Vol. 77 Monday, 

No. 180 September 17, 2012 

Part III 

Bureau of Consumer Financial Protection 

12 CFR Part 1026 

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

Proposed Rule 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57318 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

1Federal 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. 

2See Dodd-Frank Act sections 1418, 1420, 1463, 

and 1464. 

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 

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 DoddFrank 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 on or 

before November 16, 2012. 

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 

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 

Web site, 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 Web site. 

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 

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 (Pub. L. 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 ‘‘force-placing’’ 

insurance where borrowers have 


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Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57319 

3Note 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. 

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 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 

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 TILA and 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 1,000 or 

fewer mortgage loans and service only 

mortgage loans that they originated or 

own. 

2. Adjustable-rate mortgage interestrate 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 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. Pursuant to the Dodd-Frank 

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 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. Servicers 

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. Servicers would be 


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57320 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

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/. 

5As 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). 

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 servicer 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. 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 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. 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. 

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 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, this 

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 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 dayto-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 dedicated companies to 

perform these activities, it is 


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6See, 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.’’). 

7See, 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/dspace-law/bitstream/ 

handle/1773.1/1074/86WLR755.pdf. 

8See, 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. