest rate adjustment notice. Two other mortgage servicing rulemakings proposed by 

the Bureau, the periodic statement, see below, and the early intervention for delinquent 

borrowers in the 2012 RESPA Servicing Proposal, also would require contact information for the 

State housing finance authority. However, those proposals would require the contact information 

for the State in which the property is located rather than in which the consumer resides, since the 

scope of those proposed rules is not limited to a consumer’s principal dwelling. This is 

consistent with the proposed ARM rule since the consumer’s principal dwelling should be 

located in the State in which the property is located. The Bureau seeks comment on how to 

address any compliance difficulties posed by this inconsistency. 

TILA section 128A also mandates that the initial interest rate adjustment notices include 

the names, mailing and internet addresses, and telephone numbers of counseling agencies or 

programs reasonably available to the consumer that have been certified or approved and made 

publicly available by HUD or a State housing finance authority. 

On July 9, 2012, the Bureau released proposed rules to implement other Dodd-Frank Act 

requirements expanding protections for “high-cost” mortgage loans under HOEPA, including a 

requirement that borrowers receive housing counseling (2012 HOEPA Proposal).94 The 2012 

HOEPA proposal also proposed to implement other homeownership-counseling-related 

requirements that are not amendments to HOEPA, including a proposed amendment to 

 

94 See 2012 HOEPA Proposal, available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_highcost-mortgage-protections.pdf, at 29-35. 
121 

Regulation X that lenders provide a list of five homeownership counselors or counseling 

organizations to applicants for a federally related mortgage loan.95

The Bureau has taken an alternative approach with regard to the initial ARM interest rate 

adjustment notice and proposes to use its exception authority to require creditors, assignees, and 

servicers simply to provide the website address to access either the Bureau list or the HUD list of 

homeownership counseling agencies and programs,96 instead of requiring contact information for 

a list of specific counseling agencies or programs. The Bureau believes that this approach 

appropriately balances consumer and industry interests based on the following considerations: 

The ARM notice required by proposed § 1026.20(d) has limited space and contains a 

significant amount of important technical information about the consumer’s loan. Including too 

much information could overwhelm consumers and minimize the value of the other information 

contained in the notice. Also, not all consumers would benefit from the counselor information, 

although it would provide an important benefit for those consumers who face financial 

difficulties if their initial interest rate adjustment may cause their mortgage payments to 

significantly increase. Finally, importing updated information from the Bureau or HUD website 

would involve more programming burden than simply listing one of the agencies’ websites. 

 

95 The list provided by the lender pursuant to the 2012 HOEPA Proposal would include only homeownership 

counselors or counseling organizations from either the most current list of homeownership counselors or counseling 

organizations made available by the Bureau for use by lenders, or the most current list maintained by HUD of 

homeownership counselors or counseling organizations certified by HUD, or otherwise approved by HUD. The 

2012 HOEPA Proposal proposed that the list include five homeownership counselors or counseling organizations 

located in the zip code of the loan applicant’s current address, or, if there are not the requisite five counselors or 

counseling organizations in that zip code, then counselors or organizations within the zip code or zip codes closest to 

the loan applicant’s current address. To facilitate compliance with the proposed list requirement, the Bureau is 

expecting to develop a website portal that would allow lenders to type in the loan applicant’s zip code to generate 

the requisite list, which could then be printed for distribution to the loan applicant. See 2012 HOEPA Proposal at 

31-32 (discussing proposed Regulation X § 1024.20(a)). 

96 At the time of publishing, the Bureau list was not yet available; the HUD list is available at 

http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm. 
122 

Providing consumers with the website address for either the Bureau or HUD list of 

homeownership counseling agencies and programs would streamline the disclosure and present 

clear and concise information for the consumer to use. However, directing consumers to the 

actual list would allow them to choose a conveniently located program or agency and to locate 

other programs or agencies if those contacted initially could not help the consumer at that time. 

The Bureau seeks comment on whether this proposal strikes an appropriate balance, and on the 

benefits and burdens to both consumers and industry of requiring that a list of several individual 

housing counselors be included in the initial ARM interest rate adjustment notice. 

Authority. The Bureau proposes to use its authority under TILA sections 105(a) and (f) 

and DFA section 1405(b) to exempt creditors, assignees, and servicers from the requirement in 

TILA section 128A to include in the initial ARM interest rate adjustment notice contact 

information for specific government-certified counseling agencies or programs reasonably 

available to the consumer, and its authority under TILA section 105(a) and DFA section 1405(b) 

to instead require that the initial ARM interest rate adjustment notice contain information that 

directs consumers to the Bureau list or HUD list of homeownership counselors or counseling 

agencies. For the reasons discussed above, the Bureau believes that the proposed exception and 

addition is necessary and proper under TILA section 105(a) both to effectuate the purposes of 

TILA -- to promote the informed use of credit and protect consumers against inaccurate and 

unfair credit billing practices -- and to facilitate compliance. Moreover, the Bureau believes, in 

light of the factors in TILA section 105(f), that disclosure of the government-certified counseling 

agencies or programs reasonably available to the consumer specified in TILA section 128A 

would not provide a meaningful benefit to consumers. Specifically, the Bureau considers that 

the exemption is proper irrespective of the amount of the loan and the status of the borrower 
123 

(including related financial arrangements, financial sophistication, and the importance to the 

borrower of the loan). The Bureau further notes, in light of TILA section 105(f)(2)(D), that the 

requirements in § 1026.20(d) would only apply to loans secured by the consumer’s principal 

dwelling. Moreover, in the estimation of the Bureau, the proposed exemption would simplify the 

initial ARM adjustment notice and improve the housing counselor information provided to the 

consumer, thus furthering the consumer protection purposes of TILA. In addition, consistent 

with section 1405(b) of the Dodd-Frank Act, the Bureau believes that the proposed modification 

of the requirements in TILA section 128A would improve consumer awareness and 

understanding and is in the interest of consumers and in the public interest. 

20(d)(3) Format of Initial Rate Adjustment Disclosures 

As discussed above, the Bureau proposes to make proposed § 1026.20(d) subject to 

certain of the general form requirements of § 1026.17(a)(1), including requiring that the 

disclosure be clear and conspicuous, in writing, and in a form consumers can keep, and giving 

creditors, assignees, and servicers the option of providing the disclosures to consumers in 

electronic form, subject to compliance with consumer consent and other applicable provisions of 

the E-Sign Act. However, as discussed above, because § 1026.20(d) disclosures are subject to 

the statutory requirement that they must be provided separate and distinct from all other 

correspondence, the Bureau proposes to amend § 1026.17(a) to provide that the general 

segregation and grouping requirements in that provision would not apply to § 1026.20(d). 

Authority. In addition, as described below, § 1026.20(d)(3) proposes additional form 

requirements for initial ARM adjustment notices. For the reasons described below, these 

requirements are authorized under TILA section 105(a) and DFA sections 1032(a) and 1405(b). 

As discussed in the section-by-section analysis for each of the proposed sections of 
124 

§ 1026.20(d)(3), the Bureau believes, consistent with TILA section 105(a), that the proposed 

formatting requirements are necessary and proper to effectuate the purposes of TILA to assure a 

meaningful disclosure of credit terms, to avoid the uninformed use of credit, and to protect 

consumers against inaccurate and unfair credit billing practices. Further the Bureau believes, 

consistent with DFA section 1032(a), that the proposed formatting requirements ensure that the 

features of the ARM loans covered by proposed § 1026.20(d) are fully, accurately, and 

effectively disclosed to consumers in a manner that permits them to understand the costs, 

benefits, and risks associated with such loans, in light of their individual facts and circumstances. 

Moreover, consistent with DFA section 1405(b), the Bureau believes that modification of the 

provision in TILA section 128A to require the proposed format discussed below would improve 

consumer awareness and understanding of residential mortgage loans transactions involving 

ARMs, and is thus in the interest of consumers and in the public interest. 

20(d)(3)(i) All Disclosures in Tabular Form, Except the Date 

Proposed § 1026.20(d)(3)(i) would require that, except for the date of the notice, the 

initial ARM adjustment disclosures be provided in the form of a table and in the same order as, 

and with headings and format substantially similar to, Forms H-4(D)(3) and (4) in Appendix H to 

subpart C for initial interest rate adjustments. 

The proposed ARM adjustment notice contains complex concepts challenging for 

consumers to understand. For example, consumer testing revealed that participants generally had 

difficulty understanding the relationship among index, margin, and interest rate.97 They also had 

difficulty with the concepts of amortization and interest rate carryover.98 As a starting point, the 

 

97 Macro Report, supra note 38, at viii. 98 Id. at viii-ix. 
125 

Bureau looked at the model forms developed by the Board for its 2009 Closed-End Proposal to 

amend § 1026.20(c). The Bureau then conducted its own consumer testing. 

The Bureau’s testing showed that consumers can more readily understand these concepts 

when the information is presented to them in a simple manner and in the groupings contained in 

the model forms. The Bureau also observed that consumers more readily understood the 

concepts when they were presented in a logical order, with one concept presented as a foundation 

to understanding other concepts. For example, the form begins by informing consumers of the 

purpose of the form: that their interest rate is going to adjust, when it will adjust, and that the 

adjustment may change their mortgage payment. This introduction is immediately followed by a 

table visually showing the consumers’ current and estimated new interest rates. In another 

example, the proposed notice informs consumers about their index rate and margin before 

explaining how the new payment is calculated based on those factors as well as other factors 

such as the loan balance and remaining loan term. 

Based on consumer testing, the Bureau believes that consumer understanding is enhanced 

by presenting the information in a simple manner, grouped together by concept, and in a specific 

order that allows consumers the opportunity to build upon knowledge gained. For these reasons, 

the Bureau proposes that creditors, assignees, or servicers disclose the information required by

proposed § 1026.20(d) with headings, content, and format substantially similar to Forms H4(D)(3) and (4) in Appendix H to this part.

Over the course of consumer testing, participant comprehension improved with each 

successive iteration of the model form. As a result, the Bureau believes that displaying the 

information in tabular form focuses consumer attention and lends to greater understanding. 

Similarly, the Bureau found that the particular content and order of the information, as well as 
126 

the specific headings and format used, presented the information in a way that consumers both 

could understand and from which they could benefit. 

20(d)(3)(ii) Format of Date of Disclosure 

Proposed § 1026.20(d)(3)(ii) would require that the date of the disclosure appear outside 

of and above the table required by proposed § 1026.20(d)(3)(i). As discussed above with respect 

to paragraph 20(d)(2)(i), the date would be segregated since it is not information specific to the 

consumer’s adjustable-rate mortgage. 

20(d)(3)(iii) Format of Interest Rate and Payment Table 

Proposed § 1026.20(d)(3)(iii) would require tabular format for initial ARM interest rate 

adjustment notices for interest rates, payments, and the allocation of payments for loans that are 

interest-only or are negatively amortizing. This table would be located within the table proposed 

by § 1026.20(d)(3)(i). This table is substantially similar to the one tested by the Board for its 

2009 Closed-End Proposal to revise § 1026.20(c). The proposal would require the table to 

follow the same order as, and have headings and format substantially similar to, Forms H4(D)(3) and (4) in Appendix H of subpart C. 

Disclosing the current interest rate and payment in the same table allows consumers to 

readily compare them with the estimated or actual adjusted rate and new payment. Consumer 

testing revealed that nearly all participants were readily able to identify and understood the table 

and its contents.99 The estimated or actual new interest rate and payment and date the first new 

payment is due is key information the consumer must know in order to commence payment at 

the new rate. For these reasons, the Bureau proposes locating this information prominently in 

the disclosure. 

 

99 Id. at vii.
127 

Section 1026.36 Prohibited Acts or Practices in Connection with Credit Secured by a Dwelling 

36(c) Servicing Practices 

Existing § 1026.36(c) provides requirements for servicers in connection with a consumer 

credit transaction secured by a consumer’s principal dwelling. Essentially, such servicers must 

promptly credit payments, must not “pyramid” late fees, and must provide payoff statements at 

the consumer’s request. The Dodd-Frank Act essentially codifies the § 1026.36(c) provisions on 

prompt crediting and payoff statements with minor changes, as discussed below. The Bureau is 

amending Regulation Z both to implement the new statutory requirements, and to address the 

related issue of the handling of partial payments. Currently, Regulation Z addresses prompt 

crediting in § 1026.36(c)(1)(i). The Bureau is proposing limiting the scope of existing 

§ 1026.36(c)(1)(i) to full contractual payments, and addressing partial payments (anything less 

than a full contractual payment) in proposed § 1026.36(c)(1)(ii), as discussed below. The 

Bureau proposes to retain the substantive requirements on non-conforming payments currently in 

§ 1026.36(c)(2), but to move them to paragraph (c)(1)(iii). Likewise, the Bureau does not 

propose to change the Regulation Z provision addressing “pyramiding” of late fees currently in 

§ 1026.36(c)(1)(ii), but only to move the provision to new paragraph (c)(3). Finally, the Bureau 

is proposing four substantive changes to the provisions on payoff statements, currently located in 

§ 1026.36(c)(1)(iii), as well as to move these provisions to proposed paragraph 36(c)(3). 

The Bureau believes these changes to Regulation Z are best implemented by restructuring 

paragraph (c) and simplifying some of the language. This restructuring generally is not intended 

to make any substantive changes. All substantive changes to the paragraph (c) are discussed 

below. 

36(c)(1)(i) Full Contractual Payments
128 

 DFA section 1464(a) established TILA section 129F, which codifies existing Regulation 

Z § 1026.36(c)(1)(i) with regard to prompt crediting of mortgage loan payments. The statute and 

the existing regulation both provide generally that “no servicer shall fail to credit a payment to 

the consumer’s loan account as of the date of receipt, except when a delay in crediting does not 

result in any charge to the consumer or in the reporting of negative information to a consumer 

reporting agency.” Proposed new paragraph (c)(1)(i) generally restates existing (c)(1)(i) with the 

only change that the existing regulation applies to all payments, while proposed (c)(1)(i) would 

be limited to full contractual payments. The Bureau is proposing to establish new 

§ 1026.36(c)(1)(ii) to clarify servicers’ obligations when they receive a partial payment 

(anything less than a full contractual payment), as discussed below. 

As discussed above, proposed § 1026.36(c)(i) generally tracks the Dodd-Frank Act and 

current regulation, but changes the reference to “a payment” to “a full contractual payment” and 

makes minor modifications to reflect the proposed restructuring of the regulation. The proposed 

regulation text provides that a full contractual payment covers principal, interest, and escrow (if 

applicable), but not late fees. The Bureau engaged in outreach and found that many servicers 

already apply payments that cover principal, interest, and escrow (if applicable) without 

deducting late fees. This ensures that consumers get the full benefit of having made a payment. 

The Bureau seeks comment as to whether late fees should also be included in the definition of a 

full contractual payment. 

36(c)(1)(ii) Partial Payments 

Current Regulation Z does not define what constitutes a “payment” for purposes of the 

crediting requirement, but leaves that question to be determined by the contractual documents 

and other applicable law. Specifically, current comment 36(c)(1)(i)-2 refers to “the legal 
129 

obligation between the consumer and the creditor” as determined by “applicable state or other 

law” to determine whether a partial payment is a “payment” under the payment crediting 

provisions. Outreach to consumer and industry stakeholders revealed that partial payments are 

currently handled in a variety of ways. Some lenders do not accept partial payments, some 

lenders apply partial payments, and some lenders send partial payments to a suspense or 

unapplied funds account. Currently there is no Federal regulation that governs such accounts. 

The Bureau is proposing to address partial payments in new § 1026.36(c)(1)(ii). 

Proposed § 1026.36(c)(1)(ii) provides specific rules regarding the handling of partial 

payments and suspense accounts. New paragraph (c)(1)(ii) would require, consistent with the 

proposed periodic statement requirements in § 1026.41 discussed below, that if a servicer holds a 

partial payment, meaning any payment less than a full contractual payment, in a suspense or 

unapplied funds account, the servicer must disclose on the periodic statement the amount of 

funds held in such account. The servicer must also disclose when such funds will be applied to 

the outstanding payments due on the account. This proposed requirement is authorized under 

TILA section 129(f), which requires creditors, assignees, and servicers to send statements for 

each billing cycle including “[s]uch other information as the Bureau may prescribe in 

regulations.” 

Additionally, proposed § 1026.36(c)(1)(ii) provides that if a servicer holds a partial 

payment in a suspense or unapplied funds account, once there are sufficient funds in the account 

to cover a full contractual payment, the servicer must apply those funds to the oldest outstanding 

payment due. The proposed requirement that the funds be applied to the oldest outstanding 

payment would advance the date of delinquency by one billing cycle, and thus benefit the 

consumer. For example, suppose a previously current consumer must make a $1,000 monthly 
130 

payment, and the consumer paid $500 on January 1st and $500 on February 1st. When the second 

$500 payment is made, a full contractual payment of $1,000 (assuming late fees are not included 

in the definition of full contractual payment) is in the suspense account and must be applied to 

the January payment. Thus, this consumer would only be one month delinquent at the end of 

February. The Bureau interprets the language in TILA section 129F(a), that servicers must 

“credit” payments as of the date of receipt, except when a delay in crediting does not result in 

“any charge” to the consumer to authorize the proposed requirement that partial payments held in 

suspense accounts be credited to the oldest outstanding payment when a full contractual payment 

accumulates. Crediting the funds to a payment that was not the most delinquent would result in a 

charge to the consumer by extending the duration of the delinquency. To the extent not required 

under TILA section 129F(a), the Bureau believes this proposed requirement regarding crediting 

of funds is authorized under TILA section 105(a). As explained above, the Bureau believes the 

requirement is necessary and proper to effectuate the purpose of TILA to protect consumers 

against inaccurate and unfair credit billing practices by ensuring that funds held in a suspense 

account are promptly applied to the oldest outstanding payment when sufficient funds 

accumulate in such an account to cover a full contractual payment. 

Proposed comment 36(c)(1)(ii)-1 describes the servicer’s options upon receipt of a partial 

payment, including: crediting the payment on receipt, returning the payment, or holding the 

payment in a suspense or unapplied funds account. 

The proposed regulation would leave servicers significant flexibility in the handling of 

partial payments in accordance with contractual terms and other applicable law, for instance by 

rejecting the payment, crediting it immediately, or holding it in a suspense account. However, 

the proposed rule would also ensure greater consistency in the handling of suspense accounts by 
131 

requiring, consistent with proposed § 1026.41, that servicers disclose on the periodic statement 

that the funds are being held in such accounts and, once sufficient funds accumulate to cover a 

full contractual payment, that the servicer apply the funds to the oldest outstanding payment 

owed by the consumer. If sufficient funds accumulate to cover more than one full contractual 

payment, these funds would be applied to the next oldest outstanding payment. Partial payment 

amounts would be treated as described above. 

The Bureau believes this proposed approach would clarify servicers’ obligations in 

processing both full contractual payment and partial payments, as well as ensure all payments are 

properly applied. The proposed disclosures would help consumers understand that their 

payments are being held in a suspense account rather than having been applied, and when those 

partial payments would be applied. Additionally, requiring application to the oldest outstanding 

payment when a full payment accumulates will provide protection to consumers, as well as 

reduce the outstanding principal balance on certain consumer loans. 

Finally, the Bureau seeks comment on if this approach is the proper way to address 

suspense accounts, and specifically, whether there should be time requirements on returning 

partial payments. If a servicer chooses not to accept a partial payment, must that payment be 

returned within a specific amount of time, and if so, how long should that time be? Additionally, 

the SBREFA Panel recommended the Bureau consider if additional flexibility can be provided in 

the proposed rule for small servicers, to the extent their current practices differ from the proposal 

and provide appropriate consumer protections.100 The Bureau seeks comment on whether the 

proposed rule differs from existing small servicer practices, and if so, how additional flexibility 

can be provided while still providing appropriate consumer protection. 

 

100 SBREFA Final Report, supra note 22, at 32. 
132 

36(c)(1)(iii) Non-conforming payments 

TILA section 129F(b) further provides that “[i]f a servicer specifies in writing 

requirements for the consumer to follow in making payments, but accepts a payment that does 

not conform to the requirements, the servicer shall credit the payment as of 5 days after receipt.” 

This provision codifies the treatment of non-conforming payments in current § 1026.36(c)(2). 

The Bureau is not making any substantive changes to this provision, as the current rule is clear 

and provides protection for consumers, but the Bureau proposes to redesignate the section as new 

§ 1026.36(c)(1)(iii). 

The Bureau notes that payments held in a suspense or unapplied funds account, as 

addressed in proposed § 1026.36(c)(1)(ii) discussed above, would not be considered to have been 

“accepted” by the servicer. Thus, under the Bureau’s proposal, partial payments retained in 

suspense or unapplied funds accounts are treated as payments that have not been accepted 

subject to § 1026.36(c)(1)(ii), as opposed to non-conforming payments that have been accepted 

subject to proposed § 1026.36(c)(1)(iii), which must be credited within five days of receipt. 

36(c)(2) Prohibition on Pyramiding of Late Fees 

 The Bureau is not proposing any substantive changes to existing 36(c)(1)(ii), prohibiting 

the pyramiding of late fees. However the Bureau proposes redesignating this as new paragraph 

36(c)(2). 

36(c)(3) Payoff Statements 

DFA section 1464(b) established TILA section 129G, which requires that a creditor or 

servicer send an accurate payoff balance amount to the consumer within a reasonable time, but in 

no case more than seven business days, after the receipt of a written request for such balance 

from or on behalf of the consumer. This provision generally codifies existing 
133 

§ 1026.36(c)(1)(iii) of Regulation Z regarding provision of payoff statements with four 

substantive changes. First, while existing Regulation Z only applied the requirements to 

servicers, the statute applies the requirements to both servicers and creditors. Second, the statute 

applies the prompt response requirement to “home loans,” rather than consumer credit 

transactions secured by the consumer’s principal dwelling. Third, the statute limits the 

reasonable time for responding to not more than seven business days; by contrast, existing 

comment 36(c)(1)(iii)-1 generally creates a five business day safe harbor for responding, but 

notes that it might be reasonable to take longer to respond in certain circumstances. Fourth, the 

statute requires a prompt response only to written requests for payoff amounts, while the existing 

regulation requires a prompt response to all such requests. Due to the reorganization of 

paragraph (c), the proposed provisions on payoff statements will be located in paragraph (c)(3). 

Covered persons. Existing § 1026.36(c)(1)(iii) applies to servicers. TILA section 129G, 

as established by DFA section 1464(b), applies the payoff statement requirement to creditors and 

servicers. For the reasons discussed in the section-by-section analysis of § 1026.20(d) above, the 

Bureau interprets this to mean the payoff statement provision applies to creditors, assignees, and 

servicers as applicable. Proposed comment 36(c)(3)-1 clarifies that a creditor who no longer 

owns the mortgage loan or the mortgage servicing rights is not “applicable” and therefore not 

subject to the payoff statement requirements. The Bureau notes that the other subparts of 

paragraph (c) continue to be limited to servicers. 

Scope. Existing § 1026.36(c)(1)(iii) is limited to consumer credit transactions secured by 

principal dwellings. The Bureau is proposing to expand the scope of the provision to consumer 

credit transactions secured by all dwellings. TILA section 129G, as established by DFA section 

1464(b), applies the payoff statement requirement to “home loans,” a term not used elsewhere in 
134 

TILA. The Bureau interprets this term to expand the scope of the requirement from consumer 

credit transaction secured by principal dwellings to consumer credit transactions secured by any 

dwelling. Thus, the proposed regulation applies to consumer credit transactions (both open- and 

closed-end), secured by a dwelling, not just a principal dwelling. The Bureau notes that the other 

subparts of paragraph (c) continue to be limited to consumer credit transactions secured by a 

consumer’s principal dwelling. 

Seven business days. Existing § 1026.36(c)(1)(iii) requires the payoff statement to be 

sent within a reasonable amount of time, and comment 36(c)(1)(iii)-1 clarifies that a reasonable 

time is “within 5 business days under most circumstances.” New TILA section 129G provides 

that a reasonable time may not be more than seven business days after the receipt of the request. 

Proposed § 1026.36(c)(3) reflects this change. Because of this change, the Bureau proposes 

removing existing comment 36(c)(1)(iii)-1. 

Written requests. Existing § 1026.36(c)(1)(iii) requires the payoff statement to be sent 

after a request is received from the consumer. New TILA section 129G limits the requirement to 

provide a prompt response to “written requests” for payoff statements. Thus proposed new 

paragraph (c)(3) would require payoff statements to be provided after receipt of a written 

request. Related comment (c)(3)-3 (renumbered from (c)(1)(iii)-3)), which provides examples of 

reasonable requirements the servicer may establish for payoff requests, is also updated to reflect 

this change. 

The SBREFA Panel recommended the Bureau consider if additional flexibility can be 

provided in the proposed rule for small servicers, to the extend their current practices differ from 

the proposal and provide appropriate consumer protections.101 The Bureau seeks comment on 

 

101 Id.
135 

whether the proposed rule differs from existing small servicer practices, and if so, how additional 

flexibility can be provided while still providing appropriate consumer protection. 

Section 1026.41 Periodic Statements for Residential Mortgage Loans 

Proposed § 1026.41 would establish the periodic statement requirement for residential 

mortgage loans. This section implements TILA section 128(f) as established by DFA section 

1420. The statute requires the periodic statement to disclose seven items of information (the 

amount of the principal obligation, current interest rate and reset date if applicable, information 

on prepayment penalties and late fees, contact information for the servicer, and housing 

counselor information), as well as such other information as the Bureau may prescribe in 

regulations.102 The Bureau believes the periodic statement would provide the greatest value to 

consumers by also providing information regarding upcoming payment obligations and the 

application of past payments; a list of recent transaction activity; additional account information; 

and delinquency information. Thus, the Bureau proposes pursuant to TILA section 129(f)(1)(H) 

that each periodic statement also include this additional information. 

TILA section 128(f) applies the requirement to provide a periodic statement to creditors, 

assignees, and servicers of residential mortgage loans. To increase readability, proposed 

§ 1026.41 uses the term “servicer” to describe the entities covered by the proposed requirement, 

and defines servicer to mean creditors, assignees, or servicers for the purposes of § 1026.41. 

This terminology is also used in the section-by-section analysis for proposed § 1026.41. The 

statute applies the periodic statement to “the creditor, assignee, or servicer.” Comment 41(a)-3 

clarifies that only one periodic statement must be sent to the consumer each billing cycle, while 

the creditor, assignee and servicer are subject to the periodic statement requirement, they may 

 

102 TILA section 129(f)(1). 
136 

decide among themselves who will sent the statement. Comment 41(a)-4 clarifies that a creditor 

who no longer owns the mortgage loan or the mortgage servicing rights is not “applicable” and 

therefore not subject to the requirements. The Bureau interpretation of the statute would not 

apply the on-going periodic statement requirements to an entity that originated the loan, but has 

sold both the loan and the servicing rights and no longer has any connection to the loan. 

As proposed, the periodic statement carefully balances the need to provide consumers 

with sufficient information against the risk of overwhelming consumers with too much 

information. The proposed requirements are designed to make the statement easy to read, 

whether provided in a paper form or electronically. The Bureau believes that imposing a 

requirement that information be grouped would present the information in a logical format, while 

allowing servicers flexibility in customizing the statement. Thus, the proposed regulations 

discussed below would require the following groupings of information: 

 The Amount Due: The most prominent disclosure on the statement would be the 

amount due. The due date of the payment due and information on the late fee is also 

included in this grouping. 

 Explanation of Amount Due: This grouping would include a breakdown of the 

amount due, showing allocation to principal, interest, and escrow. This grouping 

would also provide the total sum of any fees or charges imposed, and any amount of 

past due payment. 

 Past Payment Breakdown: This grouping would include a breakdown of how 

previous payments were applied. 
137 

 Transaction Activity: This grouping would be a list of any activity that credits or 

debits the outstanding account balance, for example, charges imposed or payments 

received. 

The periodic statement would also include the following information: 

 Certain messages as required at certain times (for example, information on funds held 

in a suspense or unapplied funds account). 

 Contact information for the servicer. 

 Account information as required by the statute, including the amount of the principal 

obligation, current interest rate, and when it might change (if applicable), information 

on prepayment penalties (if applicable) and late fees, contact information for the 

servicer, and housing counselor information. 

 Finally, additional delinquency information would be required when a consumer is 

more than 45 days delinquent on his or her loan. Each of these disclosures is 

discussed below. 

Additionally, the proposed regulation sets forth requirements regarding the timing and form of 

the periodic statement and establishes exemptions to the requirement to provide a periodic 

statement. 

41(a) In general 

Proposed § 1026.41(a) states the general requirement that, for a closed-end consumer 

credit transaction secured by a dwelling, a creditor, assignee, or servicer must transmit to the 

consumer for each billing cycle a periodic statement meeting the timing, form, and content 

requirements of § 1026.41, unless an exemption applies. As discussed below, the proposed 
138 

requirements and exemptions are authorized under TILA sections 128(f), and 105(a) and (f), and 

DFA sections 1032(a) and 1405(b). 

As discussed above, the periodic statement is intended to serve a variety of purposes, 

including informing consumers of their payment obligations, providing information about the 

mortgage loan, creating a record of transactions that increase or decrease the outstanding 

balance, providing the information needed to identify and assert errors, and providing 

information when borrowers are delinquent. To meet these goals, paragraphs (b), (c), and (d) 

respectively, propose the requirements for the timing, form, content, and layout of the periodic 

statement. Paragraph (e) proposes exemptions from the proposed periodic statement 

requirement. 

Entities covered. TILA section 128(f) imposes the periodic statement requirement on 

creditors, assignees, and servicers. Proposed § 1026.41(a) would implement this provision by 

specifying that the duty to transmit periodic statements applies to the servicer, defined to mean 

creditor, assignee, or servicer. The consumer is only required to receive one periodic statement 

each billing cycle, but creditors, assignees, and servicers would all be responsible for ensuring 

that the consumer receives a periodic statement that meets the requirements of § 1026.41. 

Scope. Under TILA section 128(f), the periodic statement requirement applies to 

residential mortgage loans. The term “residential mortgage loan” is generally defined in TILA 

section 103(cc)(5) to mean any consumer credit transaction that is secured by a mortgage, deed 

of trust, or other equivalent consensual security interest on a dwelling or on residential real 

property that includes a dwelling, other than a consumer credit transaction under an open-end 

credit plan. Consistent with this definition, proposed paragraph (a) would apply the periodic 
139 

statement requirement to “any closed-end consumer credit transaction secured by a dwelling.” 

This language implements the substantive scope of the statute; no substantive change is intended. 

Transmit to the consumer. Proposed § 1026.41(a) would require the servicer to transmit 

the periodic statement to the consumer. The term “transmit” is used in the statute. Use of this 

term would indicate that the servicer must do more than simply make the statement available; the 

statement would be required to be sent to the consumer. Paper statements mailed to the 

consumer would meet this requirement. As discussed below with respect to proposed 

§ 1026.41(c), if the servicer is using an electronic method of distribution, a servicer may send the 

consumer an email indicating that the statement is available, rather than attaching the statement 

itself, to account for information security concerns. 

Proposed comment 41(a)-1 clarifies that joint obligors need not receive separate 

statements; a single statement addressed to both of them would satisfy the periodic statement 

requirement. 

Billing cycles. Proposed § 1026.41(a) would require a periodic statement to be sent each 

“billing cycle.” The billing cycle corresponds to the frequency of payments, as established by 

the legal obligation of the consumer as determined by the mortgage note and any subsequent 

modifications to that obligation. Thus, if a loan requires the consumer to make monthly 

payments, that consumer will have a monthly billing cycle. Likewise, if a consumer makes 

quarterly payments, that consumer will have a quarterly billing cycle. 

Based on industry outreach, the Bureau has learned of other alternatives to monthly 

billing cycles. Some loans may be timed to accommodate consumers employed in seasonal 

industries (for example, a loan may have 10 payments over the course of a year). For such loans 

the billing cycle may not align with the calendar months. Another non-monthly payment 
140 

arrangement may occur when payments are made every other week, or other similar less-thenmonthly periods. For example, servicers and consumers may arrange a bi-weekly payment 

program to align mortgage payments with the consumer’s paychecks. Such billing cycles may 

be arrangements with the servicer that do not modify the legal obligation of the consumer. In 

such cases, a periodic statement may, but is not required to, reflect this modified payment cycle. 

The Bureau realizes that a requirement to provide statements every other week may be 

costly for servicers and unhelpful to consumers. In addition, such a short cycle may cause 

problems with information on the statement being outdated. Thus, paragraph (a) allows that if a 

loan has a billing cycle shorter than a period of 31 days (for example, a bi-weekly billing cycle), 

a periodic statement covering an entire month may be used. Related proposed comment 41(a)–2 

clarifies how such a single statement would aggregate information from multiple billing cycles. 

Authority. Proposed paragraph (a) implements new TILA section 128(f)(1) requiring that 

a creditor, assignee, or servicer, with respect to any closed-end consumer credit transaction 

secured by a dwelling must transmit a periodic statement to the consumer. In addition, the 

Bureau proposes in paragraph (a) to use its authority under TILA section 105(a) and (f) and DFA 

section 1405(b) to exempt creditors, assignees, and servicers of residential mortgage loans from 

the requirement in TILA section 128(f)(1)(G) to transmit periodic statement each billing cycle 

when the billing cycle is less than a month, and to instead permit servicers to provide an 

aggregated periodic statement covering an entire month. For the reasons discussed above, the 

Bureau believes that the proposed exception is necessary and proper under TILA section 105(a) 

both to effectuate the purposes of TILA -- to promote the informed use of credit and protect 

consumers against inaccurate and unfair credit billing practices -- and to facilitate compliance. 

Moreover, the Bureau believes, in light of the factors in TILA section 105(f), that sending 
141 

periodic statements more than once a month would not provide a meaningful benefit to 

consumers. Specifically, the Bureau considers that the exemption is proper irrespective of the 

amount of the loan, the status of the borrower (including related financial arrangements, financial 

sophistication, and the importance to the borrower of the loan), or whether the loan is secured by 

the principal residence of the consumer. Further, in the estimation of the Bureau, consistent with 

DFA section 1405(b), the proposed exemption will prevent the consumer confusion that might 

result from receiving multiple periodic statements in close sequence, thus furthering the 

consumer protection purposes of the statute. 

Paragraph (b) interprets the statutory requirement that a periodic statement must be 

provided for each billing cycle by requiring the periodic statement be delivered or placed in the 

mail within a reasonably prompt time after the close of the grace period of the previous billing 

cycle. 

Paragraph (c) invokes authority under TILA sections 105(a), 122, and 128(f)(2) to require 

that the disclosures must be made clearly and conspicuously in writing, or electronically if the 

consumer agrees, and in a form the consumer may keep. The Bureau also interprets the statute to 

mandate certain of these form requirements. 

As discussed in more detail below, the Bureau generally proposes to impose the periodic 

statement requirement pursuant to its authority under TILA sections 128(f) and 105(a), and DFA 

sections 1032(a) and 1405(b). 

41(b) Timing of the Periodic Statement 

Proposed § 1026.41(b) provides that the periodic statement must be sent within a 

reasonably prompt time after the close of the grace period of the previous billing cycle. 
142 

Proposed comment 41(b)-1 provides that four days after the close of any grace period would be 

considered reasonably prompt. 

For the first payment on the mortgage loan, proposed paragraph (b) would require that 

the first periodic statement be sent no later than 10 days before this first payment is due. This 

adjustment is necessary because there is no previous billing cycle from which to time the sending 

of the first statement. 

The periodic statement serves the dual purposes of giving an accounting of payments 

received since the pervious periodic statement, and reminding the consumer about the upcoming 

payment. To achieve these dual purposes, the periodic statement must arrive after the last 

payment was received and before the next payment is due, which can be a relatively narrow 

window. If a payment is due on the first of the month, grace periods may give the consumer as 

late as the 15th of the month to make that payment. Thus, if a statement is sent before the 15th of 

the month, that statement may not reflect the consumer’s most recent payment, or any late charge 

imposed due to a late payment. However, if a statement is sent at the close of the month, that 

statement may not arrive before the next payment is due on the first day of the next month. 

Allowing a few days for processing and mailing of statements creates a tight timeframe. The 

Bureau seeks comment on whether the proposed regulation appropriately addresses this 

timeframe. Additionally, the Bureau seeks comment on whether it is operationally difficult to 

have the first statement delivered or placed in the mail 10 days before the first payment is due. 

The Bureau interprets the requirement in TILA section 128(f) that periodic statements be 

sent for “each billing cycle” to authorize the timing requirements proposed in § 1026.41(b). In 

addition, the proposed timing requirements are authorized under TILA section 105(a), and DFA 

sections 1032(a) and 1405(b). For the reasons noted above, the Bureau believes, consistent with 
143 

TILA section 105(a), that the proposed requirements are necessary and proper to effectuate the 

purposes of TILA to assure a meaningful disclosure of credit terms and protect consumers 

against inaccurate and unfair credit billing practices by assuring that consumers receive the 

periodic statement at a time that is useful to them. In addition, consistent with DFA section 

1032(a), the Bureau believes that the proposed timing requirements help ensure that the features 

of consumers’ residential mortgage loans, both initially and over the term of the loan, are 

effectively disclosed to consumers in a manner that permits them to understand the costs, 

benefits, and risks associated with the loan. Moreover, consistent with DFA section 1405(b), the 

Bureau believes that the proposed timing requirements would improve consumer awareness and 

understanding of their residential mortgage loans by assuring that consumers receive the periodic 

statements at a meaningful time, after their last payment is made and before their next payment is 

due, and that proposed requirements are thus in the interest of consumers. 

41(c) Form of the Periodic Statement 

Proposed § 1026.41(c) provides that the periodic statement disclosures required by 

section § 1026.41 must be made clearly and conspicuously in writing, or electronically, if the 

consumer agrees, and in a form the consumer may keep. TILA section 128(f)(1) specifies that 

periodic statements must be “conspicuous and prominent,” and TILA section 128(f)(2) requires 

the Bureau to develop and prescribe a standard form to be transmitted in writing or 

electronically. The Bureau proposes to implement these provisions, in part through the form 

requirements set forth in proposed § 1026.41(c) and the related forms provided in Appendix H28. In addition, the proposed form requirements are authorized under TILA section 122, which 

requires the disclosures under TILA be clear and conspicuous, TILA section 105(a) and DFA 

sections 1032(a) and 1405(b). As discussed below, the Bureau believes, consistent with TILA 
144 

section 105(a), that the proposed form requirements are necessary and proper to effectuate the 

purposes of TILA to assure a meaningful disclosure of credit terms and protect the consumer 

against inaccurate and unfair credit billing practices by assuring that the periodic statement sent 

to consumers is in a form that they can understand. In addition, consistent with DFA section 

1032(a), the Bureau believes that the proposed form requirements help ensure that the features of 

consumers’ residential mortgage loans, both initially and over the term of the loan, are 

effectively disclosed to consumers in a manner that permits them to understand the costs, 

benefits, and risks associated with the loan. Moreover, consistent with DFA section 1405(b), the 

Bureau believes that the proposed form requirements would improve consumer awareness and 

understanding of their residential mortgage loans by assuring that the periodic statements sent to 

consumers are in a useable form that is easy to understand and that the form requirements are 

thus in the interest of consumers and the public interest. 

Clear and conspicuous. TILA section 122 requires that disclosures under TILA be clear 

and conspicuous. Existing § 1026.31(b) generally implements this requirement with respect to 

disclosures required by subpart E, where new § 1026.41 will be located. Section 1026.31(b) 

applies only to creditors, however. Thus, to make this requirement applicable to servicers 

(defined to include creditors and assignees), proposed paragraph 41(c) would require, consistent 

with TILA section 122 and existing § 1026.31(b), that the periodic statement be clear and 

conspicuous. Proposed comment 41(c)-1 clarifies the clear and conspicuous standard, stating 

that it generally requires that disclosures be in a reasonably understandable form, and explains 

that other information may be included on the statement, so long as that other information does 

not overwhelm or obscure the required disclosures. Thus, information that is traditionally found 

on their periodic statements, but not proposed as required by this regulation, such as the 
145 

servicer’s logo, information on payment methods, or additional information on escrow accounts, 

may continue to be included on periodic statements. 

Additional information. Proposed comment 41(c)-2 states that nothing in this subpart 

prohibits a servicer from including additional information or combining disclosures required by 

other laws with the disclosures required by § 1026.41, unless such prohibition is expressly set 

forth in § 1026.41 or the applicable law. For example, the grouping requirements discussed 

below may not be overridden by additional information in the statement. 

Based on industry outreach, the Bureau understands that some institutions provide a 

combined statement for mortgage loans and other financial products. For example if a consumer 

has both a checking account and a mortgage with a credit union, the consumer may receive a 

single combined statement. The Bureau seeks comment on how servicers would actually 

combine statements. In particular, the Bureau notes that difficulties may arise when different 

disclosures have different timing requirements, and when multiple disclosures have requirements 

that information be presented on the first page of the statement. For example, if both mortgage 

loan disclosures and credit card disclosures are required to be on the first page of a statement, 

how would these statements be combined?

Electronic distribution. TILA section 128(f)(2) provides that periodic statements “may 

be transmitted in writing or electronically.” Consistent with this provision, proposed 

§ 1026.41(c) would allow statements to be provided electronically, if the consumer agrees. As 

discussed above, the requirement to transmit a periodic statement to the consumer may be met by 

sending the consumer an e-mail notification that the statement is available, rather than e-mailing 

the statement itself in light of information security concerns. This paragraph would require only 

affirmative consent by the consumer to receive statements, not compliance with E-Sign 
146 

verification procedures. The Bureau does not believe E-Sign consent is required by the statute. 

E-Sign is designed to provide an electronic alternative to required writings. The statute, 

however, requires only periodic “statements” as opposed to “writings” to be transmitted to 

consumers. Additionally, the statute contemplates electronic statements, as TILA section 

129(f)(2) provides that the Bureau shall prescribe a standard form, taking into account that the 

statements required may be transmitted in writing or electronically. Thus, the Bureau believes 

that Congress did not intend to require E-Sign verification procedures. The Bureau seeks 

comment as to whether additional requirements should be placed on when a consumer consents 

to receiving electronic statements. For example, must consent be obtained or confirmed 

electronically in a manner that demonstrates that the consumer is able to access information 

electronically? The Bureau also seeks comment on whether consumers who already receive 

electronic statements should be deemed as having consented to receive statements electronically. 

Additionally, the Bureau seeks comment on whether consumers who have auto-debit set up to 

deduct payments from their bank account should be deemed as having consented to receive 

statements electronically. 

Retainability. Proposed § 1026.41(c) would require the disclosure be provided in a form 

the consumer may keep. Paper statements sent by mail or provided in person, would satisfy this 

requirement. If electronic statements are used, they must be in a form which the consumer can 

print or download.

Sample forms. Proposed § 1026.41(c) also states that sample forms are provided in 

Appendix H-28, and that appropriate use of these forms will be deemed to comply with the 

section. The sample forms were developed through consumer testing as discussed in part III.B 

above, and are intended to give guidance regarding compliance with proposed § 1026.41. 
147 

However, they are not required forms, and any arrangements of the information that meet the 

requirements of proposed § 1026.41 would be considered in compliance with the section. The 

sample forms also contain additional information (for example, a tear-off coupon on the bottom) 

that is not required to be on the form, but is included to give context to the sample. These 

proposed regulations and sample forms were crafted to give servicers flexibility in designing 

their periodic statements. The Bureau proposes these sample forms pursuant to its authority, 

inter alia, under TILA section 128(f)(2).

41(d) Content and Layout of the Periodic Statement 

Proposed § 1026.41(d) contains content and layout requirements that implement, in part, 

TILA section 128(f), and is additionally authorized under TILA section 105(a) and DFA sections 

1302(a) and 1405(b). 

The content required by paragraph (d) is authorized under TILA section 128(f)(1). Such 

content is authorized as follows: 

 Statutorily-required content: TILA sections 128(f)(1)(a) through (g) requires the 

inclusion of certain items of information in the periodic statement. The proposed 

regulation generally implement these provisions by requiring the content set forth in 

§ 1026.41(d)(1)(ii), (6) and (7), and the description of late fees in § 1026.41(d)(4). 

 Additional content: TILA section 128(f)(1)(H) requires inclusion in periodic 

statements of such other information as the Bureau may prescribe by regulation. The 

remainder of the content of the periodic statement is proposed under this authority. 

The grouping and other form requirements of the layout in paragraph (d) implement, in 

part, the requirement under TILA section 128(f)(1) that the content of the periodic statement be 

presented in a conspicuous and prominent manner, and under TILA section 128(f)(2) for the 
148 

Bureau to develop and prescribe a standard form for the periodic statement disclosure. In 

addition, as discussed above with respect to the form requirements under § 1026.41(c) and for 

the reasons explained below, the proposed grouping and form requirements under § 1026.41(d) 

are authorized under TILA section 105(a) and DFA sections 1032(a) and 1405(b). 

The periodic statement is designed to provide the consumer with information in an easyto-read format. The goal of the proposed grouping and form requirements is to highlight key 

information – the amount due – and organize information so the statement would not be 

overwhelming to the consumer. The commentary to paragraph (d), discussed below, reflects 

these goals. 

Exemptions and adjustments: TILA section 128(f)(1)(G) requires the periodic statement 

to include the names, addresses and other contact information for government-certified 

counseling agencies or programs reasonably available to the consumer. For the reasons 

discussed below, the Bureau proposes to use its authority under TILA section 105(a) and (f) to 

exempt servicers from having to include this information in periodic statements to and to instead 

require the periodic statement to include contact information for the State housing finance 

authority for the State in which the property is located and information to access the HUD list or 

Bureau list of homeownership counselors or counseling organizations. This adjustment is 

additionally authorized under DFA section 1405(b). 

Close proximity. Proposed § 1026.41(d) would require specific disclosures be grouped 

together and presented in close proximity. Information is grouped together to aid the consumer 

in understanding relatively complex information about their mortgage. The General Design 

Principles discussed in the Macro final report (Macro Report) include grouping together related 
149 

concepts and figures because consumers are likely to find it easier to absorb and make sense of 

financial forms if the information is grouped in a logical way.103 

Proposed comment 41(d)-1 clarifies that close proximity requires items to be grouped 

together and set off from the other groupings of items. This can be accomplished, for example, 

by including lines or boxes on the statement, or by including white space between the groupings. 

Items required to be in close proximity should not have any intervening text between them. The 

close proximity standard is found in other parts of Regulation Z, including §§ 1026.24(b) and 

1026.48. In both provisions, the commentary interprets close proximity to require the 

information to be located immediately next to or directly above or below, without any 

intervening text or graphical displays.104

Information not applicable. Proposed comment 41(d)–2 provides that information that is 

not applicable to the loan may be omitted from a periodic statement. For example, if a loan does 

not have a prepayment penalty, the periodic statement may omit the prepayment penalty 

disclosure. 

Terminology. Proposed comment 41(d)-3 provides that the periodic statement may use 

terminology other than that found on the sample forms so long as the new terminology is 

commonly understood. This gives servicers the flexibility to use regional terminology or 

commonly used terms with which consumers are familiar. For example, during consumer testing 

in California, participants were confused by the use of the term “escrow.” One participant 

explained that in California, the term “escrow” refers to an account set up to hold funds until a 

homebuyer closes on the house. This participant said he was more familiar with the term 

 

103 Macro Report, supra note 38, at 4. 104 See comments 24(b)-2 and 48-3 respectively. 
150 

“impound account” to refer to the account holding funds for taxes and insurance.105 In this 

example, use of the term “impound account” to refer to the escrow account for taxes and 

insurance would be permitted for periodic statements provided to consumers in California.

41(d)(1) Amount Due 

Proposed § 1026.41(d)(1) would require the periodic statement to provide information on 

the amount due, the payment due date, and the amount of any fee that would be assessed for a 

late payment, as well as the date on which that fee would be imposed if payment is not received. 

This information would have to be grouped together and located at the top of the first page of the 

statement. The amount due would have to be more prominent than any information on the page. 

This is consistent with the general principle of designing disclosures to highlight the most 

important information for consumers to make it easy for them to find.106 A primary purpose of 

the periodic statement is to alert the consumer to upcoming payment obligations. The Bureau 

interprets TILA section 129(f)(E), which requires the periodic statement to include a description 

of any late payment fees, to require disclosure of the amount of any fees that would be assessed 

for late payments as well as the date the fee would be imposed if the payment has not been 

received, as well as other information regarding late fees discussed below. Although information 

concerning the amount due and the payment due date is not enumerated in the statute, the Bureau 

believes that this is the information the consumer is most likely to need. Because of the 

importance of this information, it is placed in the prominent position of the top of the first page, 

and the total amount must be the most prominent item on the page. In consumer testing, all 

 

105 Macro Report, supra note 38, at 12. 106 Id. at 4. 
151 

participants were able to identify the amount due on the sample periodic statement presented to 

them.107

If the consumer has a payment-option loan, each of the payment options must be 

displayed with the amount due information. An example of such a statement is included in 

proposed Appendix H-28(C). 

41(d)(2) Explanation of Amount Due 

Proposed § 1026.41(d)(2) would require periodic statements to include an explanation of 

the amount due, providing the monthly payment amount, including the allocation of that 

payment to principal, interest and escrow (if applicable). Additionally, the statement would have 

to provide the total fees or charges incurred since the last statement, and any amount past-due 

(which would include both over-due payments and over-due fees). This information would have 

to be grouped together in close proximity and located on the first page of the statement. 

The Explanation of Amount Due is intended to give consumers a snapshot of why they 

are being asked to pay the amount due. At a glance, consumers would be able to see their 

payment amount; how much is allocated to principal, interest and escrow (if applicable); and the 

total fees or other charges incurred since the last statement; and any post-due amounts. In this 

section, the fees incurred since the last statement would be shown in aggregate; a breakdown of 

the individual fees would be provided in the Transaction Activity section, discussed below. 

Additionally, this section would show the total of past due payments and fees from previous 

billing cycles. In the first round of consumer testing, Macro tested the form to see if participants 

were able to understand what charges constituted the total amount due. The sample form used in 

testing showed a late payment fee. After looking at the Explanation of Amount Due, all 

 

107 See id. at 6. 
152 

participants understood the amount due included a regular monthly payment and a late fee.108 

This indicates that the Explanation of Amount Due helps consumers understand the amount they 

need to pay. 

If the consumer has a payment-option loan, a breakdown of each of the payment options 

would be required in the Explanation of Amount Due. Additionally, the Explanation of Amount 

Due would require inclusion of information about how each of the payment options will affect 

the outstanding loan balance. A form with such a box was tested during consumer testing. All 

but one of the participants were able to understand the effects the different payment options 

would have on their loan balance – that the loan balance would decrease, stay the same (for 

interest-only payments) or increase.109 A sample form is provided in Appendix H-28(C). 

41(d)(3) Past Payment Breakdown 

Proposed paragraph (d)(3) would require periodic statements to include a snapshot of 

how past payments have been applied. Proposed § 1026.41(d)(3)(i) would require the periodic 

statement to include both the total of all payments received since the last statement and a 

breakdown of how those payments were applied to principal, interest, escrow, fees, and charges, 

and any partial payment or suspense account (if applicable). Proposed § 1026.41(d)(3)(ii) would 

require the total of all payments received since the beginning of the calendar year and a 

breakdown of how those payments were applied to principal, interest, escrow, fees, and charges, 

as well as the amount currently held in any partial payment or suspense account (if applicable). 

This information would have to be grouped together in close proximity, and located on the first 

page of the statement.

 

108 Id. 109 Id. at 14. 
153 

 The past payment breakdown disclosure serves several purposes on the periodic 

statement, including creating a record of payment application, providing the consumer 

information needed to assert any errors, and providing information about the mortgage expenses. 

The breakdown in paragraph (d)(3)(i), showing all payments made since the last 

statement, would allow the consumer to confirm that his or her payments was properly applied. 

If the payments were not properly applied, the breakdown would provide the consumers the 

information needed to assert an error. Although testing participants had some confusion about 

partial payments as discussed below, they were able to identify how their payments had been 

applied based on the past payment breakdown information included on the sample statement.110

Both the breakdown since the last billing cycle and the breakdown of the year-to-date 

play an important role in educating the consumer. The payments since the last statement inform 

consumers of how much their outstanding principal has decreased, while the year-to-date 

information educates consumers on the costs of their mortgage loan. Consumer testing revealed 

that consumers may be surprised by how much of their payment is going to interest or fees as 

opposed to principal. Aggregated over the year-to-date can bring this expense to a consumers’ 

attention, and motivate them to possibly change behaviors that are generating significant 

expenses. For example, consumers who habitually submit their payment a few days late may 

correct this behavior if they realize it is costing them hundreds of dollars a year. The breakdown 

of all payments made in the current calendar year to date is of particular importance in educating 

consumers about their loans, especially since there is no other mandated year-end summary of all 

payments received and their application. The past payment breakdown, of both the payments 

 

110 Id. at 9. 
154 

since the last statement, and payments for the year to date, provides the consumer with 

important information that is not currently required to be disclosed. 

Partial Payments. Proposed comment 41(d)(3)-1 provides guidance on how partial 

payments that have been sent to a suspense account should be reflected in the past payments 

breakdown section of the periodic statement. The proposed comment provides illustrative 

examples of how partial payments sent to a suspense account should be listed as unapplied funds 

since the last statement and year to date. Consumer testing revealed that consumers have very 

little understanding about how partial payments are handled.111 As discussed in part IV.C above, 

the periodic statement is designed to help consumers understand how partial payments are 

processed. The past payment breakdown is useful in communicating information about partial 

payments and suspense accounts to consumers. 

41(d)(4) Transaction Activity 

 Proposed § 1026.41(d)(4) would require the periodic statement to include a Transaction 

Activity section that lists any activity since the last statement that credits or debits the 

outstanding account balance. For each transaction, the statement would include the date of the 

transaction, a description of the transaction, and the amount of the transaction. This information 

must be grouped together, but may be provided anywhere on the statement. 

Proposed comment 41(d)(4)-1 clarifies that transaction activity includes any activity that 

credits or debits the outstanding loan balance. For example, proposed comment 41(d)(4)-1 states 

that transaction activity would include, without limitation, payments received and applied, 

payments received and sent to a suspense account, and the imposition of any fee or charge. 

Thus, the Transaction Activity section would provide a list of all charges and payments, covering 

 

111 Id. at 11. 
155 

the time from the last statement until the current statement is printed. This disclosure would 

allow the consumer to understand what charges are being imposed and provide further detail 

regarding the aggregated numbers found in the “Explanation of Amount Due” section. The 

Transaction Activity section would provide a record of the account since the last statement, 

allowing the consumer to review for errors, ensure payments were received, and understand any 

and all costs. If a servicer receives a partial payment and decides to return the payment to the 

consumer, such a payment would not need to be included as a line item in the Transaction 

Activity section, because this activity would neither credit nor debit the outstanding account 

balance. The Bureau seeks comment on whether the periodic statement should be required to 

include a message under paragraph (d)(5) when a partial payment is returned to the consumer. 

Late fee description. Proposed comment 41(d)(4)–2 clarifies that the description of any 

late fee charge in the transaction activity section includes the date of the late fee, the amount of 

the late fee, and the fact that a late fee was imposed. The Bureau interprets TILA section 

129(f)(E), which requires that the periodic statement include “a description” of any late payment 

fees, to require disclosure of this information, as well as information regarding late fees 

discussed above. 

Suspense accounts. Proposed comment 41(d)(4)–3 clarifies that if a partial payment is 

sent to a suspense account, the fact of the transfer should be reflected in the transaction 

description (for example, a partial payment entry in the transaction activity might read: “Partial 

payment sent to suspense account”), the funds sent to the suspense account should be reflected in 

the unapplied funds section of the past payment breakdown, and an explanation of what must be 

done to release the funds should be provided in the messages section. The messages section, 
156 

discussed below, should include an explanation of what the consumer must do to release the 

funds from the suspense account.

41(d)(5) Messages 

Proposed § 1026.41(d)(5) would require a message on the front of the statement if a 

partial payment of funds is being held in a suspense account regarding what must be done for the 

funds to be applied. 

The Bureau seeks comment on what, if any, additional messages should be required. In 

particular, the Bureau seeks comment on whether there should be a required disclosure where the 

consumer has a negatively-amortizing or interest-only loan. Additionally, the Bureau seeks 

comment on whether there should be a required disclosure on private mortgage insurance and 

when it may be eliminated. Finally, the Bureau seeks comment as to if more than one message is 

required, and if so, should these be grouped together and should these messages be required to be 

on the first page of the statement? 

41(d)(6) Contact Information 

Proposed § 1026.41(d)(6) would require that the periodic statement contain contact 

information specifying where a consumer may obtain information regarding the mortgage. 

Proposed comment 41(d)(6)-2 clarifies that this contact information must be the same as the 

contact information for asserting errors or requesting information. The Bureau seeks comment 

on whether consumers are likely to contact the servicer for information other than errors or 

inquiries, which would necessitate a different number being included on the periodic statement. 

Proposed § 1026.41(d)(6) provides that the contact information provided must include a toll-free 

telephone number. Proposed comment 41(d)(6)–1 clarifies that the servicer may provide 

additional information, such as a web address, at its option. Proposed § 1026.41(d)(6) does not 
157 

require that that the contact information be set off in a separate section, but simply that it be 

included on the front page of the statement. This proposed requirement would allow servicers to 

include this information with their company name and logo at the top of the page or elsewhere 

on the statement. 

41(d)(7) Account Information 

Proposed § 1026.41(d)(7) would require that the following information about the 

mortgage, as required by the statute, be included on the statement: the amount of principal 

obligation, the current interest rate in effect for the loan, the date on which the interest rate may 

next reset or adjust, the amount of any prepayment penalty, and information on housing 

counselors. This information may be included anywhere on the statement. This information 

may, but need not be, grouped together. While the sample form has this information on the first 

page, the servicer is not required to include this information on the first page. 

Prepayment penalty. Proposed § 1026.41(d)(7)(iv) defines a prepayment penalty as “a 

charge imposed for paying all or part of a transaction’s principal before the date on which the 

principal is due.” This definition is further clarified in the proposed commentary. Proposed 

comment 41(d)(7)(iv)–1 gives the following examples of prepayment penalties: (1) a charge 

determined by treating the loan balance as outstanding for a period of time after prepayment in 

full and applying the interest rate to such “balance,” even if the charge results from interest 

accrual amortization used for other payments in the transaction under the terms of the loan 

contract; (2) a fee, such as an origination or other loan closing cost, that is waived by the creditor 

on the condition that the consumer does not prepay the loan; (3) a minimum finance charge in a 

simple interest transaction; and (4) computing a refund of unearned interest by a method that is 

less favorable to the consumer than the actuarial method, as defined by section 933(d) of the 
158 

Housing and Community Development Act of 1992, 15 U.S.C. 1615(d). Proposed comment 

41(d)(7)(iv)-1.i further clarifies that “interest accrual amortization” refers to the method by

which the amount of interest due for each period (e.g., month) in a transaction’s term is 

determined and states, for example, that “monthly interest accrual amortization” treats each 

payment as made on the scheduled, monthly due date even if it is actually paid early or late (until 

the expiration of any grace period). The proposed comment also provides an example where a 

prepayment penalty of $1,000 is imposed because a full month’s interest of $3,000 is charged 

even though only $2,000 in interest was accrued in the month during which the consumer 

prepaid. 

Proposed comment 41(d)(7)(iv)-2 clarifies that a prepayment penalty does not include: 

(1) fees imposed for preparing and providing documents when a loan is paid in full, if the fees 

are imposed whether or not the loan is prepaid, such as a loan payoff statement, a reconveyance 

document, or another document releasing the creditor’s security interest in the dwelling that 

secures the loan; or (2) loan guarantee fees. 

The definition of prepayment penalty in proposed § 1026.41(d)(7)(iv) and comments 

41(d)(7)(iv)-1 and -2 substantially incorporate the definitions of and guidance on prepayment 

penalties from the Board’s 2009 Closed-End Proposal, 2010 Mortgage Proposal, and 2011 ATR 

Proposal and, as necessary, reconciles their differences. For example, the Bureau is proposing to 

incorporate the language from the Board’s 2009 Closed-End Proposal and 2010 Mortgage 

Proposal but omitted in the Board’s 2011 ATR Proposal listing a minimum finance charge as an 

example of a prepayment penalty and stating that loan guarantee fees are not prepayment 

penalties, because similar language is found in longstanding Regulation Z commentary. Based 

on the differing approaches taken by the Board in its recent mortgage proposals, however, the 
159 

Bureau seeks comment on whether a minimum finance charge should be listed as an example of 

a prepayment penalty and whether loan guarantee fees should be excluded from the definition of 

the term prepayment penalty. 

The Bureau expects to coordinate the definition of the term prepayment penalty in 

proposed § 1026.41(d)(7)(iv) with the definitions in other pending rulemakings relating to 

mortgages. 

The Bureau seeks comment on the feasibility of disclosing the amount of any prepayment 

penalty, as the amount of the penalty could depend on the timing or amount of prepayment, and 

if a preferable alternative would be to disclose the maximum amount of a prepayment penalty. 

Alternatively, the Bureau seeks comment on whether a better alternative would be for the 

periodic statement to disclose the existence of a prepayment penalty in place of the amount. 

Housing counselors. Proposed § 1026.41(d)(7)(v) would require the periodic statement 

to include contact information for the State housing finance authority for the State in which the 

property is located, and information to access either the either the Bureau list or the HUD list of 

homeownership counselors or counseling organizations. 

TILA section 128(f)(1)(G) requires the periodic statement to include the names, 

addresses, telephone numbers and internet addresses of counseling agencies or programs 

reasonably available to the consumer that have been certified or approved and made publically 

available by the Secretary of Housing and Urban Development or a State housing finance 

authority. 

On July 9, 2012, the Bureau released the 2012 HOEPA Proposal to implement other 

Dodd-Frank Act provisions, including the requirement to provide a list of housing counselors in 
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connection with the application process for mortgage loans.112 In connection with those 

requirements, the Bureau proposed to require creditors to provide a list of five homeownership 

counselors or counseling organizations to applicants for various categories of mortgage loans. 

The Bureau also indicated that it is expecting to develop a website portal that would allow 

lenders to type in the loan applicant’s zip code to generate the requisite list, which could then be 

printed for distribution to the loan applicant. This will allow creditors to access lists of the 

housing counselors with a minimum amount of effort.113 

In connection with the periodic statement requirement, however, the Bureau is proposing 

to use its exception authority to require servicers simply to list where consumers can find a list of 

counselors, rather than to reproduce a list of counselors in each billing cycle. The Bureau 

believes that this approach appropriately balances consumer and servicer interests based on 

several considerations. 

First, the Bureau is concerned about information overload for consumers. The periodic 

statement contains a significant amount of information already. While consumers who are 

deciding whether to take out a mortgage loan in the first instance may greatly benefit from 

consultation with a housing counselor, that likelihood is greatly reduced with regard to 

consumers receiving regular periodic statements on existing loans. 

Second, the burden on servicers to import the list of counselors into a periodic statement 

document or to attach a list with each billing cycle is significantly higher than with regard to a 

single provision of the list. Space on the periodic statements is limited, and importing updated 

 

112 See 2012 HOEPA Proposal, available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_highcost-mortgage-protections.pdf, at 29-35. 

113 The list provided by the lender pursuant to the 2012 HOEPA Proposal would include only homeownership 

counselors or counseling organizations from either the most current list of homeownership counselors or counseling 

organizations made available by the Bureau for use by lenders, or the most current list maintained by HUD of 

homeownership counselors or counseling organizations certified by HUD, or otherwise approved by HUD. See id. 

at 32-33. 
161 

information from the CFPB website each cycle would involve more programming burden than 

simply listing the two agencies’ websites in the first instance. 

To address these concerns, the proposal would require that the periodic statements 

include the contact information to access the State housing finance authority for the State in 

which the property is located, and the website and telephone number to access either the Bureau 

list or the HUD list of homeownership counselors or counseling organizations.114 Directing 

consumers to this information would allow them to choose a program or agency conveniently 

located for them, and would allow the consumer to locate other programs or agencies if those 

contacted initially could not help the consumer at that time. The Bureau seeks comment on 

whether this proposal strikes an appropriate balance, and on the benefits and burdens to both 

borrowers and servicers of requiring that a list of several individual housing counselors be 

included in or with the periodic statement. 

Because housing counselor information may not be relevant to consumers who are 

current and not facing any problems, the proposal does not require this information to be on the 

front of the statement. The Bureau seeks comment if this information should be required to be 

located on the front of this statement. In a related requirement, when the delinquency 

information is provided, the proposed regulations would require that the delinquency information 

contain a reference to this housing counselor information. This would ensures that the housing 

counselor information would be brought to the attention of delinquent consumers. These 

provisions are discussed further below. 

The Bureau expects to coordinate the housing counselor information requirement in 

proposed § 1026.41(d)(7)(v) with the definitions in other pending rulemakings concerning 

 

114 At the time of publishing, the Bureau list was not yet available and the HUD list is available at 

http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm. 
162 

mortgage loans that address housing counselors. The Bureau believes that, to the extent 

consistent with consumer protection objectives, adopting a consistent approach to providing 

housing counselor information across its various pending rulemakings will facilitate compliance. 

The Bureau notes that other housing counselor requirements (for example, the ARMs initial 

interest rate adjustment notification) require the contact information for the State housing finance 

authority for the State in which the consumer resides (as opposed to the State in which the 

property is located). While the Bureau expects the State in which the property is located will 

most often be the State where the consumer resides, under certain circumstances (a vacation 

home), these may be different States. Additionally, the Bureau notes that a difference in 

regulation requirements for different disclosures may increase compliance costs for servicers. 

The Bureau seeks comment on which State housing finance authority’s contact information 

should be required on the periodic statement. 

The Bureau proposes to use its authority under TILA section 105(a) and (f) and DFA 

section 1405(b) to exempt creditors, assignees, and servicers of residential mortgage loans from 

the requirement in TILA section 128(f)(1)(G) to include in periodic statements contact 

information for government-certified counseling agencies or programs reasonably available to 

the consumer, and to instead require that periodic statements disclose the State housing finance 

authority for the State in which the property is located and information to access either the 

Bureau list or HUD list of homeownership counselors or organizations. For the reasons discussed 

above, the Bureau believes that the proposed exception and addition is necessary and proper 

under TILA section 105(a) both to effectuate the purposes of TILA -- to promote the informed 

use of credit and protect consumers against inaccurate and unfair credit billing practices -- and to 

facilitate compliance. Moreover, the Bureau believes, in light of the factors in TILA section 
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105(f), that disclosure of the information specified in TILA section 128(f)(1)(G) would not 

provide a meaningful benefit to consumers. Specifically, the Bureau considers that the 

exemption is proper irrespective of the amount of the loan, the status of the borrower (including 

related financial arrangements, financial sophistication, and the importance to the borrower of 

the loan), or whether the loan is secured by the principal residence of the consumer. Further, in 

the estimation of the Bureau, the proposed exemption will simplify the periodic statement, and 

improve the housing counselor information provided to the consumer, thus furthering the 

consumer protection purposes of the statute. In addition, consistent with DFA section 1405(b), 

the Bureau believes that the proposed modification of the requirements in TILA section 

128(f)(1)(G) will improve consumer awareness and understanding and is in the interest of 

consumers and in the public interest. 

41(d)(8) Delinquency Notice 

 Proposed § 1026.41(d)(8) would require that if the consumer is more than 45 days 

delinquent, the servicer must include on the periodic statement certain delinquency information 

grouped together.. The accounting of mortgage payments is confusing at best, and becomes 

significantly more complicated in a delinquency scenario. The combination of fees, partial 

payments being sent to suspense accounts, and application of payments to oldest outstanding 

payments due can quickly lead to confusion. Additionally, consumers in delinquency are often 

facing stress due to the situation that left them unable to make their mortgage payments. The 

proposed early intervention rules would require servicers to disclose information about loss 

mitigation or loan modification, but this information would not be customized to individual 

consumers. The delinquency notice, discussed below, would provide information that is tailored 

to the specific consumer. This information would benefit the consumer in several ways. First, 
164 

this notice would ensure that the consumer is aware of the delinquency as well as potential 

consequences. Second, this information would ensure that the consumer has the information 

about his or her loan. For example, certain loan modification programs are tied to specific 

timelines in delinquency. This information would ensure that consumers understand the timeline 

for their delinquency so they can benefit from early intervention information. Finally, the 

delinquency information would create a record of how payments were applied, which would both 

help consumers understand the amount due and give consumers the information needed to 

become aware of any errors so they can could use the appropriate error resolution procedures. 

Delinquency date and risks. Proposed paragraph (d)(8)(i) would require the periodic 

statement to include the date on which the consumer became delinquent. Many timelines 

relevant to the loss mitigation and foreclosure processes are based on the number of days of 

delinquency. For example, under certain programs consumers may not be eligible for a loan 

modification unless they are at least 60 days delinquent. However consumers may not know the 

date on which he or she was first considered delinquent. This can be especially confusing in a 

scenario where the consumer is making partial payments. Proposed paragraph (d)(8)(ii) would 

require the periodic statement to include a statement reminding the consumer of potential risks of 

delinquency, for example, late fees may be assessed or, after a number of months, the consumer 

can be subject to foreclosure. 

A recent account history. Proposed paragraph (d)(8)(iii) would require the periodic 

statement to include a recent account history as part of the delinquency information. The 

accounting associated with mortgage loan payments is complicated, and can be even more so in 

delinquency situations. The accrual of fees and the application of payments to past months can 

make it very difficult for consumers to understand the exact amount he or she owes on the loan, 
165 

and how that total was calculated. Additionally, this complex accounting makes it very difficult 

for a consumer to identify errors in of payment allocations. Although some of this information 

would be available from previous periodic statements, the Bureau believes that providing a 

separate recent account history is warranted under the circumstances. 

The Bureau believes that the recent account history would enable the consumer to 

understand how past payments were applied, provide the information needed to identify any 

errors, and provide the information necessary to make financial decisions. Proposed paragraph 

(d)(8)(iii) would require the account history to show the amount due for each billing cycle, or the 

date on which a payment for a billing cycle was considered fully paid. The date on which the 

payment was considered fully paid is included to help a consumer understand that a past 

payment that was previously delinquent has been considered paid. For example, suppose a 

delinquent consumer does not make a payment in January, but makes a regular payment in 

February. Without the account history, the consumer would not be able to verify that payments 

were properly applied. The account history is limited to the lesser of the past 6 months or the 

last time the account was current to avoid creating a long list that could overwhelm the rest of the 

periodic statement. 

Notice of any loan modification programs. Proposed paragraph (d)(8)(iv) would require 

the periodic statement to include as part of the delinquency information in the periodic statement 

notice of any acceptance into a modification program, either trial or permanent, create a record 

of acceptance into the modification program. 

Notice if the loan has been referred to foreclosure. Proposed paragraph (d)(8)(v) would 

require the periodic statement to include, as part of the delinquency information notice, that the 
166 

loan has been referred to foreclosure, if applicable, to ensure that the consumer is aware of any 

pending foreclosure. 

Total amount to bring the loan current. Proposed paragraph (d)(8)(vi) would require that 

the total amount needed to bring the loan current be included in the delinquency information to 

ensure that consumers knows how much money they must pay to bring the loan back to current 

status. 

Housing counselor information reference. Proposed paragraph (d)(8)(vii) would require 

that the delinquency notice also contain a statement directing the consumer to the housing 

counselor information located on the statement, as proposed by paragraph (d)(7)(v). For 

example, if the housing counselor information is on the back of the statement, the delinquency 

information, on the front of the statement, would direct consumers to the back of the statement. 

45 Days. The delinquency information is intended to assist consumers who have fallen 

behind on their mortgage payments. The proposal would not require provision of this 

information until the consumer is 45 days delinquent. The Bureau recognizes that not all 

delinquencies indicate troubled consumers; a single missed payment may be the result of other 

factors such as misdirected mail. Such consumers would likely be notified of a single missed 

payment by their servicer, and the lack of payment received would be reflected on the next 

periodic statement. These consumers would receive minimal additional benefit from the 

delinquency information, and, if this is a frequent occurrence, such consumers might become 

accustomed to ignoring the delinquency information. By contrast, two missed payments likely 

indicate a potentially more serious issue, unlike simply failing to remember to send in a payment 

on time. Thus, the delinquency information would be required at 45 days to ensure receipt of 

this information by a borrower who missed two consecutive payments. 
167 

41(e) Exemptions 

41(e)(1) Reverse Mortgages

Proposed § 1026.41(e)(1) exempts reverse mortgages, as defined by § 1026.33(a), from 

the periodic statement requirement. The Bureau is proposing this exemption for reverse 

mortgages because the periodic statement requirement was designed for a traditional mortgage 

product. Information that would be relevant and useful on a reverse mortgage statement differs 

substantially from the information required on the periodic statement. Incorporating the unique 

aspects of a reverse mortgage into the periodic statement regulations would require massive 

alterations to the form and regulation. The Bureau believes that it is more appropriate to address 

consumer protections relating to reverse mortgages in a separate comprehensive rulemaking. 

The Bureau proposes to use its authority under TILA sections 105(a) and (f) and DFA 

section 1405(b) to exempt reverse mortgages from the requirement in TILA section 128(f) to 

provide periodic statements. For the reasons discussed above, the Bureau believes the proposed 

exemption is necessary and proper under TILA section 105(a) both to effectuate the purposes of 

TILA, and to facilitate compliance. 

Moreover, the Bureau believes, in light of the factors in TILA section 105(f), that 

disclosure of the information specified in TILA section 128(f)(1) would not provide a 

meaningful benefit to consumers of reverse mortgages. Specifically, the Bureau considers that 

the exemption is proper irrespective of the amount of the loan, the status of the borrower 

(including related financial arrangements, financial sophistication, and the importance to the 

borrower of the loan), or whether the loan is secured by the principal residence of the consumer. 

Further, in the estimation of the Bureau, the proposed exemption would further the consumer 

protection purposes of the statute by avoiding the consumer confusion that would result by 
168 

applying the same disclosure requirements to reverse mortgages as other mortgages and leaving 

reverse mortgages to be addressed in a comprehensive reverse mortgage rulemaking. 

In addition, consistent with DFA section 1405(b), the Bureau believes that the proposed 

modification of the requirements in TILA section 128(f) to exempt reverse mortgages would 

improve consumer awareness and understanding and is in the interest of consumers and in the 

public interest. 

41(e)(2) Time Shares

Proposed § 1026.41(e)(2) would clarify that timeshares as defined by 11 U.S.C. 101 

(53(D)) are exempt from the periodic statement requirement. TILA section 128(f) provides that 

the periodic statement requirement applies to residential mortgage loans. The definition of 

residential mortgage loans set forth in TILA section 103(cc)(5) specifies that timeshares do not 

fall under this definition. 

41(e)(3) Coupon Book Exemption 

Proposed § 1026.41(e)(3) would implement the statutory exemption for fixed-rate loans 

for which the servicer provides a coupon book containing substantially similar information as 

found in the periodic statement. The Bureau recognizes the value of the coupon book as striking 

a balance between ensuring consumers receive important information, and providing a low 

burden method for servicers to comply with the periodic statement requirements. As such, the 

Bureau seeks to effectuate the coupon book exemption. The nature of a coupon book (both its 

smaller size and static nature) creates difficulties in including substantially similar information as 

would be on a periodic statement. The main problem is the static nature of a coupon book. 

Because a coupon book may cover an entire year or more, it cannot include information that 

changes on a monthly basis. By contrast, a periodic statement can provide dynamic information 
169 

that changes on a monthly basis. To address this problem, the Bureau is proposing to modify the 

coupon book exception permitted by TILA section 128(f)(3) to apply the exception where the 

coupon book contains certain static information and other dynamic information is made 

accessible to the consumer. 

Proposed comment 41(e)(3)-1 defines “fixed-rate” by reference to § 1026.18(s)(7)(iii), 

which defines “fixed-rate mortgage” as a transaction secured by a dwelling that is not an 

adjustable-rate or a step-rate mortgage. Proposed comment 41(e)(3)-2 explains what a coupon 

book is. 

The Bureau proposes to use its authority under TILA section 105(a) to give effect to the 

coupon book exemption in TILA section 128(f)(3). TILA section 128(f)(3) provides an 

exemption to the periodic statement for fixed-rate loans when a coupon book that contains 

substantially similar information to the periodic statement is provided. Using its authority under 

TILA section 128(f)(1)(H), the Bureau has added certain dynamic items to the periodic statement 

that would be infeasible to include in a coupon book. The Bureau is proposing to use its TILA 

105(a) authority to permit use of a coupon book even where certain dynamic information is not 

included in the book so long as such information is made available via the inquiry process. The 

Bureau believes this proposed exemption is necessary and proper to facilitate compliance. 

Information in the coupon book. Proposed paragraph (e)(3)(i) would require the 

following information to be included on each coupon within the book: the payment due date, the 

amount due, and the amount and date that any late fee will be incurred. In specifying the 

amount due on each coupon, servicers would assume that all prior payments have been paid in 

full.
170 

 Proposed paragraph (e)(3)(ii) would require the following information to be included in 

the coupon book itself, though it need not be on each coupon: the amount of the principal loan 

balance, the interest rate in effect for the loan, the date on which the interest rate may next 

change; the amount of any prepayment fee that may be charged, the contact information for the 

servicer, and housing counselor information. Each of these items is discussed above in the 

section-by-section analysis of proposed paragraph (d). The coupon book would also be required 

to disclose information on how the consumer may obtain the dynamic information discussed 

below. The information described above may, but is not required to be, included on each 

coupon. Instead, it may be included anywhere in the coupon book, including on the covers, or 

on filler pages, as explained by proposed comment 41(e)(3)-3. 

 Because the outstanding principal balance will typically change during the time period 

covered by the coupon book, proposed comment 41(e)(3)-4 clarifies that a coupon book need 

only include the outstanding principal balance at the beginning of that time period. 

Information made available. As discussed above, due to the static nature of the coupon 

book, certain dynamic information that is required to be included on periodic statements cannot 

be included. To use the coupon book provision, the proposed rule would require that the 

dynamic information be made available upon the consumer’s request. The servicer could 

provide the information orally, or in writing, or electronically, if the consumer consents. Thus, 

proposed paragraph (e)(3)(iii) would require the following dynamic information be made 

available to the consumer upon request: the monthly payment amount, including a breakdown 

showing how much, if any, will be allocated to principal, interest, and any escrow account; the 

total of fees or charges imposed since the last payment period; any payment amount past due; the 

total of all payments received since the beginning of the payment period, including a breakdown 
171 

of how much, if any, of those payments was applied to principal, interest, escrow, fees and 

charges, and any partial payment suspense accounts; the total of all payments received since the 

beginning of the calendar year, including a breakdown of how much, if any, of those payments 

was applied to principal, interest, escrow, fees and charges, and how much is currently in any 

partial payment or suspense account; and a list of all the transaction activity (as defined in 

proposed comment 41(d)(4)-1) that occurred since the payment period. 

The Bureau seeks comment on whether requiring servicers to make this information 

available would impose significant burden or costs that exceed consumer benefits. In particular, 

the Bureau seeks comment on whether providing the past payment breakdown information 

would impose greater burden then benefits.

Delinquency information. Because of the importance of the delinquency information, 

proposed paragraph (e)(3)(iv) would require that to qualify for the coupon book exception, the 

delinquency information required by proposed § 1026.41(d)(8), discussed above,to be sent to the 

consumer in writing for each billing cycle for which the consumer is more than 45 days 

delinquent at the beginning of the billing cycle.

41(e)(4) Small Servicer Exemption 

 Proposed paragraph (e)(4) would exempt certain smaller servicers from the duty to 

provide periodic statements for certain loans. A small servicer would be defined as a servicer (i) 

who services 1,000 or fewer mortgage loans; and (ii) only services mortgage loans for which the 

servicer or an affiliate is the owner or assignee, or for which the servicer or an affiliate is the 

entity to whom the mortgage loan obligation was initially payable. 

The Bureau has decided to propose this exemption after careful consideration of the 

benefits and burdens of the periodic statement requirement. As proposed, the Bureau believes 
172 

that the periodic statement will be helpful to consumers because it will provide a well-integrated 

communication that not only contains information about upcoming payments due, but also 

information about loan status, fees charged, past payment crediting, and potential resources and 

other useful information for consumers who have fallen behind in their payments. The Bureau 

believes that providing a single-integrated document, in place of a number of other 

communications that contain fragments of this information can be more efficient for consumers 

and servicers alike. And in light of the historic problems that have been reported in parts of the 

servicing industry, the periodic statement could be a useful tool for consumers to monitor their 

servicers’ performance and identify any issues or errors as soon as they occur. 

 At the same time, the Bureau recognizes that the servicing industry is not monolithic. 

Producing a periodic statement with the elements proposed in § 1026.41 requires sophisticated 

programming to place individualized information on each borrower’s statement for each billing 

cycle. The Bureau recognizes that very small servicers would likely have to rely on outside 

vendors to develop or modify existing systems to produce statements in compliance with the 

rule. As discussed further below, the Bureau received detailed information from the SBREFA 

panel process confirming the technological and operational challenges faced by small servicers, 

as well as postage and other expenses that would be associated with providing periodic 

statements on an ongoing basis. Because small servicers maintain small portfolios, the SBREFA 

participants emphasized that they cannot spread fixed costs across a large number of loans the 

way that larger servicers can. 

 Where small servicers already have incentives to provide high levels of customer contact 

and information, the Bureau believes that the circumstances may warrant exempting those 

servicers from complying with the periodic statement requirement. In particular, small servicers 
173 

that make loans in their local communities and then either hold their loans in portfolio or retain 

the servicing rights have incentives to maintain “high-touch” customer service models. 

Affirmative communications with consumers help such servicers (and their affiliates) to ensure 

loan performance, protect their reputations in their communities, and market other consumer 

financial products and services.115 Because those servicers have a long-term relationship with 

the borrowers, their incentives with regard to charging fees and other servicing practices may be 

more aligned with borrower interests. These motivations to ensure a good relationship 

incentivize good customer service, including making information about upcoming payments, 

fees charged and payment history, and information for distressed borrowers easily available to 

consumers by other means 

The Bureau believes, however, that both conditions are necessary to warrant a possible 

exemption from the periodic statement rule—that is, that an exemption may be appropriate only 

for servicers that service a relatively small number of loans and that originated the loans and 

either retained ownership or servicing rights. Larger servicers are likely to be much more reliant 

on and sophisticated users of computer technology in order to manage their operations 

efficiently. In such situations, implementation of the periodic statement requirement is likely to 

be somewhat easier to accomplish and perhaps even provide technological benefits for the 

servicers. Larger servicers also generally operate in a larger number of communities under 

circumstances in which the “high touch” model of customer service is not practicable. In light of 

this fact and the consumer benefits from integrated communications, the Bureau does not believe 

it would be appropriate to exempt all servicers who originate loans that they then hold in 

portfolio or with respect to which they retain servicing rights, without regard to size. 

 

115 See Re-Thinking Loan Serving, Prime Alliance Loan Servicing, p. 8 (April 2010) available at: 

http://cuinsight.com/media/doc/WhitePaper_CaseStudy/wpcs_ReThinking_LoanServicing_May2010.pdf 
174 

 SBREFA Panel. The proposed exemption is consistent with feedback that the Bureau 

received from small entity representatives during the SBREFA panel process regarding the 

potentially significant burdens that would be imposed by a periodic statement requirement. 

 Participants explained that they already provided much of the information in the proposed 

periodic statement through alternative means, including correspondence, more limited periodic 

statements, coupon books, passbooks, and telephone conversations.116 Even where SERs did not 

affirmatively provide particular items of information to borrowers, they stated that their 

companies would generally provide it on request. However, the participants emphasized 

repeatedly that consolidating all of the information into a single monthly dynamic statement 

would be difficult for small servicers.117

 The SERs explained that due to their small size, they generally do not maintain in-house 

technological expertise and would generally use third-party vendors to develop periodic 

statements. Due to their small size, they believed they would have no control over these vendor 

costs.118 Additionally, the small servicers have smaller portfolios over which to spread the fixed 

costs of producing periodic statements. Such servicers stated they are unable to gain cost 

efficiencies and cannot effectively spread the implementation costs of periodic statements across 

their loan portfolios. Finally, several SERs stated that simply mailing periodic statements could 

cost thousands of dollars per month beyond some of their current alternative communication 

channels, such as coupon books or passbooks. 

Small Servicer Defined. The Bureau lacks the data necessary to precisely calibrate the 

amount of burden that would be imposed by the periodic statement requirement on servicers of 

 

116 SBREFA Final Report, supra note 22, at 16-19. 117 Id. 118 Id. at 17. 
175 

different sizes. However, the Bureau believes that a threshold of 1,000 loans serviced may be an 

appropriate approximation to limit the proposed exemption to smaller servicers in the market. 

Assuming that, on average, most loans are refinanced about every five years, this threshold 

works out to an average of 200 originations per year. The Bureau estimates that a small servicer 

of this size would earn about $600,000 annually in servicing fee revenues.119 The SERs 

estimated that the periodic statement burden could cost thousands of dollars each month.120 For 

comparison, the Bureau notes that the top 100 mortgage servicers, as measured by size of unpaid 

principal balance serviced, (which together have approximately 82% of the mortgage servicing 

market share121) each service in excess of $3 billion of unpaid principal balance. 

 In addition to the 1,000 loan threshold, the exemption from the periodic statement would 

be limited to entities that exclusively service loans that they or an affiliate originated or was the 

entity to which the obligation was initially payable. A servicer must both exclusively service 

such loans and satisfy the 1000-loan threshold to qualify for the small servicer exemption. The 

exemption is limited to these servicers because of the incentive discussed above. 

 The proposed commentary clarifies the application of the small servicer definition. 

Proposed comment 41(e)(4)-1 states that loans obtained by a servicer or an affiliate in connection 

 

119 This estimate assumes that a servicer generates a net mortgage servicing fee rate of 35 basis points and that the 

average unpaid principal balance on the 1,000 loans is $175,000. The 35 basis points represents a blend of different 

mortgage servicing asset quality. Mortgage servicing fees for conventional servicing are generally 25 basis points; 

mortgage servicing fees for subprime mortgage loans or loans sold to trusts guaranteed by Ginnie Mae may vary 

between 40-50 basis points. Servicers are also able to generate ancillary income from sources other than the 

mortgage servicing fee, including additional fee revenue, such as late fees, and float on principal, interest and 

escrow payments, the composition of which may vary significantly among servicers. The Bureau believes that 35 

basis points is a reasonable assumption in current market conditions. See, e.g., Newcastle Investment Corp., Form 

10-Q, filed May 10, 2012, at 15-16, available at 

http://www.sec.gov/Archives/edgar/data/1175483/000138713112001455/nct-10q_033112.htm (last accessed June 

13, 2012 (describing REIT investment in excess mortgage servicing rights (MSRs) from a portfolio of MSRs 

generating an initial weighted average total mortgage servicing fee amount of 35 basis points). 

120 SBREFA Final Report, supra note 22, at 19. (One SER estimated it could cost an additional $11,000 per month 

in on-going support, another SER estimated that a vendor might charge $1,000 - $2,000 per month in fees, a third 

SER estimated monthly costs of $2,200 based on a cost of $1 per statement). 

121 Inside Mortgage Finance, Issue 2012:13 (March 30, 2012) at 12. 
176 

with a merger or acquisition are considered loans for which the servicer or an affiliate is the 

creditor to whom the mortgage loan is initially payable. 

 The proposed rule also states that in determining whether a small servicer services 1,000 

mortgage loans or less, a servicer is evaluated based on its size as of January 1 for the remainder 

of the calendar year. A servicer that, together with its affiliates, crosses the threshold will have 

six months or until the beginning of the next calendar year, whichever is later, to begin providing 

periodic statements. Proposed comment 41(e)(4)-2 gives examples for calculating when a 

servicer who crosses the 1,000 loan threshold would need to begin sending periodic statements. 

The purpose of this provision is to permit a servicer that crosses the 1,000 loan threshold a period 

of time (the greater of either six months, or until the beginning of the next calendar year) to bring 

the servicer’s operations into compliance with the periodic statement provisions for which the 

servicer was previously exempt. 

 Proposed comments 41(e)(4)-3 clarifies when subservicers or servicers who do not own 

the loans they are servicing, do not qualify for the small servicer exemption, even if such 

servicers are below the 1,000 loan threshold. 

 Proposed comment 41(e)(4)-4 clarifies if a servicer subservices mortgage loans for a 

master servicer that does not meet the small servicer exemption, the subservicer cannot claim the 

benefit of the exemption, even if it services 1,000 or fewer loans. The Bureau believes that 

permitting an exemption in such circumstance could potentially exempt a larger master servicer 

from the obligation to provide periodic statements, even if it has master servicing responsibility 

for several thousand loans. 
177 

 The Bureau seeks comment on all aspects of the proposed exemption, particularly 

whether the regulation should exempt small servicers122, and, if so, whether the proposed scope 

and definition of a small servicer is appropriate. Specifically, should the test be the one proposed 

regarding origination, and is 1,000 or less the appropriate size threshold? The Bureau 

particularly requests data on implementation costs and the level of general activity by small 

servicers. The Bureau also seeks comment on whether it would be appropriate to exempt small 

servicers from other elements of the proposed servicing rules under TILA and RESPA. 

Authority. The Bureau proposes to exercise its authority under TILA section 105(a) and 

(f), and DFA section 1405(b) to exempt small servicers from the periodic statement requirement 

under TILA section 128(f). For the reasons discussed above, the Bureau believes the proposed 

exemption is necessary and proper under TILA section 105(a) to facilitate compliance. As 

discussed above, it would be very expensive for small servicers to incur the initial costs of 

setting up a system to send periodic statements, as a result, such servicers may choose to exit the 

market. In addition, consistent with TILA section 105(f) and in light of the factors in that 

provision, the Bureau believes that requiring small servicers to comply with the periodic 

statement requirement specified in TILA section 128(f) would not provide a meaningful benefit 

to consumers in the form of useful information or protection. The Bureau believes that the 

business model of small servicers ensures their consumers already receive the necessary 

information, and that requiring them to provide periodic statements would impose significant 

costs and burden. Specifically, the Bureau believes that the exemption is proper without regard 

to the amount of the loan, the status of the borrower (including related financial arrangements, 

financial sophistication, and the importance to the borrower of the loan), or whether the loan is 

 

122 As discussed above, for the purposes of § 1026.41, the term “servicer” includes creditors, assignees and servicers. 
178 

secured by the principal residence of the consumer. In addition, consistent with DFA section 

1405(b), for the reasons discussed above, the Bureau believes that the proposed modification of 

the requirements in TILA section 128(f) to exempt small servicers would further the consumer 

protection purposes of TILA.

Appendix H to Part 1026 

The Bureau proposes to exercise its authority under TILA section 105(c) to propose model and 

sample forms for § 1026.20(c) and (d). 

Appendix H-4(D) to Part 1026 

The Bureau proposes to exercise its authority under TILA section 105(c) to propose model and 

sample forms for § 1026.20(c) and (d). 

Appendices G and H – Open-End and Closed-End Model Forms and Clauses 

Proposed revisions to Appendices G and H-1 would add the appendix sections that would 

illustrate examples of the model forms and sample forms for the ARM disclosures proposed by 

§ 1026.20(c) and (d) to the list of appendix sections illustrating examples of other model 

disclosures required by Regulation Z whose format or content may not be changed by creditors. 

Appendix H – Closed Model Forms and Clauses-7(i) 

Proposed revisions to Appendix H-7(i) would include § 1026.20(d), as well as 

§ 1026.20(c), as the types of models illustrated in this appendix. The proposed revision also 

would add text so that the provision stated that the Appendix H-4(D) includes examples of the 

two types of model forms for adjustable-rate mortgages: § 1026.20(d) initial adjustment notices 

and § 1026.20(c) payment change notices for adjustments resulting in corresponding payment 

changes. 

VII. Section 1022(b)(2) Analysis 
179 

In developing the proposed rule, the Bureau has considered potential benefits, costs, and 

impacts, and has consulted or offered to consult with the prudential regulators, HUD, the FHFA, 

and the Federal Trade Commission, including regarding consistency with any prudential, market, 

or systemic objectives administered by such agencies.123 The Bureau also held discussions with 

or solicited feedback from the U.S. Department of Agriculture Rural Housing Service, the Farm 

Credit Administration, the FHA, and the VA regarding the potential impacts of the proposed rule 

on those entities’ loan programs. 

In this rulemaking, the Bureau proposes to amend Regulation Z, which implements 

TILA, and the official commentary to the regulation, as part of its implementation of the DoddFrank Act amendments to TILA’s mortgage servicing rules. The proposed amendments to 

Regulation Z implement Dodd-Frank Act Sections 1418 (initial interest rate adjustment notice 

for ARMs), 1420 (periodic statement), and 1464 (prompt crediting of mortgage payments and 

response to requests for payoff amounts). The proposed rule would also revise certain existing 

regulatory requirements for disclosing rate and payment changes to adjustable-rate mortgages in 

current § 1026.20(c). 

Elsewhere in today’s Federal Register, the Bureau is also publishing the 2012 RESPA 

Servicing Proposal that would implement section 1463 of the Dodd-Frank Act. The RESPA 

proposal addresses procedures for obtaining force-placed insurance; procedures for investigating 

and resolving alleged errors and responding to requests for information; reasonable information 

 

123 Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act calls for the Bureau to consider the potential benefits 

and costs of a regulation to consumers and covered persons, including the potential reduction of access by 

consumers to consumer financial products or services; the impact on depository institutions and credit unions with 

$10 billion or less in total assets as described in section 1026 of the Dodd-Frank Act; and the impact on consumers 

in rural areas. 
180 

management policies and procedures; early intervention for delinquent borrowers; continuity of 

contact for delinquent borrowers; and loss-mitigation procedures. 

As discussed in part II above, mortgage servicing has been marked by pervasive and 

profound consumer protection problems. As a result of these problems, Congress included in the 

Dodd-Frank Act the provisions described above, which specifically address mortgage servicing. 

The new protections in the rules proposed under TILA and RESPA would significantly improve 

the transparency of mortgage loans after origination, provide substantive protections to 

consumers, enhance consumers’ ability to obtain information from and dispute errors with 

servicers, and provide consumers, particularly distressed and delinquent consumers, with better 

customer service when dealing with servicers. 

A. Provisions to be Analyzed 

The analysis below considers the benefits, costs, and impacts of the following major 

proposed provisions: 

1. New initial interest rate adjustment notices for most closed-end adjustable-rate 

mortgages. 

2. Changes in the format, content, and timing of the Regulation Z § 1026.20(c) 

disclosure for most closed-end adjustable-rate mortgages. 

3. New periodic statement disclosure for most closed-end mortgages. 

4. Prompt crediting of payments for consumer credit transactions (both open- and 

closed-end) secured by the consumer’s principal dwelling and response to requests 

for payoff amounts from consumers with consumer credit transactions (both openand closed-end) secured by a dwelling. 
181 

With respect to each major proposed provision, the analysis considers the benefits and 

costs to consumers and covered persons. The analysis also addresses certain alternative 

provisions that were considered by the Bureau in the development of the rule. The Bureau 

requests comments on the analysis of the potential benefits, costs and impacts of the proposal. 

B. Baseline for Analysis

The amendments to TILA are self-effectuating, and the Dodd-Frank Act does not require 

the Bureau to adopt regulations to implement these amendments. Specifically, the proposed 

provisions regarding the new initial interest rate adjustment notice and the new periodic 

statement disclosure implement self-effectuating amendments to TILA. Thus, many costs and 

benefits of these proposed provisions would arise largely or entirely from the statute, not from 

the proposed rule. The proposed provisions would provide substantial benefits compared to 

allowing these TILA amendments to take effect alone, even without the proposed additional 

content and other features of the disclosures, by clarifying parts of the statute that are ambiguous. 

Greater clarity on these issues should reduce the compliance burdens on covered persons by 

reducing costs for attorneys and compliance officers as well as potential costs of overcompliance and unnecessary litigation. Moreover, the costs that these provisions would impose 

beyond those imposed by the statute itself are likely to be minimal. 

DFA section 1022 permits the Bureau to consider the benefits, costs, and impacts of the 

proposed rule solely compared to the state of the world in which the statute takes effect without 

an implementing regulation. To provide the public better information about the benefits and 

costs of the statute, however, the Bureau has chosen to consider the benefits, costs, and impacts 

of the major provisions of the proposed rule against a pre-statutory baseline (i.e., to consider the 
182 

benefits, costs, and impacts of the relevant provisions of the Dodd-Frank Act and the regulation 

combined). 

The proposed provisions regarding prompt crediting of payments and response to 

requests for payoff amounts also implement self-effectuating amendments to TILA. These 

amendments to TILA, however, largely codify existing Regulation Z provisions in § 1026.36(c). 

Thus, the pre-statute and post-statute baselines are substantially the same. The proposed 

provisions would clarify servicer124 duties that are ambiguous under the statute and existing 

regulations. 

Finally, the proposed provisions regarding the § 1026.20(c) disclosure for adjustable-rate 

mortgages impose obligations on servicers125 that are authorized, but not required, under TILA 

sections 105(a) and 128(f) and DFA section 1405(b). With respect to proposed § 1026.20(c), the 

Bureau has chosen to consider the benefits, costs, and impacts of the proposed provisions against 

the baseline provided by the current provisions of § 1026.20(c). 

The Bureau has discretion in future rulemakings to choose the most appropriate baseline 

for that particular rulemaking. 

C. Coverage of the Proposal 

Each proposed provision covers certain consumer credit transactions secured by a 

dwelling, as described further in each section below.

D. Potential Benefits and Costs to Consumers and Covered Persons

1. New initial interest rate adjustment notice for adjustable-rate mortgages

Section 1418 of the Dodd-Frank Act requires servicers to provide a new disclosure to 

 

124 Reference in parts VII, VIII, and IX to “servicers” with regard to the proposed rule for requests for payoff 

amounts means creditors and servicers. 

125 Reference in parts VII, VIII, and IX to “servicers” with regard to the proposed rules for adjustable-rate mortgages 

means creditors, assignees, and servicers. 
183 

consumers who have hybrid ARMs. The disclosure concerns the initial interest rate adjustment 

and must be given either (a) between 6 and 7 months prior to such initial interest rate adjustment 

or (b) at consummation of the mortgage if the initial interest rate adjustment occurs during the 

first six months after consummation. 

The Bureau proposes to implement this provision by requiring that the disclosure be 

given at least 210, but not more than 240, days before the first payment at the adjusted level is 

due. The Bureau, relying upon the savings clause in TILA section 128A(b), proposes to broaden 

the scope of the proposed rule to include ARMs that are not hybrid. The proposed disclosure 

would include the content required by the statute, except for providing contact information for 

housing counseling agencies and programs (where the proposed rule provides an alternative 

disclosure), and certain additional information. Finally, as explained above, the Bureau 

conducted three rounds of consumer testing. The disclosures were revised after each round of 

testing to improve their effectiveness with consumers. 

Benefits to consumers. The information in the proposed interest rate adjustment notice 

would provide a number of benefits to consumers with closed-end adjustable-rate mortgages at 

the initial interest rate adjustment. These benefits may be broadly categorized as facilitating (a) 

the choice of an alternative to making the new payment, including refinancing; (b) the correction 

of any errors in the adjusted payment; (c) the budgeting of household resources; and (d) the 

accumulation of equity by certain consumers (i.e., those with interest-only or negativelyamortizing payments). Individual items in the disclosure may provide more than one of these 

benefits. 

The proposed rule would require disclosure of the new interest rate and payment—the 

exact amount, where available, or an estimate, where exact amounts are unavailable. Disclosing 
184 

an estimate of the interest rate and any new payment at least 210, but not more than 240, days 

before the first payment at the adjusted level is due would give consumers a significant amount 

of time in which to pursue alternatives to repaying the loan at the adjusted level. When interest 

rates are stable, the estimate is informative about the future mortgage payment, and consumers 

benefit from being able to plan future budgets or to address a problem with affordability, perhaps 

by refinancing. The estimate is less informative about the future mortgage payment when 

interest rates are volatile, but under any circumstances, an estimated payment that is well above 

the highest amount that the consumer can afford alerts the consumer to a potential problem and 

the need to gather additional information. 

While some consumers with adjustable-rate mortgages may benefit from disclosure of 

any potential new interest rate and payment (or estimates of these amounts) well before payment 

is due, the benefits from this information are likely greatest when provided prior to the initial 

interest rate adjustment. Subsequent interest rate adjustments reflect the difference between two 

fully indexed interest rates (i.e., interest rates that are the sum of a benchmark rate and a margin). 

In contrast, the initial interest rate adjustment may reflect the difference between an interest rate 

that is below the fully indexed rate at the time of origination (a so-called “teaser” or 

“introductory” rate) and a rate that is fully indexed at the time of adjustment. For example, in 

2005, the teaser rate on subprime ARMs with an initial fixed-rate period of two or three years 

was 3.5 percentage points below the fully indexed rate.126 As a result, mortgages originated in 

that year faced a potentially large change in the interest rate and payment, or “payment shock,” at 

the first adjustment. Furthermore, consumers facing the initial interest rate adjustment may fail 

to anticipate even the possibility of a change in payment, since this is necessarily the first time 

 

126 See Christopher Mayer, Karen Pence, & Shane Sherlund, The Rise in Mortgage Defaults, 23 J. Econ. Persps. 27, 

37 (2009). 
185 

since origination that the payment could change. Consumers facing payment shock or an 

unanticipated change in payment also benefit from having additional time to plan future budgets 

or to address a problem with affordability. Thus, consumers facing the initial interest rate 

adjustment may benefit from the proposed notice through both the information it provides 

regarding the potentially new interest rate and payment and the additional time it provides 

consumers to adapt. 

A number of items on the proposed disclosure would help the consumer respond to 

problems with making the new payment. In addition to information on the amount of the new 

payment, the proposed disclosure lists alternatives to making the new payment and gives a brief 

explanation of each alternative. It explains the circumstances under which any prepayment 

penalty may be imposed and the maximum amount of the penalty. It provides information on 

rate limits that may affect future payment changes. It provides the telephone number of the 

creditor, assignee, or servicer to call if the consumer anticipates having problems making the 

new payment. Finally, it gives contact information for the State housing authority and 

information to access certain lists of homeownership counselors made available by Federal 

agencies. All of this information benefits a consumer who needs to find an alternative to making 

the new payment. 

Certain items on the proposed disclosure may assist the consumer in detecting any errors 

in the computation of the new payment estimate. The proposed disclosure provides an 

explanation of how the new interest rate and payment are determined, including the index or 

formula used and any additional adjustment, such as a margin added to the index. It also states 

any limits on the increase in the interest rate or payment at each adjustment and over the life of 

the loan. This information may also facilitate consumers’ ability to compare their current 
186 

mortgage against competing products and provide other benefits, but at the very least it assists 

consumers in verifying the accuracy of the new estimated payment. 

Finally, certain items on the proposed disclosure may facilitate the accumulation of 

equity by consumers with interest-only or negatively-amortizing payments. For these 

consumers, the disclosure states the amount of both the current and the expected new payment 

allocated to principal, interest, and escrow, as applicable.127 The disclosure also states that the 

new payment will not be allocated to pay loan principal. If negative amortization occurs as a 

result of the adjustment, the disclosure must state the payment required to fully amortize the loan 

at the new interest rate. The proposed disclosure alerts consumers with these types of loans to 

features that bear on equity accumulation, and it provides this information at a time when these 

consumers may be evaluating their mortgage terms and considering refinancing. 

As discussed above, the Bureau is proposing formatting requirements for the initial 

interest rate adjustment notice. These requirements benefit consumers by facilitating consumer 

understanding of the information in the disclosures. Except for the date of the notice, the 

proposed rule requires that the disclosures must be provided in the form of a table and in the 

same order as, and with headings and format substantially similar to, certain forms provided with 

the proposed rule. The Bureau’s testing showed that consumers readily understood the 

information in the notice when the terms and calculations were presented in the groupings and 

logical order contained in the model forms. While there is no formula for producing the ideal 

disclosure, the proposed formatting requirements are generally informed by decades of consumer 

 

127 The current payment allocation would also appear on the proposed periodic statement disclosure. However, 

listing the current and expected new payment allocation in one disclosure benefits consumers by making clear any 

differences between the two allocations. The Bureau recognizes that the benefit of information in a particular 

disclosure may be mitigated to the extent that the same information is available in other disclosures that are provided 

at the same (or nearly the same) time. 
187 

testing. The Bureau believes that disclosures that satisfy the proposed formatting requirements 

likely provide greater benefits to consumers than both the alternatives tested and disclosures that 

do not satisfy these requirements.128

Magnitude of the benefits to consumers. Research shows that consumers make important 

decisions about housing finance at the initial interest rate adjustment. Consumers often choose 

to prepay at the initial interest rate adjustment, and the greater the payment shock, the greater the 

likelihood of prepayment. These results hold for conventional ARMs originated in the 1990s as 

well as for subprime hybrid ARMs (2/28 and 3/27) originated in the 2000s.129 

 More controversial is the question of whether payment shock at the initial interest rate 

adjustment causes default. In general, data from the 2000s does not find a causal relationship 

between payment shock at the initial interest rate adjustment and default.130 However, for 

consumers with certain hybrid ARMs originated in the 2000s, a substantial number experienced 

a payment shock of at least 5% at the initial interest rate adjustment, and some research finds that 

the default rate for these loans was three times higher than it would have been if the payment had 

not changed.131

 Whether or not the proposed initial interest rate adjustment notice would reduce default 

under certain conditions, the disclosure may generally facilitate the important decisions about 

 

128 For a general discussion of disclosure formatting, disclosure testing and consumer benefits, see Jeanne Hogarth & 

Ellen Merry, Designing Disclosures to Inform Consumer Financial Decisionmaking: Lessons Learned from 

Consumer Testing, 97 Fed. Reserve Bull. 1 (Aug. 2011). 129 Brent W. Ambrose & Michael LaCour-Little, Prepayment Risk in Adjustable Rate Mortgages Subject to Initial 

Year Discounts: Some New Evidence, 29 Real Est. Econs. 305 (2001) (showing that the expiration of teaser rates 

causes more ARM prepayments, using data from the 1990s). The same result, using data from the 2000s and 

focusing on subprime mortgages, is reported in Shane Sherland, The Past, Present and Future of Subprime 

Mortgages, (Div. of Research & Statistics and Div. of Monetary Affairs, Fed. Reserve Bd., Washington, D.C. 2008); 

The result that larger payment increases generally cause more ARM prepayments, using data from the 1980s, 

appears in James Vanderhoff , Adjustable and Fixed Rate Mortgage Termination, Option Values and Local Market 

Conditions, 24 Real Est. Econs. 379 (1996). 130 Mayer, Pence, & Sherlund, supra note 125, at 37. 131 Anthony Pennington-Cross & Giang Ho, The Termination of Subprime Hybrid and Fixed-Rate Mortgages, 38 

Real Est. Econs. 399, 420 (2010). 
188 

housing finance that consumers make at the initial interest rate adjustment. Extrapolating from 

FHFA data, the Bureau estimates that approximately 285,000 adjustable-rate mortgages will 

have an initial interest rate adjustment in each of the next three years. Few adjustable-rate 

mortgages in recent years have had teaser rates; however, consumers with these mortgages may 

benefit from shifting to a fixed-rate mortgage. If the new initial interest rate adjustment notice 

prompts just 1% of consumers who receive the notice to refinance and these consumers save $50 

per month, the annual savings to consumers would be over $1.7 million. 

 The Bureau does not have the data necessary to fully quantify the benefits of the 

proposed initial interest rate adjustment notice to consumers. Certain consumers with adjustablerate mortgages will be aware of the upcoming initial interest rate adjustment and the possibility 

of refinancing or (if there is a payment adjustment) considering alternatives to making a new 

payment, of needing to reallocate household resources in light of a new payment, of addressing 

an error in computing a new payment, and of reviewing the household balance sheet in light of 

an interest-only or negatively-amortizing loan. The Bureau is not aware of data with which it 

could fully quantify the value of the information in the disclosure to these consumers or 

determine the savings to them in time and other resources from not having to obtain this 

information from other sources. Furthermore, there are other consumers with adjustable-rate 

mortgages who may be uninformed or misinformed (or perhaps forgetful) about the upcoming 

initial interest rate adjustment, the possibility of an error in computing a potential new payment, 

or the financial implications of interest-only and negatively-amortizing loans on equity 

accumulation. The Bureau is not aware of data with which it could quantify the benefits to these 

consumers of becoming better informed about these features of their mortgages. However, the 
189 

Bureau believes that the proposed initial interest rate adjustment notice may provide substantial 

benefits to these consumers. 

Costs to consumers. As explained below in the discussion of costs to covered persons, 

the cost per disclosure would be about $2.60. This estimate takes into account both one-time 

costs (amortized over five years) and annual production and distribution costs.132 Under 

conservative assumptions, in the illustration above, the benefits to consumers who receive the 

disclosure would be $6.

 Given the small cost per disclosure, the Bureau believes that consumers would see at 

most a minimal increase in fees or charges. Servicers may in general attempt to shift a cost 

increase onto others and consumers may ultimately bear part of an increase that falls nominally 

on servicers. For the proposed initial interest rate adjustment notice, however, the costs to be 

shifted are small. Furthermore, even if servicers did attempt to shift the costs, it is not clear that 

consumers would bear them. Consider, for example, servicers who bid for servicing rights on 

mortgages originated by others. The additional costs associated with providing the initial rate 

adjustment notice may cause servicers to bid less aggressively for certain servicing rights. In this 

case, lenders or investors may bear some of the cost. Servicers may also attempt to obtain higher 

compensation for servicing from originators. Originators may respond by attempting to increase 

fees or charges at origination or by increasing the cost of credit. In this case consumers may bear 

some of the costs, but not necessarily all of them. The relative sensitivity of supply and demand 

in these inter-related markets would determine the proportion of the cost increase borne by 

different persons, including consumers. 

The proposed rule limits how servicers may present the required information in the 

 

132 In this and subsequent numerical discussions, “amortizing” an amount $x over a certain number of years means 

making equal payments in each year that sum up to $x. 
190 

disclosure. Servicers would have to present the required information in a format substantially 

similar to the format of the proposed model forms. The Bureau recognizes the possibility that 

constraints on the way servicers present information to consumers may prohibit the use of more 

effective forms that servicers are using or may develop. The constraints would then impose a 

cost on consumers. The Bureau does not believe there are any such costs in this case. The 

Bureau is unaware of any efforts by servicers to develop an initial interest rate adjustment notice 

that meets the requirements of the Dodd-Frank Act and provides the benefits to consumers of the 

proposed model forms. The Bureau worked closely with Macro to develop the model 

disclosures, conducted three rounds of consumer testing, and revised the disclosure after testing. 

 During the SBREFA process, the Bureau received comments from some SERs that 

disclosing an estimate of the new monthly payment may confuse certain consumers. The Bureau 

believes that clearly stating on the form that the new monthly payment is an estimate and that 

consumers will receive a notice with the exact amounts two to four months prior to the date the 

first payment at the adjusted level is due (in cases where the interest rate adjustment results in a 

corresponding payment change) will mitigate consumer confusion on this point. The Bureau 

notes that section 1418 of the Dodd-Frank Act requires disclosure of a good faith estimate of the 

new monthly payment. In addition, servicers must provide an accurate statement of the new 

monthly payment in the notice if it is available; and if it is not available, then consumers will 

receive an accurate statement of the new monthly payment between 60 and 120 days before the 

first payment is due, if the interest rate adjustment causes a corresponding change in payment 

pursuant to the proposed § 1026.20(c) disclosure. 

Benefits to covered persons. The timing and the content of the proposed initial interest 

rate adjustment notice may provide certain benefits to servicers. Servicers benefit when 
191 

distressed consumers contact them well in advance of a possible increase in interest rate and 

payment, since early communication gives servicers and consumers more time to work together 

constructively. The proposed disclosure provides consumers with substantial advance notice 

about their potential future payment and alternatives. Distressed consumers with such notice 

may be more likely to contact their servicer well in advance of an increase in payment, work 

constructively with their servicer, and, if necessary, explore alternatives. 

Costs to covered persons. The proposed initial interest rate adjustment notice will result 

in certain compliance costs to covered persons. Servicers (or their vendors) may need to adapt 

their software and compliance systems to produce the new form. The new proposed form would 

also provide to borrowers information that is not currently disclosed to them, including 

information that is specific to each loan. Servicers (or their vendors) may not have ready access 

to all of this additional loan-level information; for example, if some of this additional 

information is stored in a database that is not regularly accessed by systems that produce the 

current disclosures. The Bureau seeks information from servicers and vendors that provide 

services to servicers with respect to operations regarding the storage of loan-level information 

and the costs of providing the proposed new loan-level information to consumers. 

Some of the information provided in the proposed initial interest rate adjustment notice is 

also provided in the proposed revisions to the § 1026.20(c) disclosure. The Bureau believes that 

harmonizing the two disclosures would mitigate the compliance burden for servicers and reduce 

the aggregate production costs to servicers. 

 Based on discussions with servicers and software vendors to date, the Bureau believes 

that servicers will for the most part use vendors for one-time software and IT upgrades and for 

ongoing production and distribution (i.e., mailing) of the disclosure. Servicers will also incur 
192 

one-time costs to learn about the proposed rule, but those costs will be minimal. Furthermore, 

the Bureau believes that under existing mortgage servicing contracts, vendors would absorb the 

one-time software and IT costs and ongoing production costs of disclosures for large- and 

medium- sized servicers but pass along these costs to small servicers. All servicers would pay 

distribution costs. 

 Based on discussions with industry and extrapolating from FHFA data, the Bureau 

estimates the one-time cost of the proposed disclosure to be just over $3 million for 12,800 

servicers. Amortizing this cost over five years and combining it with annual costs of $139,000 

gives a total annual cost of $58 per servicer, or $2.60 per notice. The use of vendors 

substantially mitigates the costs of revising software and IT, as the efforts of a single vendor 

addresses the needs of a large number of servicers. The ongoing costs reflect the fact that there 

will be relatively few initial interest rate adjustments on adjustable-rate mortgages over the next 

few years. 

For small servicers, the one-time cost of the proposed disclosure is $2.3 million. This 

also gives a total annual cost of about $58 per servicer. However, it is not possible to estimate 

the number of initial interest rate adjustment notices that small servicers will produce each year, 

since the Bureau is not aware of any reasonably obtainable data on the loan portfolios of small 

servicers. The Bureau believes that the number is small since the total number of mortgages 

serviced by small servicers is small and the notice is given only once to each ARM borrower. 

The Bureau seeks comment on these estimates and asks interested parties to provide data, 

research, and other information that may inform the further consideration of these costs. 

The Bureau recognizes that certain financial benefits to consumers from the initial 

interest rate adjustment notice may have an associated financial cost to covered persons. 
193 

Servicer compensation is not directly tied to the interest rate on a consumer’s mortgage, but 

rather to the unpaid principal balance. Thus, when a consumer refinances a mortgage at a lower 

interest rate, one servicer incurs a cost but another has a benefit. On the other hand, if a 

consumer refinances from an adjustable-rate mortgage to a fifteen year fixed-rate mortgage, then 

the consumer would pay off the unpaid principal balance more quickly and servicer income 

would fall. Servicers may also receive reduced fee income from delinquent borrowers (or 

investors) if the notice helps borrowers avoid delinquency. The Bureau believes that the 

proposed initial interest rate adjustment notice is likely to have a small effect on the costs to 

servicers through the channels just described, but the Bureau seeks data with which it may 

further consider these costs. 

Finally, as discussed in part VI, the Bureau considered but decided not to except small 

servicers from the proposed initial interest rate adjustment notice. The Bureau is not proposing 

an exception for small servicers because an exception would deprive certain consumers of the 

seven to eight months advance notice before payment at a new level is due that is provided by 

the disclosure and the information about alternatives and how to contact various sources of 

assistance. Conversely, the Bureau believes that the benefit to small entities from an exception 

would be small. Vendors will spread the one-time software and IT costs of the notice over many 

small servicers and the annual costs will be small since the proposed notice is given just once to 

each consumer with an adjustable-rate mortgage. As discussed above, the Bureau believes that 

five annual payments of $58 by each small servicer will fully amortize the one-time cost of the 

proposed interest rate adjustment notice. 

2. Changes in the format, content, and timing of the Regulation Z § 1026.20(c) disclosure for 

adjustable-rate mortgages 
194 

 Under current § 1026.20(c), creditors must mail or deliver to consumers whose payments 

will change as a result of an interest rate adjustment a notice of interest rate adjustment for 

variable-rate transactions subject to § 1026.19(b) at least 25, but no more than 120, calendar days 

before a payment at a new level is due. Creditors must also provide an annual disclosure to 

consumers whose interest rate, but not mortgage payment, changes during the year covered by 

the disclosure. The Bureau is proposing to eliminate the annual disclosure. Thus, the discussion 

below relates exclusively to the payment change disclosure required under § 1026.20(c).133 The 

Bureau is proposing to change the minimum time for providing advance notice to consumers 

from 25 days to 60 days before payment at a new level is due, with an accommodation for 

existing ARMs with look-back periods of less than 45 days.134 The maximum time for advance 

notice would remain the same: 120 days prior to the due date of the first payment at a new level. 

The coverage, content, and format of the revised § 1026.20(c) disclosure closely tracks the 

coverage, content, and format of the proposed initial interest rate adjustment disclosure. 

Benefits to consumers. Regarding the change in timing, the Bureau does not believe that 

the current minimum of 25 days provides sufficient time for consumers to pursue meaningful 

alternatives such as refinancing, home sale, loan modification, forbearance, or deed in lieu of 

foreclosure. Nor does this minimum provide sufficient time for consumers to adjust household 

finances to cover new payments. The Board’s 2009 Closed-End Proposal stated that HMDA 

 

133 As discussed in part VI, the Bureau believes that annual notice is duplicative given the proposed periodic 

statement, which would provide much of the same information. Thus, eliminating the annual notice reduces costs 

for servicers with little or no loss in benefits to consumers. 

134 As explained above, the Bureau is aware that for certain ARMs, there is currently less than 60 days between the 

date on which the index value is selected that serves as the basis for the new payment and the date on which 

payment at a new level is due. It may therefore be difficult for servicers to provide a notice of interest rate 

adjustment within 60 days of the date on which payment at a new level is due. The Bureau may provide an 

accommodation for some of these ARMs by requiring a different minimum time for providing this advance notice. 

The Bureau solicits comments on the operational changes that would be required to provide § 1026.20(c) notices at 

least 60 days before payment at a new level is due. 
195 

data for the years 2004 through 2007 suggested that a requirement to provide ARM adjustment 

disclosures 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. 

 Regarding the proposed changes in the content of the § 1026.20(c) disclosure, the Bureau 

believes that it is helpful to consumers to receive similar notices for similar purposes. Thus, the 

Bureau believes there is some consumer benefit in harmonizing the § 1026.20(c) disclosure with 

the proposed initial interest rate adjustment disclosure. However, the two disclosures are 

triggered by different (although related) events and the benefit of the information to consumers is 

somewhat different. 

 Both the current and proposed § 1026.20(c) disclosure provide the current and upcoming 

interest rate and payment (not an estimate) and the date the first new payment is due. This 

information facilitates household budgeting and may alert the consumer to a potential problem 

with affordability. 

 Proposed § 1026.20(c) requires the disclosure to include an explanation of how the new 

interest rate and payment are determined, including the index or formula used, any margin 

added, and any previously foregone interest increase applied. The proposed disclosure also 

states any limits on the interest rate or payment increase at each adjustment and over the life of 

the loan. This information assists the consumer in detecting any errors in the computation of the 

new payment. In contrast, the current § 1026.20(c) disclosure provides the index value without 

any explanation and does not provide information about limits on interest rate or payment 

increases. 

 Information provided in the proposed § 1026.20(c) disclosure facilitates the evaluation of 

alternatives to paying the new amount due. For example, the proposed disclosure provides an 
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explanation of the circumstances under which any prepayment penalty may be imposed and the 

maximum amount of the penalty, which highlights the direct cost of refinancing into a different 

loan. Also, disclosure of key features of the loan like the new allocation of payments for 

interest-only and negatively-amortizing ARMs, the rate limit per year and over the life of the 

loan, and warnings about interest-only payments and increases in the loan balance may also 

facilitate the comparison of the current loan with alternatives. Disclosures required by current 

§ 1026.20(c) do not provide any of this information. 

The proposed § 1026.20(c) disclosure provides the same information as the proposed 

initial interest rate adjustment notice regarding features of the mortgage that affect the 

accumulation of equity. The disclosure of the loan balance itself is useful for this purpose. For 

interest-only or negatively-amortizing loans, the disclosure states the amount of the new payment 

allocated to pay principal, interest, and taxes and insurance in escrow, as applicable, and that the 

new payment will not be allocated to pay loan principal. If negative amortization will occur due 

to the interest rate adjustment, the disclosure states the payment required to fully amortize the 

loan at the new interest rate. The proposed disclosure alerts consumers with these types of loans 

to features that bear on equity accumulation, and it provides this information at a time when 

these consumers may be evaluating their mortgage terms and considering refinancing. In 

contrast, the current § 1026.20(c) disclosures provide only the loan balance and information 

about the payment required to fully amortize the loan at the new interest rate if the interest rate 

adjustment caused the negative amortization. 

As noted above, the Bureau recognizes that the benefit to consumers of information in a 

particular disclosure may be attenuated to the extent that the same information is available in 

other disclosures that are provided at the same (or nearly the same) time. However, some of the 
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information on the proposed § 1026.20(c) disclosure that also appears on the proposed periodic 

statement disclosure is provided on the § 1026.20(c) disclosure in order to facilitate comparisons 

between the current and new payment before the new payment is due. Since the proposed 

§ 1026.20(c) disclosure is provided only if the payment changes, the benefit to consumers from 

receiving the same information on both disclosures is likely greater than the benefit of receiving 

this information only on the periodic statement disclosure.135

Finally, the Bureau is proposing formatting requirements for the § 1026.20(c) disclosure 

similar to those for the initial interest rate adjustment notice. As discussed above, these 

requirements benefit consumers by facilitating consumer understanding of the information in the 

disclosures. The proposed rule provides that the disclosures must be provided in the form of a 

table and in the same order as, and with headings and format substantially similar to, certain 

forms provided with the proposed rule. The Bureau’s testing of the same information proposed 

for inclusion in § 1026.20(c) notice in the proposed § 1026.20(d) notice showed that consumers 

readily understood the information in the notice when the terms and calculations were presented 

in the logical order contained in the model forms. As discussed above, while there is no formula 

for producing the ideal disclosure, the Bureau believes that disclosures that satisfy the proposed 

formatting requirements likely provide greater benefits to consumers than both the alternatives 

tested and disclosures that do not satisfy these requirements. 

Extrapolating from FHFA data, the Bureau estimates that approximately 650,000 

adjustable-rate mortgages will adjust in each of the next three years. To illustrate the possible 

benefits of the proposed § 1026.20(c) disclosure, suppose that the proposed change in the timing 

 

135 Of course, a consumer who receives the proposed § 1026.20(c) disclosure may derive little additional benefit 

from shortly thereafter receiving the same information on the proposed periodic statement disclosure. There would, 

however, likely be little cost saving for servicers in not having to provide the information on the proposed periodic 

statement disclosure that also appears on the § 1026.20(c) disclosure for just one or two months. 
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of the disclosure from 25 days to 60 days before payment at a new level is due prompts certain 

consumers to refinance one month sooner. If the change in timing provides just 5% of 

consumers with ARMs a one-time benefit of $50, the annual savings to consumers would be over 

$1.6 million. 

Costs to consumers. As explained further in the discussion of costs to covered persons, 

the proposed provisions would produce a minimal increase in costs, about 80 cents per 

disclosure. This estimate takes into account both one-time additional costs (amortized over five 

years) and additional annual production and distribution costs. Under conservative assumptions, 

in the illustration above, the benefit to consumers would be $2.50 per disclosure.

Given the small additional cost per disclosure, the Bureau believes that consumers would 

not see any increase in fees or charges. Servicers may in general attempt to shift a cost increase 

onto others and consumers may ultimately bear part of an increase that falls nominally on 

servicers. For the proposed § 1026.20(c) disclosure, however, the costs to be shifted are very 

small. Thus, the proposed disclosure is not likely to impose any cost increase on consumers. 

 As with the proposed initial interest rate adjustment notice, the proposed rule limits how 

servicers may present the required information in the proposed § 1026.20(c) disclosure. 

Servicers would have to present the required information in a format substantially similar to the 

format of the proposed model form. The Bureau recognizes the possibility that constraints on the 

way servicers present information to consumers may prohibit the use of more effective forms 

that servicers are using or may develop. The constraints would then impose a cost on consumers. 

The Bureau does not believe there are any such costs in this case. The Bureau is unaware of any 

efforts by servicers to develop a payment adjustment notice that meets the requirements of 

proposed § 1026.20(c) and provides the benefits to consumers of the proposed model forms. 
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 As discussed above, some consumers have adjustable-rate mortgages with look-back 

periods shorter than 45 days. For example, FHA and VA ARMs often have look-back periods of 

15 or 30 days. These ARMs contractually will not be able to comply with the proposal to require 

sending the § 1026.20(c) disclosure 60 to 120 days before payment at a new level is due. The 

Bureau is proposing grandfathering these existing ARMs. Going forward, however, ARMs must 

be structured to permit compliance with the proposed 60- to 120-day time frame. 

Initial outreach suggests that the absence of adjustable-rate mortgages with short lookback periods will not reduce the mortgage options available to consumers. It is possible, 

however, that mortgages with short look-back periods may have certain cost advantages to 

servicers or investors in certain interest rate environments (e.g., when rates are rising quickly) 

and that competition may translate some of these advantages into benefits to consumers. In this 

case, the proposed 60- to 120-day time frame would impose a cost on consumers. The Bureau 

seeks comments on both the grandfathering provision and general requirement for compliance 

with the proposed time frame going forward. 

Benefits to covered persons. The timing and content of the proposed § 1026.20(c) 

disclosure may provide certain benefits to servicers. Servicers benefit when distressed 

consumers contact them in advance of a possible increase in interest rate and payment, since 

early communication gives servicers and consumers more time to work together constructively. 

Changing the minimum time for providing advance notice to consumers from 25 days to 60 days 

before payment at a new level is due provides essential household budgeting information to 

consumers sooner. Distressed consumers may then contact their servicer sooner, and the servicer 

and the consumer would then have additional time to work together and if necessary to explore 

alternatives.
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Costs to covered persons. The proposed modifications of the § 1026.20(c) disclosure 

will result in certain compliance costs to covered persons. Servicers (or their vendors) may need 

to adapt their software and compliance systems to produce the revised disclosure. The revised 

disclosure would also provide to borrowers information that is not currently disclosed to them, 

including information that is specific to each loan. Servicers (or their vendors) may not have 

ready access to all of this additional loan-level information; for example, if some of this 

additional information is stored in a database that is not regularly accessed by systems that 

produce the current disclosures. The Bureau solicits information about servicer and vendor 

operations regarding the storage of loan-level information and the costs of providing the 

proposed new loan-level information to consumers.

 As discussed above, some of the information provided in the proposed revisions to the 

§ 1026.20(c) disclosure is also provided in the proposed initial interest rate adjustment 

disclosure. The Bureau believes that harmonizing the two disclosures would mitigate the 

compliance burden for servicers and reduce the aggregate production costs to servicers. 

Based on discussions with servicers and software vendors to date, the Bureau believes 

that, in general, servicers of all sizes will incur minimal one-time costs to learn about the 

proposed provision. They will for the most part use vendors for one-time software and IT 

upgrades and for producing and distributing (i.e., mailing) the disclosure. Under existing vendor 

contracts, large servicers will not be charged for the upgrades and production but may be charged 

for distribution. Smaller servicers may be charged for all these costs, but they service relatively 

few loans so in aggregate these costs are small. 

Based on discussions with industry and extrapolating from FHFA data, the Bureau 

estimates one-time costs of just under $2 million for the 12,800 servicers overall. Amortizing 
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this cost over five years and combining it with annual costs of $129,000 gives a total annual cost 

of $41 per servicer, or 80 cents per disclosure. For small servicers, the one-time cost is $1.65 

million. This also gives a total additional annual cost of about bout $41 per servicer. The 

Bureau is not aware of any reasonably obtainable data on the loan portfolios of small servicers, 

so it is not possible to estimate the number of disclosure that small servicers would produce each 

year. The Bureau seeks comment on these estimates and asks interested parties to provide data, 

research, and other information that may inform the further consideration of these costs. 

The Bureau recognizes that certain financial benefits to consumers from the revised 

§ 1026.20(c) disclosure may have an associated financial cost to covered persons. The 

discussion of this point for the initial interest rate adjustment notice applies equally to the revised 

§ 1026.20(c) disclosure. 

Finally, as discussed above, the Bureau recognizes that there may be costs to covered 

persons from extending the minimum advance notice period to 60 days. Mortgages with short 

look-back periods may have certain cost advantages in certain interest rate environments (e.g., 

when rates are rising quickly). The Bureau seeks comments on both the grandfathering 

provision and general requirement for compliance with the proposed time frame going forward. 

3. New periodic statement disclosure for certain mortgages 

Section 1420 of the Dodd-Frank Act requires the creditor, assignee, or servicer of any 

residential mortgage loan to transmit to the consumer, for each billing cycle, a periodic statement 

that sets forth certain specified information in a clear and conspicuous manner. The statute also 

gives the Bureau the authority to require servicers136 to include additional content to be included 

in the periodic statement. The statute provides an exception to the periodic statement 

 

136 Reference in parts VII, VIII, and IX to “servicers” with regard to the proposed rule for the periodic statement, 

means creditors, assignees, and servicers. 
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requirement for fixed-rate loans where the consumer is given a coupon book containing 

substantially the same information as the statement. 

 The proposed rule would require the periodic statement to include the content listed in the 

statute, as applicable, as well as billing information, payment application information, and 

information that may be helpful to distressed or delinquent consumers. In accordance with the 

statute, the proposed rule provides a coupon book exemption for fixed-rate loans when the 

consumer is given a coupon book with certain of the information required by the periodic 

statement. The proposed rule also has exemptions for small servicers, reverse mortgages, and 

timeshares. 

 The proposed periodic statement disclosure would be provided to all consumers with a 

closed-end residential mortgage, unless one of the exemptions applies. 

Benefits to consumers. The Bureau does not have representative information on the 

extent to which servicers currently provide consumers with coupon books, billing statements, or 

periodic statements that may comply with the proposed rule. Servicers do have an incentive to 

provide consumers with basic billing information. This includes the payment due date, amount 

of any late payment fee, amount due, and current interest rate. This information also appears on 

the proposed periodic statement. While this basic information provides benefits to consumers, 

those benefits are already provided for by current disclosures. The proposed periodic statement 

will also contain information that could appear on a coupon book that does provide additional 

benefits to consumers, for example, the housing counselor information. 

There is other information that appears on billing statements and coupon books but is 

accurate only if the consumer always makes the scheduled payment on time and no other 

payment. This information is accurate because it follows a set formula. It includes the 
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outstanding principal balance, total payments made since the beginning of the calendar year, and 

the breakdown of payments into principal, interest, and escrow. This information is not accurate, 

however, if the borrower makes an extra payment, provides a partial payment, or misses a 

payment entirely. 

All of this aforementioned information appears on the proposed periodic statement. 

However, on the proposed periodic statement, the information would be accurate even if the 

consumer makes an extra payment, provides a partial payment, or misses a payment entirely. 

Consumers generally benefit from having accurate information about payments in order to 

monitor the servicer, assert errors if necessary, and track the accumulation of equity. However, 

delinquent consumers may especially benefit from tracking the effects of delinquency on equity 

so they can effectively determine how to allocate income and consider options for refinancing. 

For these consumers, the proposed periodic statement may provide large benefits relative to 

coupon books or billing statements that do not provide the aforementioned information. 

Finally, there is information that simply cannot be provided on a coupon book or on a 

billing statement that provides the same information as a coupon book. This includes fees or 

charges imposed since the last periodic statement, partial payments, past due payments, and a 

wide range of delinquency information and information about loan modifications and 

foreclosure. 

Consumers who are more than 45 days delinquent will have a delinquency notice 

included on the periodic statement (or provided to them if their servicer is using a coupon book) 

providing specific information about the delinquency of their loan. This is one way the servicer 

may catch the attention of the consumer. The messages section provides an additional route. 

The only message the proposed rule requires the servicer to provide concerns partial payments; 
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however, the proposal also seeks comment on other messages that should be required. 

Consumers who make partial payments may benefit from knowing what they must do to have the 

funds in a suspense or unapplied funds account applied to the outstanding balance. 

All of this information is useful to distressed or delinquent consumers who may need to 

assert an error and evaluate alternatives to paying the current mortgage. A consumer with past 

due amounts on a mortgage, car, and credit card would need information about the past due 

amounts and how the fees and charges accumulate in order to determine the most advantageous 

way of reducing total debt. The information generally benefits consumers who are managing a 

variety of debts and who want to know the least costly way of increasing their total debt or the 

most advantageous way of reducing their total debt. 

The Bureau is proposing grouping requirements in the format of the periodic statement. 

The grouping requirement presents the information in a logical format and may facilitate 

consumer understanding of the information in the different components of the disclosure. The 

General Design Principles discussed in the Macro Final Report, discussed in the section-bysection analysis, include grouping together related concepts and figures because consumers are 

likely to find it easier to absorb and make sense of financial forms if the information is grouped 

in a logical way. The Bureau also tested model periodic statement disclosures that satisfy the 

grouping requirements. As discussed above, while there is no formula for producing the ideal 

disclosure, the Bureau believes that disclosures that satisfy the grouping requirement are likely to 

provide greater benefits to consumers than disclosures that do not. 

There are two main exceptions to the proposed periodic statement requirement. The first, 

provided by statute, is an exception for consumers with fixed-rate mortgages and coupon books 

that contain certain information. As discussed above, the fixed or formulaic information on 
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coupon books will be accurate for consumers who make only scheduled payments. Consumers 

with fixed-rate mortgages never have to manage a changed payment amount. However, the 

Bureau does not have ready access to data on whether they are less likely to make additional 

payments, partial payments or miss a payment and may obtain substantially reduced benefits 

because of the exception. 

The Bureau is also proposing an exception for small servicers. A small servicer would be 

defined as a servicer (i) who services 1,000 or fewer mortgage loans and (ii) that only services 

mortgage loans for which the servicer or an affiliate is the owner or assignee, or for which the 

servicer or an affiliate is the entity to whom the mortgage loan obligation was initially payable. 

Such small servicers will not have to provide the proposed periodic statement. 

As discussed in the section-by-section analysis on § 1026.41(e)(4), the Bureau believes 

that servicers that meet both conditions generally provide consumers with ready access to the 

information on the proposed periodic statement, but possibly through other channels. Servicers 

that meet the first condition face either a reduction in the value of an asset on its portfolio or the 

loss of an investment in the relationship with the consumer which was established by originating 

if they provide poor servicing. Servicers that also service relatively few loans have an incentive 

to commit to a “high-touch” business model that offers highly responsive customer service. The 

Bureau believes that servicers that meet both conditions can and generally do provide their 

customers with ready access to comprehensive information about their payments, amounts due 

and other account information through a variety of channels. Thus, the Bureau believes that the 

proposed exemption would produce at most a minimal reduction in benefits to the customers of 

small servicers. 
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Using regulatory filings, the Bureau roughly estimates that approximately 49 million 

consumers would receive the proposed periodic statement disclosure (even taking into account 

the small servicer exception). To illustrate the possible benefits of the disclosure, suppose 10% 

save 15 minutes each year because the proposed disclosure provides them with information 

about their loan or payments that their billing statements or coupon books may not provide (e.g., 

a past payment breakdown) and they would spend 15 minutes obtaining this information, say by 

contacting their servicer by phone, mail or some other means. This is a savings of 1.225 million 

hours per year, or almost $21 million at the median wage of $17 per hour. 

Benefits to covered persons. Providing the proposed content on a regular basis to 

consumers may reduce the frequency with which consumers contact the servicer for information 

and reduce the time servicers spend answering consumer questions. Servicers also benefit from 

reduced costs when they manage fewer partial payments and delinquencies and can resolve 

delinquencies sooner.

Costs to covered persons. The proposed periodic statement disclosure will result in 

certain compliance costs to servicers. Servicers (or their vendors) may need to adapt their 

software and compliance systems to produce the new disclosure. The new proposed disclosure 

would also provide to borrowers information that is not currently disclosed to them, including 

information that is specific to each loan. Servicers (or their vendors) may not have ready access 

to all of this additional loan-level information; for example, if some of this additional 

information is stored in a database that is not regularly accessed by systems that produce the 

current disclosures. The Bureau solicits information about servicer and vendor operations 

regarding the storage of loan-level information and the costs of providing the proposed new loanlevel information to consumers.
207 

The Bureau believes that, in general, servicers of all sizes will incur minimal one-time 

costs to learn about the proposed provision. Based on information provided by servicers and by 

software vendors, the Bureau believe that servicers will use vendors for one-time software and 

IT upgrades and for producing and distributing (i.e., mailing) the disclosure. Under existing 

vendor contracts, large servicers will not be charged for the upgrades and production but may be 

charged for distribution. Smaller servicers may be charged for all these costs, but they service 

relatively few loans so in aggregate these costs are small. 

The Bureau is not aware of any reasonably obtainable data that would allow an accurate 

calculation of the additional annual cost from the proposed disclosure per servicer. This 

calculation would depend critically on the number of servicers not covered by the exception and 

the number of adjustable-rate mortgages with coupon books that these servicers currently 

service. A plausible illustration is that 2,013 servicers not covered by the exception begin 

providing 1 million consumers (i.e., those with coupon books and adjustable rate mortgages) 

twelve new disclosures per year at fifty cents per disclosure, for an average annual cost of $2,981 

per servicer. This figure does not include the additional annual cost to these servicers of 

providing the information on the proposed periodic statement disclosure that is not currently 

provided on their existing billing statements. The Bureau welcomes comment on this estimate 

and asks interested parties to provide data, research, and other information that may inform the 

further consideration of the costs of the proposed periodic statement disclosure. 

The small servicer exemption in proposed § 1026.41(e)(4) would benefit small servicers 

by providing an alternative, and potentially less expensive, means of compliance with the 

periodic statement requirement. The SBREFA panel stated that a periodic statement requirement 

would impose significant burdens on small servicers. The panel explained that while much of 
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the information in the proposed periodic statement was already being provided through 

alternative means and most of the information is available on request, consolidating this 

information into a single monthly dynamic statement is difficult for small servicers. 

The SERs expressed that due to their small size, they would not be able to have in-house 

expertise and would generally use third-party vendors to develop periodic statements. Due to 

their small size, they believe they would have no control over these vendor costs. Additionally, 

the small servicers have a smaller portfolio over which to spread the fixed costs of producing 

periodic statements. Such servicers stated they are unable to gain cost efficiencies and cannot 

effectively spread the implementation costs of periodic statements across their loan portfolios. 

Finally, even the costs of mailing monthly statements could be significant to the extent that small 

servicers currently use alternative information methods (such as coupon books for adjustable-rate 

mortgages, or passbooks). 

For small servicers, the cost savings from the proposed exception equals the costs not 

incurred to begin providing periodic statements or to improve existing disclosures to consumers 

who would be required to receive the periodic statement under the proposal. The only 

consumers who need not receive the proposed disclosure are those with fixed-rate mortgages and 

coupon books. The Bureau believes that this is a relatively small fraction of the loans held on 

portfolio or sold with servicing retained by servicers with less than 1,000 loans. Thus, small 

servicers would have to increase the content of existing disclosures or begin providing the 

periodic statement disclosure to almost all of their consumers. However, many of these 

consumers receive billing statements, so there would not be additional distribution costs from the 

proposed disclosure, and the exception does not mitigate costs that would not be incurred. 
209 

There is no reasonably available data with which the Bureau can accurately estimate the 

number of these consumers or the mix of new disclosures and improved disclosures. However, 

based on regulatory data, the Bureau believes that approximately 10,800 small servicers service 

2.3 million mortgages. Based on discussions with industry, the Bureau believes that each 

periodic statement would cost a range of 20 - 50 cents to provide. Thus, a reasonable estimate of 

the cost savings for small servicers from the proposed exception is $6 million - $14 million. The 

Bureau seeks data and other information with which it may further consider the question of the 

cost savings from the proposed small servicer exception. 

4. Prompt crediting of payments and response to requests for payoff amounts

 DFA section 1464(a) codifies existing Regulation Z § 1026.36(c)(1)(i) on prompt 

crediting. The Bureau is proposing an additional requirement for the handling of partial 

payments (i.e., payments that are not full contractual payments). Under the proposal, if servicers 

hold partial payments in a suspense account, once the amount in the account equals a full 

contractual payment, the servicer must credit the payment to the most delinquent outstanding 

payment. The Bureau proposes to define a full contractual payment as a payment covering 

principal, interest and escrow (if applicable). A proposed alternative to the definition would 

include late fees. 

 DFA section 1464(b) requires that a creditor or servicer of a home loan send an accurate 

payoff balance within a reasonable time, but in no case more than seven business days, after the 

receipt of a written request for such balance from or on behalf of the consumer. This generally 

codifies existing Regulation Z § 1026.36(c)(1)(iii) on payoff statements. 

Benefits and costs to consumers. The proposed provision on prompt crediting generally 

ensures that consumers benefit from every effort that they make to pay their mortgage debt. The 
210 

proposed provision helps consumers manage and reduce default by clarifying the rules servicers 

must follow when processing partial payments. 

 As the statute largely codifies an existing regulation, the benefits and costs to consumers 

from a pre-statute baseline are small. However, the existing regulation does not specifically 

address the handling of partial payments. As discussed above, the proposed regulation would 

leave servicers significant flexibility in the handling of partial payments but would also ensure 

greater consistency in the handling of suspense accounts. The Bureau believes this proposed 

approach would clarify servicers’ obligations in processing both full contractual payment and 

partial payments, as well as ensure all payments are properly applied. The proposed disclosures 

would help consumers understand the their processing of their payments. Additionally, requiring 

application to the oldest outstanding payment when a full payment accumulates will provide 

protection to consumers, as well as reduce the outstanding principal balance on certain consumer 

loans. The Bureau requests comment on the benefits and costs to consumers of including late 

fees in the definition of a full contractual payment. Not including late fees in the definition of a 

full contractual payment would require servicers to credit a payment that covered principal, 

interest and escrow even if late fees were outstanding. Consumers who made such a payment 

would benefit from having that payment credited. While some servicers currently follow this 

practice, other servicers who hold such payments in suspense accounts until the fees are paid 

would be required to change their practices. 

Benefits and costs to covered persons. As the statute largely codifies an existing 

regulation, the benefits and costs to covered persons from a pre-statute baseline are small. The 

proposed provision on prompt crediting may cause certain covered persons with different 

crediting practices to forfeit some fee income or float income, but the Bureau has no data with 
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which to determine whether this is the case. The Bureau requests comment on the benefits and 

costs to covered persons of including late fees in the definition of a full contractual payment.

E. Potential Specific Impacts of the Proposed Rule 

1. Depository Institutions and Credit Unions with $10 Billion or Less in Total Assets, As 

Described in § 1026 

Overall, the impact of the rule on depository institutions and credit unions depends on a 

number of factors, including the institutions’ current software and compliance systems and the 

current practices of third-party service providers. Based on discussions with industry, the 

Bureau believes that larger depositories and credit unions will incur only minimal costs from this 

rulemaking. 

The initial interest rate adjustment notice is a new disclosure, but the Bureau believes that 

the larger depository institutions and credit unions (of those with $10 billion or less in total 

assets) use third-party vendors who will, under current contracts, absorb the information 

collection and data processing costs. The Bureau believes that vendors do not absorb the costs of 

mailing disclosures, and based on discussions with industry the Bureau understands that 70-80% 

of consumers have not elected to receive disclosures electronically. Relatively few adjustablerate mortgages have been originated in recent years, however, and so the number that will adjust 

for the first time in the near term will be small. 

The costs to the larger depositories and credit unions (of those with $10 billion or less in 

total assets) from the proposed changes to the two other proposed disclosures will also be 

minimal. The Bureau expects that the information collection and data processing costs of the 

periodic statement disclosure and the proposed changes in the § 1026.20(c) disclosure will 

largely be absorbed by third-party vendors. The Bureau believes that the mailing costs of the 
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periodic statement disclosure are likely to be the same as those for billing statements that it 

would replace. The proposed provision on periodic statements would require consumers who 

use a coupon book for payments on an adjustable-rate mortgage to receive a periodic statement, 

but the number of such consumers is small. The mailing costs of the proposed § 1026.20(c) 

disclosure would be the same as the mailing costs of the current disclosure. 

The Bureau believes that smaller depositories and credit unions may incur some 

additional costs from this rulemaking. Smaller depositories also use third-party vendors, but the 

Bureau believes that contracts with these vendors may allow them to pass along the information 

collection and data processing costs to the servicers. Even for smaller depository servicers, 

however, the additional costs from the two proposed disclosures for adjustable-rate mortgage are 

likely to be small. There will be few initial interest rate adjustments in the near term, and 

servicers currently are required to send the § 1026.20(c) disclosure. Thus, most new costs will 

come from the one-time and ongoing costs of providing the periodic statement disclosure. As 

discussed above, the Bureau is proposing to exempt certain small servicers from the periodic 

statement disclosure requirement if they service fewer than 1,000 loans and either hold the loans 

in portfolio or originated them. Using Call Report data, the Bureau concludes that almost all 

servicers with under $175 million in assets would qualify for this exemption, as would many 

servicers with greater assets. However, the Bureau will examine this question further and 

requests data and additional information on the small servicers who would qualify for the 

proposed exemption. 

Based on discussions with industry, the Bureau believes that the vast majority of 

depositories and credit unions, of any size, are already in compliance with the proposed 

provisions for prompt crediting of payments and response to requests for payoff amounts. 
213 

2. Impact of the Proposed Provisions on Consumers in Rural Areas

Consumers in rural areas may experience benefits from the proposed rule that are 

different in certain respects from the benefits experienced by consumers in general. Consumers 

in rural areas may be more likely to obtain mortgages from small local banks and credit unions 

that either service the loans in portfolio or sell the loans and retain the servicing rights. These 

servicers may already provide most of the benefits to consumers that the proposed rule is 

designed to provide, including the benefits to consumers with adjustable-rate mortgages. On the 

other hand, it is also possible that a lack of alternatives for consumers in some rural areas 

regarding lenders who also service mortgages may cause the proposed rule to provide rural 

consumers with greater benefits than the rule may provide to other consumers. 

The Bureau will further consider the impact of the proposed rule on consumers in rural 

areas. The Bureau therefore asks interested parties to provide data, research results and other 

factual information on the impact of the proposed rule on consumers in rural areas. 

F. Additional Analysis Being Considered and Request for Information 

The Bureau will further consider the benefits, costs, and impacts of the proposed 

provisions and additional proposed modifications before finalizing the proposal. As noted 

below, there are a number of areas where additional information would allow the Bureau to 

better estimate the benefits and costs of this proposal. 

In addition, the Bureau asks interested parties to provide general information, data, and 

research results on: 

 How consumers might respond to the information proposed for inclusion in the new 

initial interest rate adjustment disclosure, the additional information proposed for 
214 

inclusion in the revised Regulation Z § 1026.20(c) disclosure, and the information 

proposed for inclusion in the new periodic statement disclosures; 

 The coverage and format of these proposed disclosures; 

 The benefits to consumers from the disclosures listed above; and 

 The potential impact on servicers and on the functioning of the servicing market from 

the disclosures listed above and the prompt crediting requirement. 

The Bureau also requests specific information on the costs to covered persons of 

complying with the proposal, such as revising compliance software and systems. 

To supplement the information discussed in this preamble and any information that the 

Bureau may receive from commenters, the Bureau is currently working to gather additional data 

that may be relevant to this and other mortgage-related rulemakings. These data may include 

additional data from the National Mortgage License System (NMLS) and the NMLS Mortgage 

Call Report, loan file extracts from various lenders, and data from the pilot phases of the 

National Mortgage Database. The Bureau expects that each of these datasets will be 

confidential. This section now describes each dataset in turn.

First, as the sole system supporting licensure/registration of mortgage companies for 53 

regulatory agencies for states and territories and mortgage loan originators under the SAFE Act, 

NMLS contains basic identifying information for non-depository mortgage loan origination 

companies. Firms that hold a State license or State registration through NMLS are required to 

complete either a standard or expanded Mortgage Call Report (MCR). The Standard MCR 

includes data on each firm’s residential mortgage loan activity including applications, closed 

loans, individual mortgage loan originator (MLO) activity, line of credit, and other data 

repurchase information by State. It also includes financial information at the company level. 
215 

The expanded report collects more detailed information in each of these areas for those firms that 

sell to Fannie Mae or Freddie Mac.137 To date, the Bureau has received basic data on the firms 

in the NMLS and de-identified data and tabulations of data from the MCR. These data were 

used, along with HMDA data, to help estimate the number and characteristics of non-depository 

institutions active in various mortgage activities. In the near future, the Bureau may receive 

additional data on loan activity and financial information from the NMLS including loan activity 

and financial information for identified lenders. The Bureau anticipates that these data will 

provide additional information about the number, size, type, and level of activity for nondepository lenders engaging in various mortgage origination and servicing activities. As such, it 

supplements the Bureau’s current data for non-depository institutions reported in HMDA and the 

data already received from NMLS. For example, these new data will include information about 

the number and size of closed-end first and second loans originated, fees earned from origination 

activity, levels of servicing, revenue estimates for each firm, and other information. The Bureau 

may compile some simple counts and tabulations and conduct some basic statistical modeling to 

better model the levels of various activities at various types of firms. In particular, the 

information from the NMLS and the MCR may help the Bureau refine its estimates of benefits, 

costs, and impacts for each of the revisions to the RESPA Good Faith Estimate and settlement 

statement forms, changes to the HOEPA thresholds, changes to requirements for appraisals, 

updates to loan originator compensation rules, proposed new servicing requirements, and the 

new ability to repay standards. 

Second, the Bureau is working to obtain a random selection of loan-level data from 

several lenders. The Bureau intends to request loan file data from lenders of various sizes and 

 

137 More information about the Mortgage Call Report can be found at 

http://mortgage.nationwidelicensingsystem.org/slr/common/mcr/Pages/default.aspx. 
216 

geographic locations to construct a representative dataset. In particular, the Bureau will request a 

random sample of RESPA, GFE, and RESPA settlement statement forms from loan files for 

closed-end loans. These forms include data on some or all loan characteristics including 

settlement charges, origination charges, appraisal fees, flood certifications, mortgage insurance 

premiums, homeowner’s insurance, title charges, balloon payments, prepayment penalties, 

origination charges, and credit charges or points. Through conversations with industry, the 

Bureau believes that such loan files exist in standard electronic formats allowing for the creation 

of a representative sample for analysis. The Bureau may use these data to further measure the 

impacts of certain proposed changes. Calculations of various categories of settlement and 

origination charges may help the Bureau calculate the various impacts of proposed changes to 

the definition of finance charge and other aspects of the proposal, including proposed changes in 

the number and characteristics of loans that exceed the HOEPA thresholds, loans that would 

meet the high rate or high risk definitions mandating additional consumer protections, and loans 

that meet the points and fees thresholds contained in the ability to repay provisions of the DoddFrank Act. 

Third, the Bureau may also use data from the pilot phases of the National Mortgage 

Database (NMDB) to refine its proposals and/or its assessments of the benefits, costs, and 

impacts of these proposals. The NMDB is a comprehensive database, currently under 

development, of loan-level information on first lien single-family mortgages. It is designed to be 

a nationally representative sample (1%) and contains data derived from credit reporting agency 

data and other administrative sources along with data from surveys of mortgage borrowers. The 

first two pilot phases, conducted over the past two years, vetted the data development process, 

successfully pretested the survey component and produced a prototype dataset. The initial pilot 
217 

phases validated that sampled credit repository data are both accurate and comprehensive and 

that the survey component yields a representative sample and a sufficient response rate. A third 

pilot is currently being conducted with the survey being mailed to holders of 5,000 newly 

originated mortgages sampled from the prototype NMDB. Based on the 2011 pilot, a response 

rate of 50% or higher is expected. These survey data will be combined with the credit repository 

information of non-respondents, and then de-identified. Credit repository data will be used to 

minimize non-response bias, and attempts will be made to impute missing values. The data from 

the third pilot will not be made public. However, to the extent possible, the data may be 

analyzed to assist the Bureau in its regulatory activities and these analyses will be made publicly 

available. 

The survey data from the pilots may be used by the Bureau to analyze consumers’ 

shopping behavior regarding mortgages. For instance, the Bureau may calculate the number of 

consumers who use brokers, the number of lenders contacted by borrowers, how often and with 

what patterns potential borrowers switch lenders, and other behaviors. Questions may also 

assess borrowers’ understanding of their loan terms and the various charges involved with 

origination. Tabulations of the survey data for various populations and simple regression 

techniques may be used to help the Bureau with its analysis. 

The Bureau requests commenters to submit data and to provide suggestions for additional 

data to assess the issues discussed above and other potential benefits, costs, and impacts of the 

proposed rule. The Bureau also requests comment on the use of the data described above. 

VIII. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA), as amended by SBREFA, requires each agency to 

consider the potential impact of its regulations on small entities, including small businesses, 
218 

small governmental units, and small not-for-profit organizations. 5 U.S.C. 601 et seq. The RFA 

generally requires an agency to conduct an initial regulatory flexibility analysis (IRFA) and a 

final regulatory flexibility analysis (FRFA) of any rule subject to notice-and-comment 

rulemaking requirements, unless the agency certifies that the rule will not have a significant 

economic impact on a substantial number of small entities. 5 U.S.C. 603, 604. The Bureau also 

is subject to certain additional procedures under the RFA involving the convening of a panel to 

consult with small business representatives prior to proposing a rule for which an IRFA is 

required. 5 U.S.C. 609. 

The Bureau has not certified that the proposed rule would not have a significant economic 

impact on a substantial number of small entities within the meaning of the RFA. Accordingly, the 

Bureau convened and chaired a SBREFA Panel to consider the impact of the proposed rule on small 

entities that would be subject to that rule and to obtain feedback from representatives of such small 

entities. The SBREFA Panel for this rulemaking is discussed below in part VIII.A. 

The Bureau is publishing an IRFA. Among other things, the IRFA estimates the number of 

small entities that will be subject to the proposed rule and describes the impact of that rule on those 

entities. The IRFA for this rulemaking is set forth below in part VIII.B. 

A. Small Business Review Panel 

Under section 609(b) of the RFA, as amended by SBREFA and the Dodd-Frank Act, the 

Bureau seeks, prior to conducting the IRFA, information from representatives of small entities 

that may potentially be affected by its proposed rules to assess the potential impacts of that rule 

on such small entities. 5 U.S.C. 609(b). Section 609(b) sets forth a series of procedural steps 

with regard to obtaining this information. The Bureau first notifies the Chief Counsel for 

Advocacy (Chief Counsel) of the SBA and provides the Chief Counsel with information on the 

potential impacts of the proposed rule on small entities and the types of small entities that might 
219 

be affected. 5 U.S.C. 609(b)(1). Not later than 15 days after receipt of the formal notification 

and other information described in section 609(b)(1) of the RFA, the Chief Counsel then 

identifies the SERs, the individuals representative of affected small entities for the purpose of 

obtaining advice and recommendations from those individuals about the potential impacts of the 

proposed rule. 5 U.S.C. 609(b)(2). The Bureau convenes a SBREFA Panel for such rule 

consisting wholly of full- time Federal employees of the office within the Bureau responsible for 

carrying out the proposed rule, the Office of Information and Regulatory Affairs (OIRA) within 

the OMB, and the Chief Counsel. 5 U.S.C. 609(b)(3). The SBREFA Panel reviews any material 

the Bureau has prepared in connection with the SBREFA process and collects the advice and 

recommendations of each individual small entity representative identified by the Bureau after 

consultation with the Chief Counsel on issues related to sections 603(b)(3) through (b)(5) and 

603(c) of the RFA.138 5 U.S.C. 609(b)(4). Not later than 60 days after the date the Bureau 

convenes the SBREFA Panel, the panel reports on the comments of the SERs and its findings as 

to the issues on which the SBREFA Panel consulted with the SERs, and the report is made public 

as part of the rulemaking record. 5 U.S.C. 609(b)(5). Where appropriate, the Bureau modifies 

the rule or the IRFA in light of the foregoing process. 5 U.S.C. 609(b)(6). 

On April 9, 2012, the Bureau provided the Chief Counsel with the formal notification and 

other information required under section 609(b)(1) of the RFA. To obtain feedback from small 

entity representatives to inform the SBREFA Panel pursuant to sections 609(b)(2) and 609(b)(4) 

 

138 As described in the IRFA in part VIII.B, below, sections 603(b)(3) through (b)(5) and 603(c) of the RFA, 

respectively, require a description of and, where feasible, provision of an estimate of the number of small entities to 

which the proposed rule will apply; a description of the projected reporting, record keeping, and other compliance 

requirements of the proposed rule, including an estimate of the classes of small entities which will be subject to the 

requirement and the type of professional skills necessary for preparation of the report or record; an identification, to 

the extent practicable, of all relevant Federal rules which may duplicate, overlap, or conflict with the proposed rule; 

and a description of any significant alternatives to the proposed rule which accomplish the stated objectives of 

applicable statutes and which minimize any significant economic impact of the proposed rule on small entities. 

5 U.S.C. 603(b)(3), 603(b)(4), 603(b)(5), 603(c). 
220 

of the RFA, the Bureau, in consultation with the Chief Counsel, identified five categories of 

small entities that may be subject to the proposed rule for purposes of the IRFA: commercial 

banks/savings institutions, credit unions, non-depositories engaged primarily in lending funds 

with real estate as collateral (included in NAICS 522292), non-depositories primarily engaged in 

loan servicing (included in NAICS 522390), and certain non-profit organizations. Section 3 of 

the IRFA, in part VIII.B.3, below, describes in greater detail the Bureau’s analysis of the number 

and types of entities that may be affected by the proposed rule. Having identified the categories 

of small entities that may be subject to the proposed rule for purposes of an IRFA, the Bureau 

then, in consultation with the Chief Counsel, selected 16 small entity representatives to 

participate in the SBREFA process. As described in chapter 7 of the SBREFA Final Report, 

described below, the SERs selected by the Bureau in consultation with the Chief Counsel 

included representatives from each of the categories identified by the Bureau and comprised a 

diverse group of individuals with regard to geography and type of locality (i.e., rural, urban, 

suburban, or metropolitan areas). 

On April 10, 2012, the Bureau convened the SBREFA Panel pursuant to section 

609(b)(3) of the RFA. Afterwards, to collect the advice and recommendations of the SERs under 

section 609(b)(4) of the RFA, the SBREFA Panel held an outreach meeting/teleconference with 

the small entity representatives on April 24, 2012. To help the small entity representatives 

prepare for the outreach meeting beforehand, the SBREFA Panel circulated briefing materials 

prepared in connection with section 609(b)(4) of the RFA that summarized the proposals under 

consideration at that time, posed discussion issues, and provided information about the SBREFA 
221 

process generally.139 All 16 small entity representatives participated in the outreach meeting 

either in person or by telephone. The SBREFA Panel also provided the small entity 

representatives with an opportunity to submit written feedback until May 1, 2012. In response, 

the SBREFA Panel received written feedback from five of the representatives.140 

On June 11, 2012, the SBREFA Panel submitted to the Director of the Bureau, Richard 

Cordray, a written SBREFA Final Report that includes the following: background information 

on the proposals under consideration at the time; information on the types of small entities that 

would be subject to those proposals and on the small entity representatives who were selected to 

advise the SBREFA Panel; a summary of the SBREFA Panel’s outreach to obtain the advice and 

recommendations of those small entity representatives; a discussion of the comments and 

recommendations of the small entity representatives; and a discussion of the SBREFA Panel 

findings, focusing on the statutory elements required under section 603 of the RFA. 5 U.S.C. 

609(b)(5).141 

In preparing this proposed rule and the IRFA, the Bureau has carefully considered the 

feedback from the small entity representatives participating in the SBREFA process and the 

findings and recommendations in the SBREFA Final Report. The section-by-section analysis of 

the proposed rule in part VI, above, and the IRFA discuss this feedback and the specific findings 

and recommendations of the SBREFA Panel, as applicable. The SBREFA process provided the 

SBREFA Panel and the Bureau with an opportunity to identify and explore opportunities to 

minimize the burden of the rule on small entities while achieving the rule’s purposes. It is 

 

139The Bureau posted these materials on its website and invited the public to email remarks on the materials. See 

http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-outlines-borrower-friendlyapproach-to-mortgage-servicing/ (the materials are accessible via the links within this document). 140 This written feedback is attached as appendix A to the SBREFA Final Report, discussed below. 141 SBREFA Final Report, supra note 22. 
222 

important to note, however, that the SBREFA Panel prepared the SBREFA Final Report at a 

preliminary stage of the proposal’s development and that the SBREFA Final Report—in 

particular, the SBREFA Panel’s findings and recommendations—should be considered in that 

light. Also, any options identified in the SBREFA Final Report for reducing the proposed rule’s 

regulatory impact on small entities were expressly subject to further consideration, analysis, and 

data collection by the Bureau to ensure that the options identified were practicable, enforceable, 

and consistent with TILA, the Dodd-Frank Act, and their statutory purposes. The proposed rule 

and the IRFA reflect further consideration, analysis, and data collection by the Bureau. 

B. Initial Regulatory Flexibility Analysis 

Under RFA section 603(a), an IRFA “shall describe the impact of the proposed rule on 

small entities.” 5 U.S.C. 603(a). Section 603(b) of the RFA sets forth the required elements of 

the IRFA. Section 603(b)(1) requires the IRFA to contain a description of the reasons why 

action by the agency is being considered. 5 U.S.C. 603(b)(1). Section 603(b)(2) requires a 

succinct statement of the objectives of, and the legal basis for, the proposed rule. 5 U.S.C. 

603(b)(2). The IRFA further must contain a description of and, where feasible, provision of an 

estimate of the number of small entities to which the proposed rule will apply. 5 U.S.C. 

603(b)(3). Section 603(b)(4) requires a description of the projected reporting, recordkeeping, 

and other compliance requirements of the proposed rule, including an estimate of the classes of 

small entities that will be subject to the requirement and the types of professional skills necessary 

for the preparation of the report or record. 5 U.S.C. 603(b)(4). In addition, the Bureau must 

identify, to the extent practicable, all relevant Federal rules which may duplicate, overlap, or 

conflict with the proposed rule. 5 U.S.C. 603(b)(5). The Bureau, further, must describe any 

significant alternatives to the proposed rule which accomplish the stated objectives of applicable 
223 

statutes and which minimize any significant economic impact of the proposed rule on small 

entities. 5 U.S.C. 603(b)(6). Finally, as amended by the Dodd-Frank Act, RFA section 603(d) 

requires that the IRFA include a description of any projected increase in the cost of credit for 

small entities, a description of any significant alternatives to the proposed rule which accomplish 

the stated objectives of applicable statutes and which minimize any increase in the cost of credit 

for small entities (if such an increase in the cost of credit is projected), and a description of the 

advice and recommendations of representatives of small entities relating to the cost of credit 

issues. 5 U.S.C. 603(d)(1); DFA section 1100G(d)(1). 

1. Description of the Reasons Why Agency Action Is Being Considered 

As discussed in the Overview, part I above, mortgage servicing has been marked by 

pervasive and profound consumer protection problems. As a result of these problems, Congress 

included a number of provisions in the Dodd-Frank Act specifically to address mortgage 

servicing. These provisions are DFA sections 1418 (initial rate adjustment notice for adjustablerate mortgages (ARMs)), 1420 (periodic statement), 1463 (amending RESPA), and 1464 (prompt 

crediting of mortgage payments and response to requests for payoff amounts). The Bureau also 

proposes to amend current rule § 1026.20(c) to harmonize with DFA section 1418, although not 

required by statute. 

The Dodd-Frank Act and TILA authorize the Bureau to adopt implementing regulations 

for the statutory provisions provided by DFA sections 1418, 1420, and 1464. The Bureau is 

using this authority to propose regulations in order to provide servicers with clarity about their 

statutory obligations under these three provisions. The Bureau is also proposing to adjust 

servicers’ statutory obligations, including the obligations of small servicers, in certain 
224 

circumstances. The Bureau is taking this action in order to ease burden when doing so would not 

sacrifice adequate protection of consumers. 

Elsewhere in today’s Federal Register, the Bureau is publishing a proposed rule issued 

under RESPA that would implement DFA section 1463, the 2012 RESPA Servicing Proposal, 

which addresses procedures for obtaining force-placed insurance; procedures for investigating 

and resolving alleged errors and responding to requests for information; reasonable information 

management policies and procedures; early intervention for delinquent borrowers; and continuity 

of contact for delinquent borrowers. 

The new statutory requirements take effect automatically on January 21, 2013, as written 

in the statute, unless final rules are issued prior to that date. The Dodd-Frank Act provides the 

Bureau with limited authority to extend the effective date of statutory requirements when 

adopting implementing regulations. The Bureau will consider the time servicers need to come 

into compliance in determining the effective date. 

The Bureau’s proposed rules under Regulation Z and X represent another important step 

towards establishing uniform minimum national standards. As discussed in part II above, other 

Federal regulatory agencies have issued guidance on mortgage servicing and loan modifications 

and taken enforcement actions against mortgage servicers (including that National Mortgage 

Settlement, discussed in part II.C above). 

These varied regulatory responses are understandable when viewed as a response to an 

unprecedented mortgage crisis and significant problems in the servicing of mortgage loans. 

Ultimately, however, both borrowers and mortgage servicers will be better served by having 

uniform national standards that govern mortgage servicing. When adopted in final form, the 

Bureau’s rules will generally apply to all mortgage servicers, whether depository institutions or 
225 

non-depository institutions, and to all segments of the mortgage market, regardless of the 

ownership of the loan. 

2. Succinct Statement of the Objectives of, and Legal Basis for, the Proposed Rule 

DFA section 1418 requires servicers to provide a new disclosure to consumers who have 

hybrid ARMs. The disclosure concerns the initial interest rate adjustment and must be given 

either (a) between six and seven months prior to such initial interest rate adjustment or (b) at 

consummation of the mortgage if the initial interest rate adjustment occurs during the first six 

months after consummation. The Bureau proposes implementing TILA section 128A(b) by 

broadening the scope of the proposed rule generally to adjustable-rate mortgages, not just hybrid 

ARMs. 

The proposed new ARM disclosure for the initial interest rate adjustment provides the 

content listed in the statute and certain additional information. The disclosure provides, among 

other things, information about the terms of the loan, a description of the way the new rate and 

upcoming payment would be determined, a good faith estimate of the upcoming payment, and 

information that may be especially useful to distressed and delinquent borrowers. The proposed 

revisions to the Regulation Z § 1026.20(c) disclosure would harmonize the timeframe and 

content requirements with those of the new ARM disclosure. 

The Bureau believes that the current era of declining interest rates has reduced the 

payment shock that can result from ARM interest rate adjustments. If interest rates increase 

quickly, however, then payment shock may also increase. Furthermore, the popularity of 

adjustable-rate mortgages, which provide the opportunity for reduced interest rates during an 

introductory period, likely would increase along with the advent of higher interest rates. 

The proposed rule is intended to mitigate the consequences of payment shock by ensuring 
226 

that consumers have sufficient time to identify and execute the best course of action. As 

explained above, the proposed rule would implement DFA section 1418 requirements for the 

initial ARM interest rate adjustment notice, which generally will be provided to consumers 

between six and seven months prior to the initial interest rate adjustment. The Bureau also 

proposes to revise the timeframe of the Regulation Z § 1026.20(c) disclosure for rate adjustments 

that result in an accompanying payment change, from the current 25 to 120 days before payment 

at a new level is due to, 60 to 120 days before payment at a new level is due. 

DFA section 1420 generally requires the creditor, assignee, or servicer of a residential 

mortgage loan to transmit to the borrower, for each billing cycle, a periodic statement that sets 

forth certain specified information in a clear and conspicuous manner. The statute also gives the 

Bureau the authority to require additional content to be included in the periodic statement. The 

statute provides an exception to the periodic statement requirement for fixed-rate loans where the 

consumer is given a coupon book containing substantially the same information as the statement. 

The proposed periodic statement disclosure would require the periodic statement to 

include the content listed in the statute, as well as additional loan information, billing 

information, and information that may be helpful to distressed or delinquent borrowers. In 

accordance with the statute, the proposed rule has a coupon book exemption for fixed-rate loans 

when the borrower is given a coupon with certain information required by the periodic statement 

and information to access other information included in the periodic statement. The proposed 

rule also has exemptions for certain small servicers, reverse mortgages, and timeshares. 

The proposed periodic statement is designed to serve a variety of purposes. These 

purposes include informing consumers of their payment obligation, providing consumers with 

information about their mortgage in an easily read and understood format, creating a record of 
227 

the transaction to aid in error detection and resolution, and providing information to distressed or 

delinquent borrowers. 

The Bureau understands that most borrowers will need only some of the information in 

the disclosure on a regular basis. However, distressed and delinquent borrowers will likely need 

more information. The proposed periodic statement disclosure was subjected to three rounds of 

consumer testing and refinement to identify the content and format that best promote consumer 

understanding. 

DFA section 1464 generally codifies requirements for the prompt crediting of mortgage 

payments received by servicers in connection with consumer credit transactions secured by a 

consumer’s principal dwelling. The statute also generally codifies the requirement to provide an 

accurate and timely response to a borrower request for payoff amounts for home loans. 

The proposed rule would require that once funds in a suspense account equal a full 

contractual payment that the servicer must credit the payment to the most delinquent outstanding 

payment. The proposed rule also would require a servicer to send an accurate payoff balance, in 

no case more than seven business days, after the receipt of a written request for such balance 

from or on behalf of the consumer. 

The objective of the prompt crediting requirement is to ensure that consumers benefit 

from every effort that they make to pay their mortgage debt. However, the Bureau understands 

that requiring immediate crediting of partial payments might induce some servicers to return 

partial payments. The Bureau believes that this outcome would not serve the interests of 

consumers who have demonstrated that they are trying to pay their mortgage debt. 

The objective of the payoff statement provision is to ensure that consumers can obtain 

this basic information about their mortgage debt in a timely way. This information is generally 
228 

useful to consumers but must be provided in a timely way for selling or refinancing a home or 

modifying a mortgage loan. 

3. Description and, Where Feasible, Provision of an Estimate of the Number of Small Entities to 

which the Proposed Rule Will Apply

As discussed in the SBREFA Final Report, for purposes of assessing the impacts of the 

proposed rule on small entities, “small entities” is defined in the RFA to include small businesses, 

small nonprofit organizations, and small government jurisdictions. 5 U.S.C. 601(6). A “small 

business” is determined by application of SBA regulations and reference to the North American 

Industry Classification System (NAICS) classifications and size standards.142 5 U.S.C. 601(3). 

Under such standards, banks and other depository institutions are considered “small” if they have 

$175 million or less in assets, and for other financial businesses, the threshold is average annual 

receipts (i.e., annual revenues) that do not exceed $7 million.143

During the SBREFA Panel process, the Bureau identified five categories of small entities 

that may be subject to the proposed rule for purposes of the RFA: commercial banks/savings 

institutions144 (NAICS 522110 and 522120), credit unions (NAICS 522130), firms providing real 

estate credit (NAICS 522292), firms engaged in other activities related to credit intermediation 

(NAICS 522390), and small non-profit organizations. Commercial banks, savings institutions, 

and credit unions are small businesses if they have $175 million or less in assets. Firms 

providing real estate credit and firms engaged in other activities related to credit intermediation 

are small businesses if average annual receipts do not exceed $7 million. 

 

142 The current SBA size standards are found on SBA’s website at http://www.sba.gov/content/table-small-businesssize-standards. 143 See id. 144 Savings institutions include thrifts, savings banks, mutual banks, and similar institutions. 
229 

A small non-profit organization is any not-for-profit enterprise which is independently 

owned and operated and is not dominant in its field. Small non-profit organizations engaged in 

mortgage servicing typically perform a number of activities directed at increasing the supply of 

affordable housing in their communities. Some small non-profit organizations originate and 

service mortgage loans for low and moderate income individuals while others purchase loans or 

the mortgage servicing rights on loans originated by local community development lenders. 

Servicing income is a substantial source of revenue for some small non-profit organizations 

while others receive most of their income from grants or investments.145 

The following table provides the Bureau’s estimate of the number and types of entities 

that may be affected by the proposals under consideration: 

Table 1: Estimated number of affected entities and small entities by NAICS code and 

engagement in closed-end mortgage loan servicing 

Category NAICS 

Small entity 

threshold 

Total 

entities Small entities 

Entities 

engaged in 

mortgage loan servicing 

Small entities 

engaged in 

mortgage loan servicing 

Commercial banks 

& savings institutions 

522110, 522120 $175,000,000 assets 7,724 4,250 7,502 4,098 

Credit unions 522130 $175,000,000 assets 7,491 6,568 5,190 4,270 

Real estate credit 522292 $7,000,000 revenues 5,791 5,152 

1,388 800 Other activities related to 

credit intermediation 

(includes loan servicing) 

522390 $7,000,000 revenues 5,494 5,319 

 

For commercial banks, savings institutions, and credit unions, the number of entities and 

asset sizes were obtained from December 2010 Call Report data as compiled by SNL Financial. 

 

145 The Bureau is continuing to refine its description of small non-profit organizations engaged in mortgage loan 

servicing and working to estimate the number of these entities, but it is not possible to estimate the number of these 

entities at this time. Non-profits and small non-profits engaged in mortgage loan servicing would be included under 

real estate credit if their primary activity is originating loans and under other activities related to credit 

intermediation if their primary activity is servicing. 
230 

Banks and savings institutions are counted as engaging in mortgage loan servicing if they hold 

closed-end loans secured by one to four family residential property or they are servicing 

mortgage loans for others. Credit unions are counted as engaging in mortgage loan servicing if 

they have closed-end one to four family mortgages in portfolio, or hold real estate loans that 

have been sold but remain serviced by the institution. 

For firms providing real estate credit and firms engaged in other activities related to 

credit intermediation, the total number of entities and small entities comes from the 2007 

Economic Census. The total number of these entities engaged in mortgage loan servicing is 

based on a special analysis of data from the Nationwide Mortgage Licensing System and 

Registry and is current as of Q1 2011. The total equals the number of non-depositories that 

engage in mortgage loan servicing, including tax-exempt entities, except for those mortgage 

loan servicers (if any) that do not engage in any mortgage-related activities that require a State 

license. The estimated number of small entities engaged in mortgage loan servicing is based on 

predicting the likelihood that an entity’s revenue is less than the $7 million threshold based on 

the relationship between servicer portfolio size and servicer rank in data from Inside Mortgage 

Finance.146

4. Projected Reporting, Recordkeeping, and Other Compliance Requirements of the Proposed 

Rule, Including an Estimate of the Classes of Small Entities which Will be Subject to the 

Requirement and the Type of Professional Skills Necessary for the Preparation of the Report

The proposed rule does not impose new reporting or recordkeeping requirements. The 

possible compliance costs for small entities from each major component of the proposed rule are 

presented below. The Bureau presents these costs against a pre-statute baseline. Benefits to 

 

146 The CFPB is continuing to refine its estimate of the number of firms providing real estate credit and engaging in 

other activities related to credit intermediation that are small and which engage in mortgage loan servicing. 
231 

consumers from the proposed rule are discussed in the DFA section 1022 analysis in part VII 

above. 

 (i) ARM – Notice 6 Months Prior to Initial Interest Rate Adjustment 

DFA section 1418 amends TILA by adding a new requirement that a creditor or servicer 

provide a notice regarding the initial interest rate adjustment of a hybrid adjustable-rate mortgage 

at the end of the introductory period either (a) between six and seven months prior to the 

adjustment, or (b) at consummation of the mortgage if the first adjustment occurs during the first 

six months after consummation. The Bureau proposes to use the authority granted by TILA 

section 128A(b) to require this notice for hybrid as well as ARMs that are not hybrid (1/1, 3/3, 

5/5, etc.).147 

The proposed form would require the content listed in the statute. This includes, in part, 

a good faith estimate of the amount of the resulting payment; a list of alternatives that the 

consumer may pursue, including refinancing and loan modification; and information on how to 

contact housing counselors approved by HUD or a State housing finance authority. 

Additionally, the Bureau is proposing certain required additional information including details 

about the loan, key terms of the ARM, and information about the upcoming payment. 

The new disclosure may provide some benefit to servicers. Distressed borrowers who 

contact servicers well in advance of a possible increase in the interest rate and payment may have 

more time in which to pursue an alternative financing solution. Information about loss 

mitigation alternatives and the availability of housing counseling may prompt borrowers to work 

proactively and constructively with their servicers. 

 

147Conventional ARMs, unlike hybrid ARMs which have a period with a fixed rate of interest, start with an 

adjustable rate and that rate readjusts at even intervals. 
232 

The new disclosure will likely impose one-time and ongoing costs on servicers. 

Servicers will need to obtain system upgrades from vendors or make programming changes 

themselves. One SER reported the changes could take two to four days of IT support. These 

would be one-time costs. The Bureau is mitigating the one-time cost by providing servicers with 

tested model forms. 

SERs noted that producing and sending the new disclosures would impose new costs on 

them either directly or through vendor charges. The ongoing costs are mitigated somewhat since 

the disclosures can be provided to consumers in electronic form with consumer consent. One 

SER noted that vendors have not provided cost quotes at this point. 

A number of SERs expressed concern that the proposed initial ARM interest rate 

adjustment disclosure would confuse borrowers because it would only provide an estimate that 

would not accurately reflect the actual adjusted rate. The costs and benefits to consumers of the 

initial interest rate adjustment disclosure are discussed in the DFA section 1022 analysis in part 

VII above. 

(ii) Revised 1026.20(c) Notice 

The Bureau is also proposing changes to existing Regulation Z § 1026.20(c). The 

existing provision applies to all ARMs and requires a disclosure prior to each interest rate 

adjustment that effects a change in payment and annually for interest rate adjustments that do not 

cause payment changes. The Bureau is proposing to eliminate the annual notice. The Bureau 

also proposes to amend the current disclosures requiring a notice each time an interest rate 

adjustment causes a corresponding change in payment. 

Regarding timing, the Bureau proposes changing the timeframe for providing the 

payment change notice to consumers from 25 to 120 days before payment at a new level is due to 
233 

60 to 120 days before payment at a new level is due. SERs did not identify any costs associated 

with this change and two reported they already provide the disclosure 60 to 100 days before 

payment at a new level is due. One SER reported that the new rate is calculated 45 days prior to 

the rate change date. This SER provides the borrower with a notice a minimum of 25 days, and 

typically 42 days, prior to the new interest rate becoming effective. This SER stated that the new 

interest rate becomes effective 55-72 days prior to the due date of the new payment. Another 

SER reported substantially similar numbers. The timing of the disclosures reported by these 

SERs is consistent with the proposed new timeframe. 

Regarding content, the Bureau is considering proposing content for the revised 

1026.20(c) notices that closely tracks the content it is proposing for the ARM initial interest rate 

adjustment notices pursuant to DFA section 1418. Servicers will need to obtain one-time system 

upgrades from vendors or make programming changes themselves. Given the substantial 

similarity of the revised 1026.20(c) form and the initial ARM interest rate adjustment notice, the 

Bureau believes that the additional ongoing cost of producing the revised form, on top of the 

initial ARM interest rate adjustment form, will be minimal. 

(iii) Periodic Statements

 As discussed in the section-by-section analysis above, DFA section 1420 amends TILA 

by adding a new requirement that a servicer of any residential mortgage loan provide a periodic 

statement to the consumer for each billing cycle. The Bureau tested a model periodic statement 

with consumers. 

 The proposed rule has the following exemptions: fixed-rate mortgages with coupon 

books, certain small servicers, reverse mortgages, and timeshares. These proposed provisions 

are discussed separately below. 
234 

 The proposed periodic statement requirement imposes one-time and ongoing costs on 

small servicers. The specific types of costs incurred by a servicer depend on whether the 

servicer produces the proposed periodic statement in-house or uses a third-party vendor. 

 In-house one-time costs include the development of a new form, system reprogramming 

or acquisition, and perhaps new or updated software. In-house ongoing costs for production 

include additional system use and staff time. In-house ongoing costs would also include paper, 

printing, and mailing costs for distributing the periodic statement to borrowers who do not give 

permission to receive the disclosure electronically. 

 Vendors may also charge an initial one-time cost for developing a new form as well as 

ongoing costs for producing and distributing the statement. The SERs who use vendors stated 

that they did not know what their vendors would charge so they could comply with the new 

periodic statement requirement. The SERs agreed that the one-time charge would be different 

from what they would be charged if they were the only entity making the change. Vendors can 

spread the one-time costs of new regulatory requirements over many servicers. 

 Small servicers reported a range of one-time costs of complying with the proposed 

provision. One non-depository SER estimated it would cost $150,000-$500,000 to convert to a 

new periodic statement system, a depository institution SER estimated a cost of $150,000-

$200,000, and a credit union SER estimated a cost of $30,000-$40,000. Estimates of ongoing 

costs ranged from $11,000 per month from a non-depository SER to $2,200 per month from a 

depository SER; the latter estimated ongoing costs would be approximately $1 per statement. 

One depository SER estimated $5,000-$6,000 per month in production costs, before postage. 

 The Bureau understands that the estimates of ongoing costs from the SERs did not 

exclude the costs of periodic statements, coupon books, or other payment mechanisms that they 
235 

currently provide borrowers. Some of the SERs stated that they currently provide borrowers 

with a periodic statement that contains much of the information required under the proposal. 

However, none of the SERs stated that they include contact information for housing counseling 

agencies or programs of the type required by DFA section 1420. As explained above in the 

section-by-section analysis, the Bureau is proposing to use authority under TILA sections 105(a) 

and (f) and DFA Section 1405(b) to require periodic statements to provide only information 

about where a borrower can access a complete list of housing counselors. The Bureau believes 

that the proposed provision will impose a substantially smaller burden than the statutory 

requirement. 

 In accordance with DFA section 1420, the proposed rule would include a coupon book 

exemption for fixed-rate loans where the consumer is given a coupon book with certain of the 

information required by the periodic statement. It is not possible to estimate the share of 

residential mortgage loans serviced by small servicers that would qualify for this exception. If 

this provision is included in the final rule, it is possible that small servicers would provide 

coupon books to all borrowers with fixed-rate mortgages. Many of the SERs reported that they 

provide consumers with coupon books for ARMs. However, there is no data with which to 

estimate the fraction of small servicer portfolio loans that are in fixed-rate mortgages; in fact, the 

Bureau understands that many small servicer portfolio loans are adjustable-rate mortgages. 

The Bureau is also proposing a small servicer exemption. Servicers servicing 1,000 or 

fewer loans, all of which they must either own or have originated, would be eligible. A 

preliminary analysis indicates that all but 13 small insured depositories and credit unions would 

be covered by the exemption and would not have to provide the proposed periodic statement 

disclosure. The Bureau does not currently have the data necessary to estimate the number of 
236 

small entity non-depositories that would be covered by the exemption. However, data from 

depositories suggests that approximately 584 small entity non-depositories (65% of the 800 small 

entity non-depositories) would be covered by the exemption.148 As discussed in the DFA section 

1022 analysis in part VII.F, the Bureau is currently working to gather additional data that may be 

relevant to estimating the number of small non-depositories covered by the small servicer 

exemption. These data may include additional data from the National Mortgage License System 

(NMLS) and the NMLS Mortgage Call Report, loan file extracts from various lenders, and data 

from the pilot phases of the National Mortgage Database. The Bureau is also continuing its 

outreach efforts with industry and requests interested parties to provide data, research results, 

and other information relating to this issue. 

 Finally, the proposed rule has exemptions for reverse mortgages and timeshares. 

Information that would be relevant and useful on a reverse mortgage statement differs 

substantially from the information required on the periodic statement; see the section-by-section 

analysis for further discussion. The proposed rule also exempts timeshares as these are not 

residential mortgage loans as defined in TILA. 

 (iv) Prompt Crediting and Request for Payoff Amounts 

 DFA section 1464(a) generally codifies existing Regulation Z § 1026.36 on prompt 

crediting. The Bureau is further proposing a new requirement for the handling of partial 

payments (i.e., payments that are not full contractual payments). Under the proposal, if servicers 

hold partial payments in a suspense account, then once the amount in the account equals a full 

 

148 Roughly 35% of depositories that earn less than $7 million from servicing also have too many loans to qualify for 

the small servicer exemption. Extrapolating to non-depositories, roughly 35% of non-depositories that earn less 

than $7 million from servicing—and are small entities—also service too many loans to qualify for the small 

servicer exemption. 
237 

contractual payment, the servicer must credit the payment to the most delinquent outstanding 

payment. 

 DFA section 1464(b) requires that a creditor or servicer of a home loan send an accurate 

payoff balance within a reasonable time, but in no case more than seven business days, after the 

receipt of a written request for such balance from or on behalf of the borrower. This essentially 

codifies existing Regulation Z § 1026.36 on payoff statements, except that Regulation Z requires 

payoff statements to be sent within a reasonable time and creates a safe harbor for responses sent 

within five business days. 

 The SERs generally reported that these provisions would have no impact on them as they 

are already in compliance. In correspondence, one SER suggested that the seven day maximum 

for payoff amounts should be even shorter, to prevent other servicers from delaying closings. 

(v) Estimate of the Classes of Small Entities Which will be Subject to the Requirement 

and the Type of Professional Skills Necessary for the Preparation of the Report or Record 

Section 603(b)(4) of the RFA requires an estimate of the classes of small entities which 

will be subject to the requirement. The classes of small entities which will be subject to the 

reporting, recordkeeping, and compliance requirements of the proposed rule are the same classes 

of small entities that are identified above in part VIII.B.3. 

Section 603(b)(4) of the RFA also requires an estimate of the type of professional skills 

necessary for the preparation of the reports or records. The Bureau anticipates that the 

professional skills required for compliance with the proposed rule are the same or similar to 

those required in the ordinary course of business of the small entities affected by the proposed 

rule. Compliance by the small entities that will be affected by the proposed rule will require 

continued performance of the basic functions that they perform today: generating disclosure 
238 

forms and crediting partial payments from borrowers either immediately or when they constitute 

a full payment. 

5. Identification, to the Extent Practicable, of All Relevant Federal Rules which May Duplicate, 

Overlap, or Conflict with the Proposed Rule 

 The Dodd-Frank Act codified certain requirements contained in existing regulations and 

in some cases imposed new requirements that expand or vary the scope of existing regulations. 

The Bureau is working to eliminate conflicts and to harmonize the earlier rules with the new 

statutory requirements. In general, the existing and expanded regulations cover the following 

topics: 

 New Regulation Z ARM disclosures, as required by DFA section 1418, will be 

provided six to seven months prior to the initial adjustment of interest rates. These 

disclosures will provide similar information to existing Regulation Z § 1026.20(c) 

notices, however there are timing differences, and the new notice is required only for 

the first rate adjustment. The DFA section 1418 notice is intended to be sent early 

enough for the consumer to take action (i.e. refinance or apply for a loan 

modification) before the monthly payment increases. 

 Regulation Z § 1026.36(c)(1)(i) contains a prompt crediting provision that is 

generally codified by the prompt crediting provision in DFA section 1464(a). 

 Regulation Z § 1026.36(c) addresses the application of payments. The Bureau is 

proposing modifying this rule to mandate the application of funds to the most 

delinquent outstanding payment if a full contractual payment has accumulated in any 

suspense or unapplied funds account. 
239 

 Regulation Z 1026.36(c)(1)(iii) contains a provision regarding payoff amount 

requests that is generally codified by the Dodd Frank Act. 

Elsewhere in today’s Federal Register, the Bureau is publishing a proposed rule that 

would implement DFA section 1463 and is issued under RESPA. The RESPA proposal 

addresses procedures for obtaining force-placed insurance; procedures for investigating and 

resolving alleged errors and responding to requests for information; reasonable information 

management policies and procedures; early intervention for delinquent borrowers; and continuity 

of contact for delinquent borrowers. 

These regulations do not duplicate, overlap, or conflict and the Bureau is not aware of 

any other Federal regulations that currently duplicate, overlap, or conflict with the proposals 

under consideration. 

6. Description of Any Significant Alternatives to the Proposed Rule which Accomplish the Stated 

Objectives of Applicable Statutes and Minimize Any Significant Economic Impact of the 

Proposed Rule on Small Entities 

 (i) New Initial Interest Rate Adjustment Notice for Adjustable-Rate Mortgages 

 As discussed above, DFA section 1418 requires servicers to provide a new disclosure to 

consumers who have hybrid ARMs regarding the initial interest rate adjustment. The Bureau is 

proposing to use its discretionary authority to require the initial interest rate adjustment notice for 

ARMs that are not hybrid (e.g., 1/1, 3/3, 5/5, etc.) as well. Thus, the disclosure under the 

original statutory language would have a smaller economic impact on small entities. 

 The Bureau opted for its current proposal because all ARMs, not just hybrid ARMs, may 

subject consumers to the same payment shock after the introductory period expires. Consumers 
240 

with ARMs that are not hybrid would therefore also benefit from the protections provided by the 

new disclosure. 

 The Bureau also considered whether to except small servicers from the proposed initial 

ARM interest rate adjustment notice. The SERs did express some concern about the one-time 

and ongoing costs of providing the proposed notice. They expressed concern that consumers 

would be confused by receiving estimates rather than their actual new interest rate and payment. 

 The Bureau believes an exception would deprive certain consumers of the seven to eight 

months advance notice before payment at a new level is due provided by the disclosure. This 

advance notice is designed to allow consumers time to weigh their alternatives and pursue 

alternative actions. An exception would also deprive certain consumers of the information 

provided in the notice about alternatives and how to contact their State housing finance authority 

and counseling agencies and programs. 

 The Bureau recognizes that the proposed initial ARM interest rate adjustment notice will 

impose some burden on small servicers, but it does not believe that it will impose a significant 

burden since it is a one-time notice. The Bureau seeks comment on whether the burden imposed 

on small entities by the requirements of the initial rate adjustment notice outweighs the consumer 

protection benefits it affords. 

 (ii) Regulation Z § 1026.20(c) Disclosure for Adjustable-Rate Mortgages 

 The Bureau is proposing to change the timing of the ARM payment change notice 

required under current § 1026.20(c) to be provided to consumers from 25 to 120 days before 

payment at a new level is due to 60 to 120 days before payment at a new level is due. The longer 

lead time is designed to give consumers time to refinance or take other ameliorative actions if 
241 

they are not financially equipped to pay their mortgages at an increased adjusted rate. The 

Bureau recognizes that the longer lead time may impose a burden on small servicers. 

According to outreach conducted by the Bureau, small servicers often are able to send out 

the ARM payment change notices required by § 1026.20(c) on the same day the index value is 

selected. In that case, for a loan with a 45-day look-back period, the notice is ready 45 days 

before the change date and, with the 28 to 31 days between the change date and the date payment 

at the new level is due, the interest rate adjustment notice goes out to the consumer 73 to 76 days 

before the new payment is due. Under these circumstances, small servicers could provide the 

payment change notice within the 60 day minimum period. The Bureau is also proposing an 

alternative 25-day minimum period for certain existing adjustable-rate mortgages in which the 

mortgage note requires a look-back period of less than 45 days. 

 (iii) Periodic Statements

 As discussed above, DFA section 1420 requires servicers to provide a new periodic 

statement to the consumer for each billing cycle. The proposed rule would generally require 

both the content listed in the statute, additional billing information, and information about how to 

dispute and resolve errors. The Bureau is proposing to use its discretionary authority to require 

the additional information. Thus, the disclosure under the original statutory language would 

impose a smaller economic impact on small entities that must provide the periodic statement 

disclosure. 

The Bureau believes the additional information provides important consumer benefits. 

Only some of the information in the disclosure will be required to be provided to consumers on a 

regular basis. However, distressed or delinquent borrowers will likely need more information. 

The proposed periodic statement disclosure was the subject of three rounds of consumer testing 
242 

and refinement to identify the form, content, headings, and format that best promotes consumer 

understanding. 

As discussed above, the Bureau is proposing a small servicer exemption. Servicers 

servicing 1,000 or fewer loans, all of which they must either own or have originated, would be 

eligible. As discussed above, the Bureau believes that almost all small insured depositories and 

credit unions would be covered by the exemption. The Bureau does not currently have the data 

necessary to estimate the number of small entity non-depositories that would be covered by the 

exemption. However, the Bureau is currently working to gather additional data that may be 

relevant to estimating the number of small non-depositories covered by the small servicer 

exemption.

 (iv) Prompt Crediting and Request for Payoff Amounts 

 As discussed above, the SERs generally reported that the proposed provisions regarding 

prompt crediting and payoff amounts would have no impact on them as they are already in 

compliance. In correspondence, one SER suggested that the seven day maximum for payoff 

amounts should be even shorter, to prevent other servicers from delaying closings. 

7. Discussion of Impact on Cost of Credit for Small Entities 

Section 603(d) of the RFA requires the Bureau to consult with small entities regarding 

the potential impact of the proposed rule on the cost of credit for small entities and related 

matters. 5 U.S.C. 603(d). To satisfy these statutory requirements, the Bureau provided 

notification to the Chief Counsel on April 9, 2012 that the Bureau would collect the advice and 

recommendations of the same SERs identified in consultation with the Chief Counsel through 

the SBREFA Panel process concerning any projected impact of the proposed rule on the cost of 

credit for small entities as well as any significant alternatives to the proposed rule which 
243 

accomplish the stated objectives of applicable statutes and which minimize any increase in the 

cost of credit for small entities.149 The Bureau sought to collect the advice and recommendations 

of the SERs during the SBREFA Panel outreach meeting regarding these issues because, as small 

financial service providers, the SERs could provide valuable input on any such impact related to 

the proposed rule.150 

At the time the Bureau circulated the SBREFA materials to the SERs in advance of the 

SBREFA Panel outreach meeting, it had no evidence that the proposals under consideration 

would result in an increase in the cost of business credit for small entities. Instead, the summary 

of the proposals stated that the proposals would apply only to mortgage loans obtained by 

consumers primarily for personal, family, or household purposes and the proposals would not 

apply to loans obtained primarily for business purposes.151 

 At the SBREFA Panel outreach meeting, the Bureau asked the SERs a series of questions 

regarding cost of business credit issues.152 The questions were focused on two areas. First, the 

SERs from commercial banks/savings institutions, credit unions, and mortgage companies were 

asked whether, and how often, they extend to their customers closed-end mortgage loans to be 

used primarily for personal, family, or household purposes but that are used secondarily to 

finance a small business, and whether the proposals then under consideration would result in an 

increase in their customers’ cost of credit. Second, the Bureau inquired as to whether, and how 

often, the SERs take out closed-end, home-secured loans to be used primarily for personal, 

 

149 See 5 U.S.C. 603(d)(2). The Bureau provided this notification as part of the notification and other information 

provided to the Chief Counsel with respect to the SBREFA Panel process pursuant to RFA section 609(b)(1). 150 See 5 U.S.C. 603(d)(2)(B). 151 See TILA section 104(1); RESPA section 7(a)(1). 152 See SBREFA Final Report, supra note 22, at 154-55 (appendix D, PowerPoint slides from the SBREFA Panel 

outreach meeting, “Topic 7: Impact on the Cost of Business Credit”). 
244 

family, or household purposes and use them secondarily to finance their small businesses, and 

whether the proposals under consideration would increase the SERs’ cost of credit. 

 The SERs had few comments on the impact on the cost of business credit. While they 

took this time to express concerns that these regulations would increase their costs, they said 

these regulations would have little to no impact on the cost of business credit. When asked, one 

SER mentioned that at times people may use a home-secured loan to finance a business, which 

was corroborated by a different SER based on his personal experience with starting a business. 

The Bureau is generally interested in the use of personal home-secured credit to finance a 

business and invites interested parties to provide data and other factual information on this issue. 

Based on the feedback obtained from SERs at the outreach meeting, the Bureau currently 

does not anticipate that the proposed rule will result in an increase in the cost of credit for small 

business entities. To further evaluate this question, the Bureau solicits comment on whether the 

proposed rule will have any impact on the cost of credit for small entities. 

IX. Paperwork Reduction Act 

The Bureau’s information collection requirements contained in this proposed rule, and 

identified as such, will be submitted to OMB for review under section 3507(d) of the Paperwork 

Reduction Act of 1995 (44 U.S.C. 3501 et seq.) (Paperwork Reduction Act” or PRA). Under the 

Paperwork Reduction Act, the Bureau may not conduct or sponsor, and a person is not required 

to respond to, an information collection unless the information collection displays a valid OMB 

control number. 

The title of this information collection is 2012 Truth in Lending Act (Regulation Z) 

Servicing. The frequency of response is on-occasion This proposed rule would amend 

Regulation Z. Regulation Z currently contains collections of information approved by OMB, 
245 

and the Bureau’s OMB control number for Regulation Z is 3170-0015 (Truth in Lending Act 

(Regulation Z) 12 CFR 1026). As described below, the proposed rule would amend the 

collections of information currently in Regulation Z. 

The information collection would be required to provide benefits for consumers and 

would be mandatory. See 15 U.S.C. 1601 et seq.; 12 U.S.C. 2601 et seq. Because the Bureau 

does not collect any information, no issue of confidentiality arises. The likely respondents would 

be federally-insured depository institutions (such as commercial banks, savings banks, and credit 

unions) and non-depository institutions that service consumer mortgage loans. 

Under the proposed rule, the Bureau generally would account for the paperwork burden 

associated with Regulation Z for the following respondents pursuant to its administrative 

enforcement authority: insured depository institutions with more than $10 billion in total assets, 

their depository institution affiliates (together, the Bureau depository respondents), and certain 

non-depository servicers (the Bureau non-depository respondents). The Bureau and the FTC 

generally both have enforcement authority over non-depository institutions under Regulation Z. 

Accordingly, the Bureau has allocated to itself half of its estimated burden to Bureau nondepository respondents. Other Federal agencies, including the FTC, are responsible for 

estimating and reporting to OMB the total paperwork burden for the institutions for which they 

have administrative enforcement authority. They may, but are not required to, use the Bureau’s 

burden estimation methodology. 

Using the Bureau’s burden estimation methodology, the total estimated burden under the 

proposed changes to Regulation Z for the roughly 12,813 institutions, including Bureau 
246 

respondents,153 that are estimated to service consumer mortgages subject to the proposed rule 

would be approximately 25,000 one-time burden hours and 74,000 ongoing burden hours per 

year. The aggregate estimates of total burdens presented in this part IX are based on estimates 

averaged across respondents. The Bureau expects that the amount of time required to implement 

each of the proposed changes for a given institution may vary based on the size, complexity, and 

practices of the respondent. 

A. Information Collection Requirements

The Bureau is proposing four changes to the information collection requirements in 

Regulation Z. First, as previously discussed, proposed § 1026.20(d) regarding adjustable-rate 

mortgages would require creditors, assignees, and servicers to send a new initial rate adjustment 

disclosure at least 210, but not more than 240, days before the date the first payment is due after 

the initial rate adjustment. The new disclosure includes, among other things, information 

regarding the calculation of the new interest rate and information to assist consumers in the event 

the consumer requires alternative financing. Second, proposed § 1026.20(c) regarding 

adjustable-rate mortgages would change the format, content, and timing of the existing rate 

adjustment disclosure. The proposed rule would change the minimum time for providing 

advance notice to consumers from 25 days to 60 days before payment at a new level is due. 

Servicers would be required to provide certain information that they may not currently disclose, 

but would no longer be required to notify consumers of a rate adjustment if the payment is 

unchanged. 

 

153 For purposes of this PRA analysis, the Bureau’s depository respondents under the proposed rule are 130 

depository institutions and depository institution affiliates that service closed-end consumer mortgages. The 

Bureau’s non-depository respondents are an estimated 1,388 non-depository servicers. Unless otherwise specified, 

all references to burden hours and costs for the Bureau respondents for the collection requirements under the 

proposed rule are based on a calculation of the burden from all of the Bureau’s depository respondents and half of 

the burden from the Bureau’s non-depository respondents. 
247 

Third, proposed § 1026.41 would require a new periodic statement disclosure. The 

required content would include billing information, such as the amount due, payment due date, 

and information on any late fees; information on recent transaction activity and how payments 

were applied; general loan information, such as the interest rate and when it may next 

adjustment, outstanding principal balance, etc.; and other information that may be helpful to 

troubled borrowers. Certain small servicers (those servicing less than 1,000 mortgages and own 

or originated all the loans they are servicing) would be exempt from this requirement. Fixed-rate 

mortgages would be exempt if the servicer provides the consumer with a coupon book that 

contained certain information, and makes other information available to the consumer. 

Fourth, proposed § 1026.36 would make changes to the existing requirements on 

servicers to promptly credit borrower payments that satisfy payment rules specified by a servicer. 

Proposed § 1026.36 would also make changes to the existing requirements on creditors and 

servicers to provide an accurate payoff balance upon request. An information collection is 

created by the proposed requirement to provide accurate payoff statements. 

B. Burden Analysis under the Four Proposed Information Collection Requirements154 

1. New Initial Rate Adjustment Notice for Adjustable-Rate Mortgages 

 All CFPB respondents would have a one-time burden under this requirement associated 

with reviewing the regulation. Certain CFPB respondents would have a one-time burden from 

creating software and IT capability to produce the new disclosure. The Bureau estimates this 

 

154 Based on discussions with industry, the Bureau assumes that all depository respondents except for one large 

entity and 95% of non-depository respondents (100% of small non-depository respondents) use third-party vendors 

for one-time software and IT capability and for ongoing production and distribution activities associated with 

disclosures. The Bureau believes at this time that under existing mortgage servicing contracts, vendors would 

absorb the one-time software and IT costs and ongoing production costs of disclosures for large- and medium- sized 

respondents but pass along these costs to small respondents. The Bureau will further consider the extent to which 

respondents use third-party vendors and the extent to which third-party vendors charge various costs to different 

types of respondents, and the Bureau seeks data and other factual information from interested parties on these issues. 
248 

one-time burden to be 140 hours for CFPB depository respondents and 1,488 hours and $115,000 

for CFPB non-depository respondents.155 

 Certain CFPB respondents would have ongoing burden associated with the IT used in 

producing the disclosure. All CFPB respondents would have ongoing costs associated with 

distributing (e.g., mailing) the disclosure. The Bureau estimates this ongoing burden to be 600 

hours and $63,000 for CFPB depository respondents and 70 hours and $3,400 for CFPB nondepository respondents. 

2. Changes in the Regulation Z § 1026.20(c) Disclosure for Adjustable-Rate Mortgages. 

 All CFPB respondents would have a one-time burden under this requirement associated 

with reviewing the regulation. Certain CFPB respondents would have one-time burden from 

creating software and IT capability to provide the additional content in the disclosure. The 

Bureau estimates this one-time burden to be 165 hours for CFPB depository respondents and 600 

hours and $58,000 for CFPB non-depository respondents. 

 Regarding ongoing burden, the Bureau is proposing to require the disclosure only when 

the interest rate adjustment results in a corresponding change in the required payment. The 

Bureau believes it would be usual and customary to provide consumers with a disclosure under 

these circumstances. Thus, the Bureau believes there is no burden from distribution costs for 

purposes of PRA from the proposed § 1026.20(c) disclosure. The Bureau recognizes that there is 

content in the proposed disclosure beyond what may be usual and customary to provide. Bureau 

respondents that do not use vendors and certain small respondents that use vendors will incur 

production costs associated with this extra content, and this is burden for purposes of PRA. The 

 

155 Dollar figures include estimated costs to vendors. 
249 

Bureau estimates the ongoing burden to be 1,400 hours for CFPB depository respondents and 

110 hours and $8,000 for CFPB non-depository respondents. 

3. New Periodic Statement. 

 All CFPB respondents that are not exempt would have a one-time burden under this 

requirement associated with reviewing the regulation. Certain CFPB respondents would have a 

one-time burden from creating software and IT capability to modify existing periodic disclosures 

or produce a new disclosure. The proposed disclosure incorporates all of the information in 

billing statements that many respondents already provide. However, the additional data fields 

and formatting requirements may not be usual and customary. The Bureau estimates this onetime burden to be 170 hours for CFPB depository respondents and 600 hours and $20,000 for 

CFPB non-depository respondents. 

 Regarding ongoing burden, consumers who currently receive a periodic statement or 

billing statement are receiving these disclosures in the normal course of business. The Bureau 

believes that most other consumers with mortgages receive a coupon book or other type of 

payment medium, such as a passbook. The statute provides that servicers do not have to provide 

the periodic statement disclosure to consumers who have both a fixed-rate mortgage and a 

coupon book. Thus, the only consumers who are not already receiving a billing statement or 

periodic disclosure to whom servicers will have to begin providing the periodic statement 

disclosure under the proposed rule are those with both an adjustable-rate mortgage and a coupon 

book. The burden of distributing the proposed periodic statement disclosure to these consumers 

is, for purposes of PRA, the ongoing burden from distribution costs from the proposed periodic 

statement disclosure. The Bureau recognizes that there is content in the proposed periodic 

statement disclosure beyond what may be usual and customary to provide in existing billing 
250 

statements. The Bureau estimates the ongoing burden to be 52,000 hours and $5,600,000 for 

CFPB depository respondents and 6,300 hours and $300,000 for CFPB non-depository 

respondents. 

4. Prompt crediting of payments and response to requests for payoff amounts. 

 All CFPB respondents would have a one-time burden under this requirement associated 

with reviewing the regulation. Certain CFPB respondents would have a one-time burden from 

creating software and IT costs associated with changes in the payoff statement disclosure. The 

Bureau estimates this one-time burden to be 110 hours for CFPB depository respondents and 500 

hours and $115,000 for CFPB non-depository respondents. 

 Regarding ongoing burden, the Bureau understands that the proposed payoff statement 

will replace a pre-existing disclosure that respondents are currently providing in the normal 

course of business. The Bureau does not believe that proposed changes to the content and timing 

of the existing disclosure will significantly change the ongoing production or distribution costs 

of the notice currently provided in the normal course of business. The Bureau estimates the 

ongoing burden to be 1,650 hours and $178,000 for CFPB depository respondents and 200 hours 

and $9,600 for CFPB non-depository respondents. 

C. Summary of Burden Hours for CFPB Respondents 

 Respondents Disclosures per 

Respondent 

Hours Burden 

per Disclosure 

Total Burden 

Hours 

Total Vendor 

Costs 

Ongoing 

ARM 20(c) Notice 824 700 0.002777778 1,000 $8,000 

ARM 20(d) Notice 824 300 0.002881756 1,000 $67,000 

Periodic Statements 564 35,800 0.002881756 58,000 $5,914,000 

Prompt Crediting & Payoff Statements 824 800 0.002881756 2,000 $188,000 

One-Time 

ARM 20(c) Notice 824 1 0.93 1,000 $58,000 

ARM 20(d) Notice 824 1 1.97 2,000 $115,000 

Periodic Statements 564 1 1.36 1,000 $20,000 

Prompt Crediting & Payoff Statements 824 1 0.77 1,000 $115,000 

D. Comments 
251 

Comments are specifically requested concerning: (i) whether the proposed collections of 

information are necessary for the proper performance of the functions of the Bureau, including 

whether the information will have practical utility; (ii) the accuracy of the estimated burden 

associated with the proposed collections of information; (iii) how to enhance the quality, utility, 

and clarity of the information to be collected; and (iv) how to minimize the burden of complying 

with the proposed collections of information, including the application of automated collection 

techniques or other forms of information technology. All comments will become a matter of 

public record. Comments on the collection of information requirements should be sent to the 

Office of Management and Budget (OMB), Attention: Desk Officer for the Consumer Financial 

Protection Bureau, Office of Information and Regulatory Affairs, Washington, D.C., 20503, or 

by the internet to http://oira_submission@omb.eop.gov, with copies to the Bureau at the 

Consumer Financial Protection Bureau (Attention: PRA Office), 1700 G Street NW, 

Washington, DC 20552, or by the internet to CFPB_Public_PRA@cfpb.gov. 

Text of the Proposed Revisions 

Certain conventions have been used to highlight the proposed changes to the text of the 

regulation and official interpretation. New language is shown inside ►bold-faced arrows◄, 

while language that would be deleted is set off with [bold-faced brackets].

List of Subjects in 12 CFR Part 1026 

Advertising, Consumer Protection, Credit, Credit Unions, Mortgages, National Banks, 

Reporting and Recordkeeping Requirements, Savings Associations, Truth in Lending. 

Authority and Issuance 

For the reasons set forth above, the Bureau of Consumer Financial Protection proposes to 

amend 12 CFR part 1026, as set forth below: 
252 

PART 1026 – TRUTH IN LENDING (REGULATION Z) 

1. The authority citation for part 1026 continues to read as follows: 

12 U.S.C. 5512, 5581; 15 U.S.C. 1601 et seq. 

Subpart C – Closed-End Credit 

2. Section 1026.17 is amended by revising paragraphs (a)(1) and (b) to read as follows: 

§ 1026.17 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. 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.). The 

disclosures required by §§ 1026.17(g), 1026.19(b), and 1026.24 may be provided to the 

consumer in electronic form without regard to the consumer consent or other provisions of the ESign Act in the circumstances set forth in those sections. ►Except for § 1026.20(d), which 

requires disclosures to be provided separate and distinct from all other correspondence, the◄

[The] disclosures shall be grouped together, shall be segregated from everything else, and shall 

not contain any information not directly related to the disclosures required under § 1026.18►, 

§ 1026.20(c),◄ or § 1026.47. The disclosures may include an acknowledgment 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 

creditor's identity under § 1026.18(a), the variable rate example under § 1026.18(f)(1)(iv), 

insurance or debt cancellation under § 1026.18(n), and certain security interest charges under 

§ 1026.18(o). The itemization of the amount financed under § 1026.18(c)(1) must be separate 
253 

from the other disclosures under § 1026.18, except for private education loan disclosures made in 

compliance with § 1026.47. 

(2) * * *

(b) Time of disclosures. The creditor shall make disclosures before consummation of the 

transaction. In certain residential mortgage transactions, special timing requirements are set 

forth in § 1026.19(a). In certain variable-rate transactions, special timing requirements for 

variable-rate disclosures are set forth in § 1026.19(b) and § 1026.20(c)►and (d)◄. For private 

education loan disclosures made in compliance with § 1026.47, special timing requirements are 

set forth in § 1026.46(d). 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. 

* * * * * 

3. Section 1026.20 is amended by revising the section heading and paragraphs (c) and 

(d) to read as follows: 

§ 1026.20 [Subsequent d]►D◄isclosure requirements► regarding post-consummation 

events◄. 

* * * * * 

(c) [Variable-rate] ►Rate◄ adjustments. ►The creditor, assignee, or servicer of an 

adjustable-rate mortgage shall provide disclosures to consumers, as described in § 1026.20(c), in 

connection with the adjustment of interest rates resulting in a corresponding adjustment to the 

payment. To the extent that other provisions of subpart C apply to the disclosures required by 

this section, those provisions apply to assignees and servicers as well as to creditors. The 

disclosures required under this section also shall be provided for an interest rate adjustment 

resulting from the conversion of an adjustable-rate mortgage to a fixed-rate transaction, if that 
254 

interest rate adjustment results in a corresponding payment change.◄ [Except as provided in 

paragraph (d) of this section, an adjustment to the interest rate with or without a corresponding 

adjustment to the payment in a variable-rate transaction subject to § 1026.19(b) is an event 

requiring new disclosures to the consumer. 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.]

►(1) Coverage of rate adjustment disclosures. (i) In General. For purposes of 

§ 1026.20(c), an adjustable-rate mortgage or “ARM” is a closed-end consumer credit transaction 

secured by the consumer’s principal dwelling in which the annual percentage rate may increase 

after consummation. 

 (ii) Exceptions. The requirements of § 1026.20(c) do not apply to: 

(A) Construction loans with terms of one year or less; or 
255 

(B) The first adjustment to an ARM if the first payment at the adjusted level is due within 

210 days after consummation and the actual, not estimated, new interest rate was disclosed at 

consummation pursuant to § 1026.20(d). 

(2) Timing and content of rate adjustment disclosures with a change in payment.

Disclosures required by § 1026.20(c) must be provided to consumers at least 60, but no more 

than 120, days before a payment at a new level is due. Disclosures must be provided to 

consumers at least 25, but no more than 120, days before a payment at a new level is due for 

ARMs originated prior to July 21, 2013 in which the mortgage note requires the adjusted interest 

rate and payment to be calculated based on the index figure available as of a date that is less than 

45 days prior to the adjustment date. Disclosures must be provided to consumers as soon as 

practicable, but not less than 25 days before a payment at a new level is due for the first 

adjustment to an ARM if it occurs within 60 days of consummation and the actual, not estimated, 

new interest rate was not disclosed at consummation. The disclosures must provide the 

following information: 

 (i) A statement providing: 

(A) An explanation that under the terms of the consumer’s adjustable-rate mortgage, the 

specific time period in which the current interest rate has been in effect is ending and that the 

interest rate and mortgage payment will change; 

(B) The effective date of the interest rate adjustment, and when additional future interest 

rate changes are scheduled to occur; and 

(C) Any other changes to loan terms, features, or options taking effect on the same date 

as the interest rate adjustment, such as the expiration of interest-only or payment-option features; 

(ii) A table containing the following information: 
256 

(A) The current and new interest rates; 

(B) The current and new payments and the date the first new payment is due; and 

(C) For interest-only or negatively-amortizing payments, the amount of the current and 

new payment allocated to principal, interest, and taxes and insurance in escrow, as applicable. 

The current payment allocation disclosed shall be based on the expected payment allocation for 

the last payment prior to the date of the disclosure. The new payment allocation disclosed shall 

be based on the expected payment allocation for the first payment for which the new interest rate 

will apply; 

(iii) An explanation of how the interest rate is determined, including: 

(A) The specific index or formula used in making adjustments and a source of 

information about the index or formula; and 

(B) Any adjustment to the index, including the amount of any margin and an explanation 

that the margin is the addition of a certain number of percentage points to the index; 

(iv) Any limits on the interest rate or payment increases at each adjustment and over the 

life of the loan, as applicable, including the extent to which such limits result in the creditor, 

assignee, or servicer foregoing any increase in the interest rate and the earliest date that such 

foregone interest may apply to additional future interest rate adjustments, subject to those limits; 

(v) An explanation of how the new payment is determined, including: 

(A) The index or formula used; 

(B) The amount of any adjustment to the index or formula, for example, by the addition 

of a margin or application of previously foregone interest increase; 

(C) The loan balance expected on the date of the interest rate adjustment; and 
257 

(D) The length of the remaining loan term expected on the date of the interest rate 

adjustment. Any change in the term or maturity of the loan caused by the adjustment also shall 

be disclosed; 

(vi) For interest-only or negatively-amortizing loans, a statement that the new payment 

will not be allocated to pay loan principal. If negative amortization occurs as a result of the 

adjustment, the statement shall set forth 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; and 

(vii) The circumstances under which any prepayment penalty, as defined in subpart E by 

§ 1026.41(d)(7)(iv), may be imposed when consumers fully repay their adjustable-rate 

mortgages, such as when selling or refinancing their principal residence, the time period during 

which the penalty may be imposed, and the maximum amount (in dollars) of the penalty possible 

during that time period. 

(3) Format of disclosures. (i) The disclosures required by § 1026.20(c) shall be provided 

in the form of the table and in the same order as, and with headings and format substantially 

similar to, Forms H-4(D)(1) and (2) in Appendix H to this part; and

(ii) The disclosures required by paragraph (c)(2)(ii) shall be in the form of a table located 

within the table described in paragraph (c)(3)(i) of this section. These disclosures shall appear in 

the same order as, and with headings and format substantially similar to, the table inside the 

larger table in Forms H-4(D)(1) and (2) in Appendix H to this part.◄

(d) [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.]► Initial rate adjustments. The creditor, assignee, or servicer of an 
258 

adjustable-rate mortgage shall provide disclosures to consumers, as described in § 1026.20(d), in 

connection with the initial interest rate adjustment. To the extent that other provisions of subpart 

C apply to the disclosures required by this section, those provisions apply to assignees and 

servicers as well as to creditors. The disclosures shall be provided in writing, separate and 

distinct from all other correspondence. The disclosures shall be provided at least 210, but no 

more than 240, days before the first payment at the adjusted level is due. If the first payment at 

the adjusted level is due within the first 210 days after consummation, the disclosures shall be 

provided at consummation. 

(1) Coverage of initial rate adjustment disclosures. (i) In general. For purposes of 

§ 1026.20(d), an adjustable-rate mortgage or “ARM” is a closed-end consumer credit transaction 

secured by the consumer’s principal dwelling in which the annual percentage rate may increase 

after consummation. 

 (ii) Exceptions. The requirements of § 1026.20(d) do not apply to construction loans 

with terms of one year or less. 

(2) Content of initial rate adjustment disclosures. If the new interest rate (or the new 

payment calculated from the new interest rate) is not known as of the date of the disclosure, an 

estimate shall be disclosed and labeled as such. This estimate shall be based on the index figure 

reported in the source of information described in paragraph (d)(2)(iv)(A) within fifteen business 

days prior to the date of the disclosure. The disclosures required by § 1026.20(d) shall provide 

the following:

(i) The date of the disclosure; 

(ii) A statement providing: 
259 

(A) An explanation that under the terms of the consumer’s adjustable-rate mortgage, the 

specific time period in which the current interest rate has been in effect is ending and that any 

change in the interest rate may result in a change in the mortgage payment; 

(B) The effective date of the interest rate adjustment and when additional future interest 

rate changes are scheduled to occur; and 

(C) Any other changes to loan terms, features, or options taking effect on the same date 

as the interest rate adjustment, such as the expiration of interest-only or payment-option features; 

(iii) A table containing the following information: 

(A) The current and new interest rates; 

(B) The current and new payments and the date the first new payment is due; and 

(C) For interest-only or negatively-amortizing payments, the amount of the current and 

new payment allocated to principal, interest, and taxes and insurance in escrow, as applicable. 

The current payment allocation disclosed shall be based on the expected payment allocation for 

the last payment prior to the date of the disclosure. The new payment allocation disclosed shall 

be based on the expected payment allocation for the first payment for which the new interest rate 

will apply; 

(iv) An explanation of how the interest rate is determined, including: 

(A) The specific index or formula used in making adjustments and a source of 

information about the index or formula; and 

(B) Any adjustment to the index, including the amount of any margin and an explanation 

that the margin is the addition of a certain number of percentage points to the index; 

(v) Any limits on the interest rate or payment increases at each adjustment and over the 

life of the loan, as applicable, including the extent to which such limits result in the creditor, 
260 

assignee, or servicer foregoing any increase in the interest rate and the earliest date that such 

foregone interest may apply to additional future interest rate adjustments, subject to those limits; 

(vi) An explanation of how the new payment is determined, including: 

(A) The index or formula used; 

(B) The amount of any adjustment to the index or formula, for example, by the addition 

of a margin; 

(C) The loan balance expected on the date of the interest rate adjustment; 

(D) The length of the remaining loan term expected on the date of the interest rate 

adjustment. Any change in the term or maturity of the loan caused by the adjustment also shall 

be disclosed; and 

(E) If the new interest rate or new payment provided is an estimate, a statement that 

another disclosure containing the actual new interest rate and new payment will be provided to 

the consumer 2 to 4 months prior to the date the first new payment is due for interest rate 

adjustments that result in a corresponding payment change, pursuant to § 1026.20(c); 

(vii) For interest-only or negatively-amortizing loans, a statement that the new payment 

will not be allocated to pay loan principal. If negative amortization occurs as a result of the 

adjustment, the statement shall set forth 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; 

(viii) A list of the following alternatives to paying at the new rate that consumers may 

pursue and a brief explanation of each alternative: 

(A) Refinancing the loan with the current or other lender; 

(B) Selling the property and using the proceeds to pay off the loan; 
261 

(C) Modifying the terms of the loan with the lender; or 

(D) Arranging payment forbearance with the lender; 

(ix) The circumstances under which any prepayment penalty, as defined in subpart E by 

§ 1026.41(d)(7)(iv), may be imposed when consumers fully repay their adjustable-rate 

mortgages, such as when selling or refinancing their principal residence, the time period during 

which the penalty may be imposed, and the maximum amount (in dollars) of the penalty possible 

during that time period; 

(x) The telephone number of the creditor, assignee, or servicer for consumers to call if 

they anticipate not being able to make the new payment; and 

(xi) The mailing and internet addresses and telephone number to access the State housing 

finance authority (as defined in Section 1301 of the Financial Institutions Reform, Recovery, and 

Enforcement Act of 1989) for the State in which the consumer resides, and the website and 

telephone number to access either the Bureau list or the HUD list of homeownership counselors 

or counseling organizations. 

(3) Format of initial rate adjustment disclosures. (i) Except for the disclosures provided 

by paragraph (d)(2)(i), the disclosures required by § 1026.20(d) shall be provided in the form of 

a table and in the same order as, and with headings and format substantially similar to, Forms H-

 4(D)(3) and (4) in Appendix H to this part; 

(ii) The disclosures required by paragraph (d)(2)(i) shall appear outside of and above the 

table required in paragraph (d)(3)(i); and 

(iii) The disclosures required by paragraph (d)(2)(iii) shall be in the form of a table 

located within the table described in paragraph (d)(3)(i) of this section. These disclosures shall 
262 

appear in the same order as, and with headings and format substantially similar to, the table 

inside the larger table in Forms H-4(D)(3) and (4) in Appendix H to this part. ◄ 

Subpart E – Special Rules for Certain Home Mortgage Transactions 

4. Section 1026.36 is amended by revising paragraph (c) to read as follows: 

§ 1026.36 Prohibited acts or practices in connection with a credit secured by a dwelling. 

* * * * * 

(c) Servicing practices. ► For purposes of this paragraph (c), the terms “servicer” and 

“servicing” have the same meanings as provided in 12 CFR 1024.2(b). 

 (1) Payment Processing. In connection with a consumer credit transaction secured by a 

consumer’s principal dwelling: 

(i) Full contractual payments. No servicer shall fail to credit a full contractual payment 

to the consumer’s loan account as of the date of receipt, except when a delay in crediting does 

not result in any charge to the consumer or in the reporting of negative information to a 

consumer reporting agency, or except as provided in paragraph (c)(1)(iii) of this section. A full 

contractual payment is an amount sufficient to cover principal, interest, and escrow (if 

applicable) for a given billing cycle. A payment qualifies as a full contractual payment even if it 

does not include amounts required to cover late fees or other fees that have been assessed. 

 (ii) Partial payments. Any servicer that retains a partial payment, meaning any payment 

less than a full contractual payment, in a suspense or unapplied funds account shall: 

(A) Disclose to the consumer the total amount of funds held in such suspense or 

unapplied funds account on the periodic statement required by § 1026.41, if a periodic statement 

is required. 
263 

(B) Promptly apply funds held in the suspense or unapplied funds account to the oldest 

outstanding payment when sufficient funds accumulate in such account to cover a full 

contractual payment. 

(iii) Non-conforming payments. If a servicer specifies in writing requirements for the 

consumer to follow in making payments, but accepts a payment that does not conform to the 

requirements, the servicer shall credit the payment as of 5 days after receipt. 

 (2) No pyramiding of late fees. In connection with a consumer credit transaction secured 

by a consumer’s principal dwelling, a servicer shall not impose any late fee or delinquency 

charge for a payment if: 

 (i) Such a fee or charge is attributable solely to failure of the consumer to pay a late fee or 

delinquency charge on an earlier payment; and 

 (ii) The payment is otherwise a full contractual payment received on the due date, or 

within any applicable grace period. 

 (3) Payoff Statements. In connection with a consumer credit transaction secured by a 

consumer’s dwelling, a creditor, assignee or servicer, as applicable, must provide an accurate 

statement of the total outstanding balance that would be required to pay the consumer’s 

obligation in full as of a specified date. The statement shall be provided within a reasonable 

time, but in no case more than 7 business days, after receiving a written request from the 

consumer or any person acting on behalf of the consumer.◄

[(1) In connection with a consumer credit transaction secured by a consumer’s principal 

dwelling, no servicer shall:

(i) Fail to credit a payment to the consumer’s loan account as of the date of receipt, 

except when a delay in crediting does not result in any charge to the consumer or in the reporting 
264 

of negative information to a consumer reporting agency, or except as provided in paragraph 

(c)(2) of this section; 

(ii) Impose on the consumer any late fee or delinquency charge in connection with a 

payment, when the only delinquency is attributable to late fees or delinquency charges assessed 

on an earlier payment, and the payment is otherwise a full payment for the applicable period and 

is paid on its due date or within any applicable grace period; or 

(iii) Fail to provide, within a reasonable time after receiving a request from the consumer 

or any person acting on behalf of the consumer, an accurate statement of the total outstanding 

balance that would be required to satisfy the consumer’s obligation in full as of a specified date. 

(2) If a servicer specifies in writing requirements for the consumer to follow in making 

payments, but accepts a payment that does not conform to the requirements, the servicer shall 

credit the payment as of 5 days after receipt. 

(3) For purposes of this paragraph (c), the terms “servicer” and “servicing” have the same 

meanings as provided in 12 CFR 1024.2(b), as amended.]

* * * * * 

 5. Section 1026.41 is amended by adding a section heading and new paragraphs (a) 

through (e) to read as follows: 

►§ 1026.41 Periodic statements for residential mortgage loans 

(a) In general. A servicer of a closed-end consumer credit transaction secured by a 

dwelling, must transmit to the consumer for each billing cycle a periodic statement meeting the 

requirements of paragraphs (b), (c), and (d) of this section, unless an exemption in paragraph (e) 

of this section applies. If a loan has a billing cycle shorter than a period of 31 days (for example, 
265 

a bi-weekly billing cycle), a periodic statement covering an entire month may be used. For the 

purposes of this section, servicer is defined to mean creditor, assignee, or servicer, as applicable. 

(b) Timing of the periodic statement. The periodic statement must be delivered or placed 

in the mail within a reasonably prompt time after the payment due date or the end of any grace 

period provided for the previous billing cycle. The first periodic statement must be sent no later 

than 10 days before the first payment is due. 

(c) Form of the periodic statement. The creditor, assignee, or servicer must make the 

disclosures required by this section clearly and conspicuously in writing, or electronically if the 

consumer agrees, and in a form that the consumer may keep. Sample forms for periodic 

statements are provided in Appendix H-28. Proper use of these forms will be deemed in 

compliance with this section. 

(d) Content and layout of the periodic statement. The periodic statement shall contain the 

information in this paragraph (d), in the manner described below. 

(1) Amount due. The following disclosures must be grouped together in close proximity 

to each other, and be located at the top of the first page of the statement:

(i) The payment due date; 

(ii) The amount of any late payment fee, and the date on which that fee will be imposed if 

payment has not been received; and 

(iii) The amount due. The amount due must be more prominent than other disclosures on 

the page. If a loan has multiple payment options, the amount due under each of the payment 

options must be listed. 

(2) Explanation of amount due. The following items must be grouped together in close 

proximity to each other and located on the first page of the statement:
266 

(i) The monthly payment amount, including a breakdown showing how much, if any, will 

be applied to principal, interest, and escrow. If a loan has multiple payment options, a 

breakdown of each of the payment options must be listed along with a statement whether the 

principal balance will increase, decrease or stay the same for each option listed; 

(ii) The total sum of any fees or charges imposed since the last statement; and 

(iii) Any payment amount past due. 

(3) Past Payment Breakdown. The following items must be grouped together in close 

proximity to each other and located on the first page of the statement:

(i) The total of all payments received since the last statement, including a breakdown 

showing how much, if any, of those payments was applied to principal, interest, escrow, fees and 

charges, and any partial payment or suspense account; and 

(ii) The total of all payments received since the beginning of the current calendar year, 

including a breakdown of how much, if any, of those payments was applied to principal, interest, 

escrow, fees and charges, and the amount currently held in any partial payment or suspense 

account. 

(4) Transaction activity. A list of all the transaction activity that occurred since the last 

statement must be included on the periodic statement. For purposes of this paragraph (d)(4), 

transaction activity means any activity that credits or debits the outstanding account balance. 

The transaction activity must include the date of the transaction, a brief description of the 

transaction, and the amount of the transaction for each activity on the list.

(5) Messages. If a statement reflects a partial payment that was placed in a suspense or 

unapplied funds account, the periodic statement must state what must be done for the funds to be 

applied. Such statement must be on the front page of the statement. 
267 

(6) Contact information. The periodic statement must include a toll-free telephone 

number and, if applicable, an electronic mailing address that may be used by the consumer to 

obtain information about the mortgage, on the front page of the statement.

(7) Account information. The following items must be provided on the statement: 

(i) The amount of the outstanding principal balance; 

(ii) The current interest rate in effect for the loan; 

(iii) The date on which the interest rate may next change; and 

(iv) The amount of any prepayment penalty that may be charged. For the purposes of this 

paragraph (d)(7)(iv), prepayment penalty means a charge imposed for paying all or part of a 

transaction’s principal before the date on which the principal is due. 

(v) Housing counselor information. The periodic statement must include the website 

address, if applicable, and telephone number to access: 

(A) any State housing finance authority (as defined in Section 1301 of the Financial 

Institutions Reform, Recovery, and Enforcement Act of 1989) for the State in which the property 

is located; and 

(B) Either the Bureau list or the HUD list of homeownership counselors or counseling 

organizations. 

 (8) Delinquency information. If the consumer is more than 45 days delinquent, the 

following items must be grouped together in close proximity to each other and located on the 

first page of the statement:

(i) The date on which the consumer became delinquent;

(ii) A statement alerting the consumer to possible risks, such as foreclosure, and expenses 

that may be incurred if the delinquency is not cured;
268 

(iii) An account history showing the consumer, for the lesser of the past 6 months or the 

period since the last time the account was current, the amount due for each billing cycle, or if a 

payment was fully paid, the date on which it was considered fully paid;

(iv) Notice of any loan modification programs (trial or permanent) to which the consumer 

has been accepted, if applicable; 

(v) Notice that the loan has been referred to foreclosure, if applicable;

(vi) The total payment amount needed to bring the loan current; and

(vii) A statement directing the consumer to the housing counselor information required 

by (d)(7)(v).

(e) Exemptions. 

(1) Reverse Mortgages. Reverse mortgage transactions, as defined by § 1026.33(a), are 

exempt from the requirements of this section. 

(2) Timeshare. Timeshare plans, as defined by 11 U.S.C. 101(53(D)), are exempt from 

the requirements of this section. 

(3) Coupon Book Exemption. The requirements of paragraph (a) do not apply to fixedrate loans if the creditor, assignee, or servicer: 

(i) Provides the consumer with a coupon book that includes on each coupon the 

information listed in paragraph (d)(1) above;

(ii) Provides the consumer with a coupon book that includes anywhere in the coupon 

book: 

(A) The account information listed in paragraph (d)(7) above; 

(B) The contact information for the servicer, listed in paragraph (d)(6) above; and 
269 

(C) Information on how the consumer can obtain the information listed in paragraph 

(e)(3)(iii) below. 

(iii) Makes the following information available to the consumer by telephone, writing or 

electronically, if the consumer consents: 

(A) The information in Explanation of Amount Due, listed in paragraph (d)(2) above; 

(B) The past payment breakdown information, listed in paragraph (d)(3) above; and 

(C) The transaction activity information listed in paragraph (d)(4) above; 

(iv) Provides the consumer the information listed in (d)(8) above in writing, for any 

billing cycle during which the borrower is more than 45 days delinquent. 

(4) Small Servicer Exemption. A creditor, assignee or servicer is exempt from the 

requirements of this section for loans serviced by a small servicer. To qualify as a small 

servicer, a servicer must meet all of the following requirements: 

(i) Service 1,000 or fewer mortgage loans. In determining whether a small servicer 

services 1,000 mortgage loans or fewer, a servicer is evaluated based on its size as of January 1 

for the remainder of the calendar year. A servicer that, together with its affiliates, crosses the 

threshold will have six months or until the beginning of the next calendar year, whichever is 

later, to begin compliance other than as a small servicer. 

(ii) Only service mortgage loans for which the servicer (or an affiliate) is the owner or 

assignee or the servicer (or an affiliate) is the entity to whom the mortgage loan obligation was 

initially payable.◄

6. Appendix H to Part 1026 is amended by removing the entry for H-4(D) Variable-Rate 

Model Clauses (§ 1026.20(c)), adding entries for H-4(D)(1), H-4(D)(2), H-4(D)(3), and H-
270 

4(D)(4), adding entries for H-28(A), H-28(B), H-28(C), and H-28(D), and removing and adding 

entries in the table of contents at the beginning of the appendix to read as follows: 

APPENDIX H TO PART 1026 – CLOSED-END MODEL FORMS AND CLAUSES

* * * * * 

[H-4(D) Variable-Rate Model Clauses (§ 1026.20(c))]

►H-4(D)(1) Adjustable-Rate Mortgage Model Form (§ 1026.20(c)) 

H-4(D)(2) Adjustable-Rate Mortgage Sample Form (§ 1026.20(c)) 

H-4(D)(3) Adjustable-Rate Mortgage Model Form (§ 1026.20(d)) 

H-4(D)(4) Adjustable-Rate Mortgage Sample Form (§ 1026.20(d))◄

* * * * * 

►H-28(A) Sample Form of Periodic Statement 

H-28(B) Sample Form of Periodic Statement with Delinquency Box 

H-28(C) Sample Form of Periodic Statement for a Payment-Options Loan 

H-28(D) Sample Clause for Housing Counselor Contact Information◄

* * * * * 

[ 

]►
271 

H-4(D)(1) Model Form for § 1026.20(c) 
272 

H-4(D)(2) Sample Form for § 1026.20(c) 
273 

H-4(D)(3) Model Form for § 1026.20(d) 
274 
275 

H-4(D)(4) Sample Form for § 1026.20(d) 
276 

◄

* * * * * 
277 

►H-28(A) Sample Form of Periodic Statement
278 

H-28(B) Sample Form of Periodic Statement with Delinquency Box 
279 

H-28(C) Sample Form of Periodic Statement for a Payment-Options Loan. 
280 

H-28(D) Sample Clause for Housing Counselor Contact Information 

Housing Counselor Information: If you would like counseling or assistance, you can 

contact the following: 

 U.S. Department of Housing and Urban Development (HUD): For a list of counseling 

agencies or programs in your area, go to http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm

or call 800-569-4287. 

 Tennessee Housing Development Agency 

404 James Robertson Pkwy, Ste 1200 

Nashville, TN 37243-0900 

615-815-2200 or 1-800-228-THDA 

www.thda.org 

◄

7. In Supplement I to Part 1026: 

A. Under Section 1026.17— General Disclosure Requirements, revise paragraphs 

17(a)(1)-2.ii and 17(c)(1)-1. 

B. Under Section 1026.18— Content of Disclosures, revise paragraph 18(f)-1. 

C. Under Section 1026.19—Certain Mortgage and Variable-Rate Transactions, revise 

paragraphs 19(b)-4, 19(b)-5.i.C and 19(b)(2)(xi). 

D. Under Section 1026.20— Subsequent Disclosure Requirements: 

i. Revise the section heading. 

ii. Amend 20(c) Variable-Rate Adjustments by revising paragraphs 1. and 2. and 

removing paragraph 3. 
281 

iii. Remove subheading Paragraph 20(c)(1) and remove paragraph 1. under this 

subheading. 

iv. New subheading Paragraph 20(c)(1)(i) is added and paragraph 1. under this 

subheading is added. 

v. New subheading Paragraph 20(c)(1)(ii) is added and paragraphs 1., 2., and 3. 

under this subheading are added. 

vi. Amend Paragraph 20(c)(2) by revising paragraph 1. 

vii. New subheading Paragraph 20(c)(2)(ii)(A) is added and paragraph 1. under this 

subheading is added. 

viii. New subheading Paragraph 20(c)(2)(iv) is added and paragraph 1. under this 

subheading is added. 

ix. New subheading Paragraph 20(c)(2)(v)(B) is added and paragraph 1. under this 

subheading is added. 

x. New subheading Paragraph 20(c)(2)(vi) is added and paragraphs 1. and 2. under 

this subheading are added. 

xi. Remove subheading Paragraph 20(c)(3) and remove paragraph 1. under this 

subheading. 

xii. Remove subheading Paragraph 20(c)(4) and remove paragraph 1. under this 

subheading. 

xiii. Remove subheading Paragraph 20(c)(5) and remove paragraph 1. under this 

subheading. 

xiv. New subheading Paragraph 20(d) is added and paragraphs 1., 2., and 3. under this 

subheading are added. 
282 

xv. New subheading Paragraph 20(d)(1)(i) is added and paragraph 1. under this 

subheading is added. 

xvi. New subheading Paragraph 20(d)(1)(ii) is added and paragraphs 1. and 2. under 

this subheading are added. 

xvii. New subheading Paragraph 20(d)(2)(i) is added and paragraph 1. under this 

subheading is added. 

xviii. New subheading Paragraph 20(d)(2)(iii)(A) is added and paragraph 1. under this 

subheading is added. 

xix. New subheading Paragraph 20(d)(2)(v) is added and paragraph 1. under this 

subheading is added. 

xx. New subheading Paragraph 20(d)(2)(vii) is added and paragraphs 1. and 2. under 

this subheading are added. 

xxi. New subheading Paragraph 20(d)(2)(viii) is added and paragraph 1. under this 

subheading is added. 

E. Under Section 1026.36(c)— Servicing Practices: 

i. Under subheading Paragraph 36(c)(1)(iii), remove paragraph 1. 

ii. New subheading Paragraph 36(c)(3) is added and paragraph 1. under this 

subheading is added. 

iii. Redesignate existing paragraphs 2., 3., and 4. under subheading Paragraph 

36(c)(1)(iii) as new paragraphs 2., 3., and 4., respectively, under subheading 

Paragraph 36(c)(3). 
283 

iv. Redesignate existing paragraphs 1., 2., and 3. under subheading Paragraph 

36(c)(2) as new paragraphs 1., 2., and 3., respectively, under subheading 

Paragraph 36(c)(1)(iii). 

v. Redesignate existing paragraph 1 under subheading Paragraph 36(c)(1)(ii) as 

paragraph 1 under subheading Paragraph 36(c)(2). 

vi. Under subheading Paragraph 36(c)(1)(ii), add new paragraph 1. 

vii. Under subheading Paragraph 36(c)(3), revise the first sentence of new paragraph 

1 and the first sentence of new paragraph 2. 

F. Add new Section 1026.41— Periodic Statements for Residential Mortgage Loans: 

i. New section heading Section 41 – Periodic Statements for Residential Mortgage 

Loans is added. 

ii. New subheading 41(a) In General is added and paragraphs 1., 2., 3., and 4. under 

this subheading are added. 

iii. New subheading 41(b) Timing of the Periodic Statement is added and paragraph 1. 

under this subheading is added. 

iv. New subheading 41(c) Form of the Periodic Statement is added and paragraphs 1., 

2., and 3. under this subheading are added. 

v. New subheading 41(d) Content and Format of the Periodic Statement is added and 

paragraphs 1., 2., and 3. under this subheading are added. 

vi. New subheading 41(d)(3) Past Payment Breakdown is added and paragraph 1. 

under this subheading is added. 

vii. New subheading 41(d)(4) Transaction Activity is added and paragraphs 1., 2., and 

3. under this subheading are added. 
284 

viii. New subheading 41(d)(6) Contact Information is added and paragraphs 1. and 2. 

under this subheading are added. 

ix. New subheading 41(d)(7)(iv) Prepayment Penalty is added and paragraphs 1. and 

2. under this subheading are added. 

x. New subheading 41(e) Exemptions is added and paragraph 1. under this 

subheading is added. 

xi. New subheading 41(e)(3) Coupon Book Exemption is added and paragraphs 1., 2., 

3., and 4. under this subheading are added. 

xii. New subheading 41(e)(4) Small Servicers is added and paragraphs 1., 2., 3., and 4. 

under this subheading are added. 

G. Under Appendices G and H— Open-End and Closed-End Model Forms and Clauses, 

revise paragraph 1. 

H. Under Appendix H— Closed-End Model Forms and Clauses, revise paragraph 7(i). 

The revisions and additions read as follows: 

Supplement I to Part 1026 – Official Interpretations 

* * * * * 

Subpart C – Closed-End Credit 

* * * * * 

Section 1026.17 – General Disclosures Requirements 

 17(a) Form of Disclosures 

 Paragraph 17(a)(1) 

* * * * * 

 2. * * * 
285 

(ii) The general segregation requirement described in this subparagraph does not apply 

to the disclosures required under [§]§ 1026.19(b) [and 1026.20(c)] although the disclosures must 

be clear and conspicuous. 

* * * * * 

17(c) Basis of Disclosures and Use of Estimates 

Paragraph 17(c)(1)

1. Legal obligation. 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 

§ 1026.20(c) ►and (d)◄, 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. (Certain transactions are specifically addressed in this 

commentary. See, for example, the discussion of buydown transactions elsewhere in the 

commentary to § 1026.17(c).) 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. 

* * * * * 

Section 1026.18 – Content of Disclosures 

* * * * * 

18(f) – Variable Rate 

1. Coverage. The requirements of § 1026.18(f) apply to all transactions in which the 

terms of the legal obligation allow the creditor to increase the rate originally disclosed to the 

consumer. It includes 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 
286 

apply to increases resulting from delinquency (including late payment), default, assumption, 

acceleration or transfer of the collateral. Section 1026.18(f)(1) applies to variable-rate 

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 1026.18(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 § 1026.18(f)(2) are subject 

to the special early disclosure requirements of § 1026.19(b). (However, “shared-equity” or 

“shared-appreciation” mortgages are subject to the disclosure requirements of § 1026.18(f)(1) 

and not to the requirements of §§ 1026.18(f)(2) and 1026.19(b) regardless of the general 

coverage of those sections.) Creditors are permitted under § 1026.18(f)(1) to substitute in any 

variable-rate transaction the disclosures required under § 1026.19(b) for those disclosures 

ordinarily required under § 1026.18(f)(1). Creditors who provide variable-rate disclosures under 

§ 1026.19(b) must comply with all of the requirements of that section, including the timing of 

disclosures, and must also provide the disclosures required under § 1026.18(f)(2). [Creditors 

substituting § 1026.19(b) disclosures for § 1026.18(f)(1) disclosures may, but need not, also 

provide disclosures pursuant to § 1026.20(c)]. (Substitution of disclosures under § 1026.18(f)(1) 

in transactions subject to § 1026.19(b) is not permitted.) 

* * * * * 

Section 1026.19 – Certain Mortgage and Variable-Rate Transactions 

19(b) Certain Variable-Rate Transactions 

* * * * * 

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 
287 

of other Federal agencies are exempt from the requirements of § 1026.19(b), by virtue of 

§ 1026.19(d)[, and are exempt from the requirements of § 1026.20(c), by virtue of § 1026.20(d)]. 

The exception is also available to creditors that are required by State law to comply with the 

Federal variable-rate regulations noted above. 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. * * * i. * * * 

A. * * * 

B. * * * 

C. “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 § 1026.19(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: § 1026.19(b)(2)(i), (iii), (iv), (v), (vi), (vii), (viii), and (ix). (See 

comments 20(c)[-2]►(1)(ii)-3.ii, 20(d)(1)(ii)-2.ii,◄and 30-1 regarding the inapplicability of 

variable-rate adjustment notices and interest rate limitations to price-level-adjusted or similar 

mortgages.) 

* * * * * 

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 § 1026.20(c) ►and (d)◄ regarding notices of adjustments.) 
288 

For example, the disclosure ►provided pursuant to § 1026.20(d)◄ might state, “You will be 

notified ►at least 210, but not more than 240, days before the first payment at the adjusted level 

is due after the initial adjustment of the loan. This notice will contain information about the 

adjustment, including the interest rate, payment amount, and loan balance.” The disclosure 

provided pursuant to § 1026.20(c) might state, “You will be notified◄ at least [25]►60◄, but 

no more than 120, days before the due date of a payment at a new level. This notice will contain 

information about the ►adjustment, including the◄[index and] interest [rates] ►rate◄, 

payment amount, and loan balance.” [In transactions where there may be interest rate 

adjustments without corresponding 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 information about the index 

and interest rates, payment amount, and loan balance.”] 

* * * * *

Section 1026.20 [Subsequent] Disclosure Requirements ►Regarding Post-Consummation 

Events◄

20(c) [Variable-]►R◄ate adjustments 

1. ►Creditors, assignees, and servicers. Creditors, assignees, and servicers are subject 

to the requirements of § 1026.20(c), unless they no longer own the applicable adjustable-rate 

mortgage or the mortgage servicing rights. Creditors, assignees, and servicers are also subject to 

the requirements of any provision of subpart C that applies to § 1026.20(c). For example, the 

form requirements of § 1026.17(a) apply to § 1026.20(c) disclosures and thus, assignees and 

servicers, as well as creditors, are subject to those requirements. 

2. Conversions. In addition to the disclosures required by this section for the interest rate 

adjustment of an adjustable-rate mortgage, § 1026.20(c) disclosures are also required for an 
289 

ARM converting to a fixed-rate transaction when the adjustment to the interest rate results in a 

corresponding payment change. When an open-end account converts to a closed-end adjustablerate mortgage, § 1026.20(c) disclosures are not required until the implementation of an interest 

rate adjustment post-conversion that results in a corresponding payment change. For example, 

for an open-end account that converts to a closed-end 3/1 hybrid ARM, the first § 1026.20(c) 

disclosure would not be required until three years after conversion, and only if that first 

adjustment resulted in payment change. ◄[Timing of adjustment notices. 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 a variable-rate transaction subject to § 1026.19(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 corresponding 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 required to 

be given in connection with the adjustment to the rate and payment that follows conversion of a 

transaction subject to § 1026.19(b) to a fixed-rate transaction. (In cases where an open-end 

account is converted to a closed-end transaction subject to § 1026.19(b), the requirements of this 

section do not apply until adjustments are made following conversion.)

2. Exceptions. Section 1026.20(c) does not apply to “shared-equity,” “sharedappreciation,” or “price level adjusted” or similar mortgages. 

3. Basis of disclosures. The disclosures required under this section shall reflect the terms 

of the parties' legal obligation, as required under § 1026.17(c)(1).

Paragraph 20(c)(1). 
290 

1. Current and prior interest rates. The requirements under this paragraph are satisfied 

by disclosing the interest rate used to compute the new adjusted payment amount (current rate) 

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). (If there 

has been no prior adjustment notice, the prior rates are the interest rate applicable to the 

transaction at consummation, 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)(1)(i) 

1. In general. An adjustable-rate mortgage, as defined under this section, is a variablerate transaction as that term is used in subpart C, except as distinguished by commentary to 

§ 1026.20(c)(1)(ii)-3. The requirements of this section are not limited to transactions financing 

the initial acquisition of the consumer’s principal dwelling. 

Paragraph 20(c)(1)(ii) 

1. Construction loans. In determining the term of a construction loan that may be 

permanently financed by the same creditor or assignee, the creditor or assignee may treat the 

construction and the permanent phases as separate transactions with distinct terms to maturity or 

as a single combined transaction. 
291 

2. First new payment due within 210 days after consummation. Section § 1026.20(c) 

disclosures are not required for ARMs if the first payment at the adjusted level is due within 210 

days after consummation, when the actual new interest rate (not an estimate) is disclosed at 

consummation pursuant to § 1026.20(d). This exception is intended to avoid duplicative 

disclosures, since § 1026.20(d) requires disclosures at consummation if the first payment at the 

adjusted level is due within 210 days after consummation. For example, the creditor, assignee, 

or servicer would not be required to provide the disclosures required by § 1026.20(c) for the first 

time the interest rate adjusts for an ARM if the first payment at the adjusted level was due 120 

days after consummation and the actual adjusted interest rate was disclosed at consummation 

pursuant to § 1026.20(d). 

3. Non-adjustable-rate mortgages. For purposes of this section, the following 

transactions, if structured as fixed-rate and not adjustable-rate mortgages, are not subject to 

§ 1026.20(c): 

i. Shared-equity or shared-appreciation mortgages; 

ii. Price-level adjusted 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; 

iii. Graduated-payment mortgages or step-rate transactions; 

iv. Renewable balloon-payment instruments; or 

v. Preferred-rate loans.◄

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 § 1026.20(c)(1). 
292 

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.]

►Timing. The requirement that the disclosures must be provided between 60 to 120 

days “before a payment at the new level is due” requires the creditor, assignee, or servicer to 

provide the notice to consumers 60 to 120 days prior to the due date, excluding any grace period, 

of the first payment calculated using the adjusted interest rate. For example, assume an ARM 

has a 45-day “look-back” period. In such an ARM, the most recent index figure available as of 

the date 45 days before a new interest rate goes into effect is used to determine the new interest 

rate. Because interest generally is paid in arrears, the first payment at the new level would not be 

due until the end of the billing cycle after the new interest rate goes into effect, typically a period 

of 28 to 31 days. Assume also that the creditor, assignee, or servicer has a 3-day verification 

period in which to verify the interest rate and perform other quality control measures before 

providing the notice to consumers. In this case, depending on the delivery method, the creditor, 

assignee, or servicer can provide the notice to consumers as early as 70 to 73 days before 

payment at the new level is due. 

Because creditors, assignees, or servicers cannot comply with the disclosure timing 

requirements for ARMs adjusting for the first time within 60 days of consummation when the 

new interest rate is not known at consummation, the disclosures required under § 1026.20(c) 

for such loans must be provided as soon as practicable, but not less than 25 days before payment 

at a new level is due. 

Paragraph 20(c)(2)(ii)(A) 
293 

1. The current and new interest rates. The current interest rate is the interest rate that 

applies on the date the disclosure is provided to the consumer. The new interest rate is the actual 

interest rate that will apply on the date of the adjustment. The new interest rate is used to 

determine the new payment. The “new interest rate” has the same meaning as the “adjusted 

interest rate.” 

Paragraph 20(c)(2)(iv) 

1. Rate limits and unapplied index increases. The disclosures regarding foregone 

interest increases apply only to transactions permitting interest rate carryover. The amount of 

increase foregone at any adjustment is the amount that, subject to rate caps, can be added to 

future interest rate adjustments to increase, or offset decreases in, the rate determined by using 

the index or formula.

Paragraph 20(c)(2)(v)(B) 

1. Application of a previously foregone interest increase. The disclosures regarding 

foregone interest increases apply only to transactions permitting interest rate carryover. 

Foregone interest is any percentage added or carried over to the new interest rate because a rate 

cap prevented the increase at an earlier adjustment. 

Paragraph 20(c)(2)(vi) 

1. Amortization statement. For interest-only loans, § 1026.20(c)(2)(vi) requires a 

statement that the new payment covers all of the interest but none of the principal, and therefore 

will not reduce the loan balance. For negatively-amortizing loans, § 1026.20(c)(2)(vi) requires a 

statement that the new payment covers only part of the interest and none of the principal, and 

therefore the unpaid interest will be added to the balance of the loan or will increase the term of 

the loan. 
294 

2. Amortization payment. Disclosure of the payment needed to fully amortize the loan at 

the new interest rate is required only when negative amortization occurs as a result of the 

adjustment. The disclosure is not required simply because a loan has interest-only or partiallyamortizing payments. For example, an ARM with a five-year term and payments based on a 

longer amortization schedule, in which the final payment will equal the periodic payment plus 

the remaining unpaid balance, does not require disclosure of the payment necessary to fully 

amortize the loan in the remainder of the five-year term. A disclosure is also not required when 

the new payment is sufficient to prevent negative amortization but the final loan payment will be 

a different amount due to rounding.◄

[Paragraph 20(c)(3) 

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 applies 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 in which paying the periodic payments will not fully 

amortize the outstanding balance at the end of the loan term and where the final payment will 
295 

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 § 1026.20(c)(5) is based, if applicable, or the balance at the time the disclosure is prepared. 

Paragraph 20(c)(5) 

1. Fully-amortizing payment. This paragraph requires a disclosure only when negative 

amortization occurs as a result of the adjustment. A disclosure is not required simply because a 

loan calls for interest-only 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 payment disclosed under 

§ 1026.20(c)(4) 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 § 1026.20(c)(4) is sufficient to prevent negative 

amortization in the loan but the final payment will be a different amount due to rounding.)] 

► Paragraph 20(d) 

1. Creditors, assignees, and servicers. Creditors, assignees, and servicers are subject to 

the requirements of § 1026.20(d), unless they no longer own the applicable adjustable-rate 

mortgage or the mortgage servicing rights. Creditors, assignees, and servicers are also subject to 

the requirements of any provision of subpart C that applies to § 1026.20(d). For example, the 
296 

requirements of § 1026.17(a) with regard to providing disclosures to consumers electronically, 

apply to § 1026.20(d) disclosures and thus, assignees and servicers, as well as creditors, are 

subject to those requirements. 

2. Timing and form of initial rate adjustment. The requirement that the disclosures be 

provided in writing, separate and distinct from all other correspondence, means that the initial 

ARM interest rate adjustment notice must be mailed or delivered separately from any other 

material. For example, in the case of mailing the disclosure, there should be no material in the 

envelope other than the § 1026.20(d) initial ARM interest rate adjustment notice. In the case of 

emailing the disclosure, the only attachment should be the initial ARM interest rate adjustment 

notice. The requirement that the disclosures be provided between 210 to 240 days “before the 

first payment at the adjusted level is due” means the creditor, assignee, or servicer must provide 

the notice to consumers 210 to 240 days prior to the due date, excluding any grace period, of the 

first payment calculated using the adjusted interest rate. Creditors, assignees, or servicers may 

provide the initial ARM interest rate adjustment notices to consumers in electronic form if they 

comply with the electronic delivery requirements in § 1026.17(a)(1). 

3. Conversions. When an open-end account converts to a closed-end adjustable-rate 

mortgage, § 1026.20(d) disclosures are not required until the implementation of the initial 

interest rate adjustment post-conversion. For example, for an open-end account that converts to 

a closed-end 3/1 hybrid ARM, § 1026.20(d) disclosures would not be required until three years 

after conversion, when the interest rate adjusts for the first time. 

Paragraph 20(d)(1)(i) 

1. In general. An adjustable-rate mortgage, as defined under this section, is a variablerate transaction as that term is used in subpart C, except as distinguished by commentary to 
297 

§ 1026.20(d)(1)(ii)-2. The requirements of this section are not limited to transactions financing 

the initial acquisition of the consumer’s principal dwelling. 

Paragraph 20(d)(1)(ii) 

1. Construction loans. In determining the term of a construction loan that may be 

permanently financed by the same creditor or assignee, the creditor or assignee may treat the 

construction and the permanent phases as separate transactions with distinct terms to maturity or 

as a single combined transaction. 

2. Non-adjustable-rate mortgages. For purposes of this section, the following 

transactions, if structured as fixed-rate and not adjustable-rate mortgages, are not subject to 

§ 1026.20(d): 

i. Shared-equity or shared-appreciation mortgages; 

ii. Price-level adjusted 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; 

iii. Graduated-payment mortgages or step-rate transactions; 

iv. Renewable balloon-payment instruments; or 

v. Preferred-rate loans. 

Paragraph 20(d)(2)(i) 

1. Date of the disclosure. The date that appears on the disclosure is the date the creditor, 

assignee, or servicer generates the notice to be provided to the consumer. 

Paragraph 20(d)(2)(iii)(A) 

1. The current and new interest rates. The current interest rate is the interest rate that 

applies on the date of the disclosure, pursuant to § 1026.20(d)(2). The new interest rate is the 
298 

interest rate used to calculate the new payment and may be an estimate pursuant to 

§ 1026.20(d)(2). The “new interest rate” has the same meaning as the “adjusted interest rate.” 

Paragraph 20(d)(2)(v) 

1. Rate limits and unapplied index increases. The disclosures regarding foregone 

interest increases apply only to transactions permitting interest rate carryover. The amount of 

increase foregone at the first interest rate adjustment is the amount that, subject to rate caps, can 

be added to future interest rate adjustments to increase, or offset decreases in, the rate determined 

by using the index or formula.

Paragraph 20(d)(2)(vii) 

1. Amortization statement. For interest-only loans, § 1026.20(d)(2)(vii) requires a 

statement that the new payment covers all of the interest but none of the principal, and therefore 

will not reduce the loan balance. For negatively-amortizing loans, § 1026.20(d)(2)(vii) requires 

a statement that the new payment covers only part of the interest and none of the principal, and 

therefore the unpaid interest will add to the balance of the loan or will increase the term of the 

loan. 

2. Amortization payment. Disclosure of the payment needed to fully amortize the loan at 

the new interest rate is required only when negative amortization occurs as a result of the 

adjustment. The disclosure is not required simply because a loan has interest-only or partiallyamortizing payments. For example, an ARM with a five-year term and payments based on a 

longer amortization schedule, in which the final payment will equal the periodic payment plus 

the remaining unpaid balance, does not require disclosure of the payment necessary to fully 

amortize the loan in the remainder of the five-year term. A disclosure is also not required when 
299 

the new payment is sufficient to prevent negative amortization but the final loan payment will be 

a different amount due to rounding.

Paragraph 20(d)(2)(viii) 

1. List of alternatives. The list of alternatives provided to consumers should avoid 

technical terms and explain the alternatives using the terms and explanations in Form H-4(D)(3) 

and (4) in Appendix H to this part. For the alternative “payment forbearance,” the disclosure 

should explain that payment forbearance temporarily gives the consumer more time to pay. ◄

* * * * *

Subpart E – Special Rules for Certain Home Mortgage Transactions 

* * * * * 

Section 1026.36 – Prohibited Acts or Practices in Connection With Credit Secured by a 

Dwelling 

►Paragraph 36(c)(1)(ii) 

1. Handling of Partial Payments. If a servicer receives a partial payment from a 

consumer, to the extent not prohibited by applicable law and the legal obligation between the 

parties, the servicer may take any of the following actions: 

(i) Credit the partial payment upon receipt; or 

(ii) Return the partial payment to the consumer; or 

(iii) Hold the payment in a suspense or unapplied funds account. If the payment is held 

in a suspense or unapplied funds account, this must be reflected on the periodic statement, in 

accordance with § 1026.41. When sufficient funds accumulate to cover a full contractual 

payment, they must be applied to the oldest outstanding payment. 

Paragraph 36(c)(1)(iii)
300 

1. Payment requirements. The servicer may specify reasonable requirements for making 

payments in writing, such as requiring that payments be accompanied by the account number or 

payment coupon; setting a cut-off hour for payment to be received, or setting different hours for 

payment by mail and payments made in person; specifying that only checks or money orders 

should be sent by mail; specifying that payment is to be made in U.S. dollars; or specifying one 

particular address for receiving payments, such as a post office box. The servicer may be 

prohibited, however, from requiring payment solely by preauthorized electronic fund transfer. 

(See Section 913 of the Electronic Fund Transfer Act, 15 U.S.C. 1693k.) 

2. Payment requirements—limitations. Requirements for making payments must be 

reasonable; it should not be difficult for most consumers to make conforming payments. For 

example, it would be reasonable to require a cut-off time of 5 p.m. for receipt of a mailed check 

at the location specified by the servicer for receipt of such check. 

3. Implied guidelines for payments. In the absence of specified requirements for making 

payments, payments may be made at any location where the servicer conducts business; any time 

during the servicer's normal business hours; and by cash, money order, draft, or other similar 

instrument in properly negotiable form, or by electronic fund transfer if the servicer and 

consumer have so agreed.◄

[Paragraph 36(c)(1)(ii)]

►Paragraph 36(c)(2)◄

1. Pyramiding of late fees. The prohibition on pyramiding of late fees in this subsection 

should be construed consistently with the “credit practices rule” of the Federal Trade 

Commission, 16 CFR 444.4. 

[Paragraph 36(c)(1)(iii)]
301 

►Paragraph 36(c)(3)◄

[1. Reasonable time. The payoff statement must be provided to the consumer, or person 

acting on behalf of the consumer, within a reasonable time after the request. For example, it 

would be reasonable under most circumstances to provide the statement within five business 

days of receipt of a consumer’s request. This time frame might be longer, for example, when the 

servicer is experiencing an unusually high volume of refinancing requests.]

►1. As Applicable. A creditor who no longer owns the mortgage loan or the mortgage 

servicing rights is not “applicable” and therefore is not subject to the requirements of this section 

to provide a periodic statement.◄

2. Person acting on behalf of the consumer. For purposes of 

§ 1026.36(c)[(1)(iii)]►(3)◄, a person acting on behalf of the consumer may include the 

consumer's representative, such as an attorney representing the individual, a non-profit consumer 

counseling or similar organization, or a creditor with which the consumer is refinancing and 

which requires the payoff statement to complete the refinancing. A servicer may take reasonable 

measures to verify the identity of any person acting on behalf of the consumer and to obtain the 

consumer’s authorization to release information to any such person before the “reasonable time” 

period begins to run. 

3. Payment requirements. The servicer may specify reasonable requirements for making 

payoff requests, such as requiring requests to be [in writing and ]directed to a mailing address, 

email address, or fax number specified by the servicer [or orally to a telephone number specified 

by the servicer, ]or any other reasonable requirement or method. If the consumer does not follow 

these requirements, a longer time frame for responding to the request would be reasonable. 

4. Accuracy of payoff statements. Payoff statements must be accurate when issued. 
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[Paragraph 36(c)(2)

1. Payment requirements. The servicer may specify reasonable requirements for making 

payments in writing, such as requiring that payments be accompanied by the account number or 

payment coupon; setting a cut-off hour for payment to be received, or setting different hours for 

payment by mail and payments made in person; specifying that only checks or money orders 

should be sent by mail; specifying that payment is to be made in U.S. dollars; or specifying one 

particular address for receiving payments, such as a post office box. The servicer may be 

prohibited, however, from requiring payment solely by preauthorized electronic fund transfer. 

(See Section 913 of the Electronic Fund Transfer Act, 15 U.S.C. 1693k.) 

2. Payment requirements—limitations. Requirements for making payments must be 

reasonable; it should not be difficult for most consumers to make conforming payments. For 

example, it would be reasonable to require a cut-off time of 5 p.m. for receipt of a mailed check 

at the location specified by the servicer for receipt of such check. 

3. Implied guidelines for payments. In the absence of specified requirements for making 

payments, payments may be made at any location where the servicer conducts business; any time 

during the servicer’s normal business hours; and by cash, money order, draft, or other similar 

instrument in properly negotiable form, or by electronic fund transfer if the servicer and 

consumer have so agreed.]

* * * * * 

►Section 41-- Periodic Statements for Residential Mortgage Loans 

41(a) In General

1. Recipient of Periodic Statement. When two consumers are joint obligors with primary 

liability on a mortgage loan, the disclosures may be given to either one of them. For example, if 
303 

a husband and wife jointly own a home, the servicer need not send statements to both the 

husband and the wife; a single statement may be sent. 

2. Billing Cycles Shorter than a 31-Day Period. If a loan has a billing cycle shorter than 

a period of 31 days (for example, a bi-weekly billing cycle), a periodic statement covering an 

entire month may be used. Such statement should separately list the upcoming payment due 

dates and amounts due, as required by paragraph (d)(1), and list all transaction activity that 

occurred during the related time period, as required by paragraph (d)(4). Such statement may 

aggregate the information for the Explanation of Amount Due, as required by paragraph (d)(2), 

and Past Payment Breakdown, as required by paragraph (d)(3). 

3. One Statement per Billing Cycle. The periodic statement requirement applies to the 

“creditor, assignee, or servicer as applicable.” The creditor, assignee, or servicer are all subject 

to this requirement, however only one statement must be sent to the consumer each billing cycle. 

When two or more parties are subject to this requirement, they may decide among themselves 

who will send the statement. 

4. As Applicable. A creditor who no longer owns the mortgage loan or the mortgage 

servicing rights is not “applicable” and therefore is not subject to the requirements of this section 

to provide a periodic statement. 

41(b) Timing of the Periodic Statement 

 1. Reasonably Prompt Time. Delivering or placing the periodic statement in the mail 

within 4 days of close the grace period of the previous billing cycle would be considered 

reasonably prompt. 

41(c) Form of the Periodic Statement
304 

1. Clear and Conspicuous Standard. The “clear and conspicuous” standard generally 

requires that disclosures be in a reasonably understandable form. Except where otherwise 

provided, the standard does not prohibit adding to the required disclosures, as long as the 

additional information does not overwhelm or obscure the required disclosures. For example, 

while certain information about the escrow account (such as the account balance) is not required 

on the periodic statement, this information may be included. 

2. Additional information; disclosures required by other laws. Nothing in this subpart 

prohibits a servicer from including additional information or combining disclosures required by 

other laws with the disclosures required by this subpart, unless such prohibition is expressly set 

forth in this subpart, such as the grouping requirements of paragraph 41(d) or other applicable 

law. 

3. Electronic Distribution. The periodic statement may be provided electronically if the 

consumer agrees. The consumer must give affirmative consent to receive statements 

electronically. Due to concerns about information security, if statements are provided 

electronically, the creditor, assignee or servicer may send the consumer a notification that their 

statement is available, with a link to where the statement can be accessed. 

41(d) Content and Format of the Periodic Statement 

1. Close Proximity. Paragraph (d) requires several disclosures to be provided in close 

proximity. To meet this requirement, the items to be provided in close proximity must be 

grouped together, and set off from the other groupings of items. This could be accomplished in a 

variety of ways, for example, by presenting the information in boxes, or by arranging the items 

on the document and including spacing between the groupings. Items in close proximity may not 

have any intervening text between them. 
305 

2. Not Applicable. If an item required by paragraph (d) or (e) of this section is not 

applicable to the loan, it may be omitted from the periodic statement or coupon book. For 

example, if there is no prepayment penalty associated with a loan, the prepayment penalty 

disclosures need not be provided on the periodic statement. 

3. Terminology. A servicer may use terminology other than that found on the sample 

periodic statement, so long as the new terminology is commonly understood. For example, 

servicers may take into consideration regional differences in terminology and refer to the account 

for the collection of taxes and insurance, commonly referred to as the “escrow account,” as an 

“impound account.” 

41(d)(3) Past Payment Breakdown 

1. Partial Payments. The disclosure of any portion of payments since the last statement 

that was applied to a partial payment or suspense account as required by (d)(3)(i) should reflect 

any funds that were received in the time period covered by the transaction activity of that 

statement and that were sent to a suspense or unapplied funds account. The disclosure of any 

portion of payments since the beginning of the calendar year that was sent to a partial payment or 

suspense account as required by (d)(3)(ii) should reflect all funds that are currently held in a 

suspense or unapplied funds account. For example: 

(i) Suppose a payment of $1000 is due, but the consumer only sends in $600 on January 

1, which is held in a suspense account. Further assume there are no fees charged on this account. 

Assuming there are no other funds in suspense account, the January statement should reflect: 

Unapplied funds since last statement - $600. Unapplied funds YTD - $600. 
306 

(ii) Assuming the same facts as Example (i) above, except that during February the 

consumer sends in $300 and this too is held in the suspense account. The statement should 

reflect: Unapplied funds since last statement - $300. Unapplied funds YTD - $900. 

(iii) Assuming the same facts at Example (ii) above, except that during March the 

consumer sends in $400. Of this payment, $100 completes a full contractual payment when 

added to the $900 in funds already held in the suspense account. This $1000 should be applied 

to the January payment, and the remaining $300 would be held in the suspense account. The 

statement should reflect: Unapplied funds since last statement - $300. Unapplied Funds YTD - 

$300. 

41(d)(4) Transaction Activity 

1. Meaning. Transaction activity includes any activity that credits or debits the 

outstanding account balance. Examples of transactions include, without limitation: 

(i) Payments received and applied; 

(ii) Payments received and held in a suspense account; 

(iii) The imposition of any fees (for example late fees); and 

(iv) The imposition of any charges (for example, private mortgage insurance). 

2. Description of Late Fees. The description of any late fee charges includes the date of 

the late fee, the amount of the late fee, and the fact that a late fee was imposed. 

3. Partial Payments. If a partial payment is sent to a suspense or unapplied funds 

account, this fact must be in the transaction description along with the date and amount of the 

payment, an explanation of what must be done for the payments to be applied must be provided 

on the front of the statement, and the funds must be included as unapplied funds in the 

information required by (d)(3) Past Payment Breakdown. 
307 

41(d)(6) Contact Information 

1. A toll-free telephone number is required. Additional contact information, such as a 

web address, may also be provided at the servicer’s option. 

2. If servicer has provided a telephone number for error resolution and inquiries pursuant 

to 12 CFR 1024.35 and § 1024.36, that number should be provided in the contact information 

section. 

41(d)(7)(iv) Prepayment Penalty 

1. Examples of prepayment penalties. For purposes of § 1026.41(d)(7)(iv), the following 

are examples of prepayment penalties: 

i. A charge determined by treating the loan balance as outstanding for a period of time 

after prepayment in full and applying the interest rate to such “balance,” even if the charge 

results from interest accrual amortization used for other payments in the transaction under the 

terms of the loan contract. “Interest accrual amortization” refers to the method by which the 

amount of interest due for each period (e.g., month) in a transaction’s term is determined. For 

example, “monthly interest accrual amortization” treats each payment as made on the scheduled, 

monthly due date even if it is actually paid early or late (until the expiration of any grace period). 

Thus, under the terms of a loan contract providing for monthly interest accrual amortization, if 

the amount of interest due on May 1 for the preceding month of April is $3,000, the loan contract 

will require payment of $3,000 in interest for the month of April whether the payment is made on 

April 20, on May 1, or on May 10. In this example, if the consumer prepays the loan in full on 

April 20 and if the accrued interest as of that date is $2,000, then assessment of a charge of 

$3,000 constitutes a prepayment penalty of $1,000 because the amount of interest actually earned 

through April 20 is only $2,000. 
308 

ii. A fee, such as an origination or other loan closing cost, that is waived by the creditor 

on the condition that the consumer does not prepay the loan. 

iii. A minimum finance charge in a simple interest transaction. 

iv. Computing a refund of unearned interest by a method that is less favorable to the 

consumer than the actuarial method, as defined by section 933(d) of the Housing and 

Community Development Act of 1992, 15 U.S.C. 1615(d). For purposes of computing a refund 

of unearned interest, if using the actuarial method defined by applicable State law results in a 

refund that is greater than the refund calculated by using the method described in section 933(d) 

of the Housing and Community Development Act of 1992, creditors should use the State law 

definition in determining if a refund is a prepayment penalty. 

2. Fees that are not prepayment penalties. For purposes of § 1026.41(d)(7)(iv), fees 

which are not prepayment penalties include, for example: 

i. Fees imposed for preparing and providing documents when a loan is paid in full, if such 

fees are imposed whether or not the loan is prepaid. Examples include a loan payoff statement, a 

reconveyance document, or another document releasing the creditor’s security interest in the 

dwelling that secures the loan. 

ii. Loan guarantee fees. 

41(e) Exemptions 

1. Information made available. Information made available by the servicer may be 

obtained through the inquiry process in § 1024.36. 

41(e)(3) Coupon Book Exemption 

1. Fixed Rate. “Fixed rate” is to be construed consistently with § 1026.18(s)(7)(iii). 
309 

2. Coupon Book. A coupon book is a booklet provided to the consumer with a page for 

each billing cycle during a set period of time (often covering one year). These pages are 

designed to be torn off and returned to the servicer with a payment for each billing cycle. 

Additional information about the loan is often included on or inside the front or back cover, or on 

filler pages in the coupon book. 

3. Information location. The information required by paragraph (e)(3)(ii) need not be 

provided on each coupon, but should be provided somewhere in the coupon book. Such 

information could be located e.g., on or inside the front or back cover, or on filler pages in the 

coupon book. 

4. Outstanding Principal Balance. Paragraph (e)(3)(ii)(A) requires the information 

listed in paragraph (d)(7) to be included in the coupon book. Paragraph (d)(7)(i) requires the 

disclosure of amount of the outstanding principal balance. For the purposes of the coupon book, 

the servicer need only disclose the principal balance at the beginning of the time period covered 

by the coupon book. 

41(e)(4) Small Servicers 

1. Loans obtained by merger or acquisition. Any mortgage loans obtained by a servicer 

or an affiliate as part of a merger or acquisition, or as part of the acquisition of all of the assets or 

liabilities of a branch office of a lender should be considered mortgage loans for which the 

servicer or an affiliate are the lender to whom the mortgage loan is initially payable. A branch 

office means either an office of a depository institution that is approved as a branch by a Federal 

or state supervisory agency or an office of a for-profit mortgage lending institution (other than a 

depository institution) that takes applications from the public for mortgage loans. 
310 

2. Threshold. In determining whether a small servicer services 1,000 mortgage loans or 

less, a servicer is evaluated based on its size as of January 1 for the remainder of the calendar 

year. A servicer that, together with its affiliates, crosses the threshold will have six months or 

until the beginning of the next calendar year, whichever is later, to begin compliance other than 

as a small servicer. Examples: 

i. A servicer that crosses the loan threshold on October 1 would no longer be considered a 

small servicer on April 1 of the following year. 

ii. A servicer that crosses the loan threshold on February 1 would no longer be considered 

a small servicer on January 1 of the following year. 

3. Small servicers that do not qualify for the exemption. A servicer that services any 

mortgage loans that are not owned by the servicer or an affiliate or for which the servicer or an 

affiliate were not the entity to whom the obligation was initially payable is not a small servicer. 

For example, if a servicer acquires mortgage servicing rights to service mortgage loans the 

servicer or an affiliate does not own and did not originate is not a small servicer. 

 4. Master servicing responsibilities. The periodic statement requirements apply to master 

servicers. A subservicer that meets the small servicer definition cannot claim the benefit of any 

small servicer exemption for mortgage loans that are master serviced by an entity that does not 

qualify for the small servicer exemption.◄

* * * * * 

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. ►For purposes of the model forms and samples in H-4(D), the term 
311 

creditors refers to creditors, assignees, and servicers.◄ 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 liability, except 

formatting changes may not be made to model forms and samples in ►H-4(D),◄H-18, H-19, H20, H-21, H-22, H-23, G-2(A), G-3(A), G-4(A), G-10(A)-(E), G-17(A)-(D), G-18(A) (except as 

permitted pursuant to § 1026.7(b)(2), G-18(B)-(C), G-19, G-20, and G-21, or to the model 

clauses in H-4(E), H-4(F), H-4(G), and H-4(H). Creditors may modify the heading of the second 

column shown in Model Clause H-4(H) to read “first adjustment” or “first increase,” as 

applicable, pursuant to § 1026.18(s)(2)(i)(C). 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.) 

vii. Using a vertical, rather than a horizontal, format for the boxes in the closed-end 

disclosures. 

* * * * * 
312 

Appendix H- Closed Model Forms [and Clause] 

* * * * * 

7. * * * 

i. Model H-4(D) illustrates the adjustment [notice]►notices◄ required under 

§ 1026.20(c)►and (d)◄, and provides examples of ►§ 1026.20(c)◄payment change notices 

and ►§ 1026.20(d) initial◄[annual] notices of interest rate [changes] ►adjustments◄.

* * * * * 
[THIS SIGNATURE PAGE PERTAINS TO THE PROPOSED RULE WITH REQUEST 

FOR PUBLIC COMMENT TITLED “2012 TRUTH IN LENDING ACT (REGULATION 

Z) MORTGAGE SERVICING PROPOSAL”] 

Dated: August 9, 2012. 

_____________________________________________ 

Richard Cordray, 

Director, Bureau of Consumer Financial Protection.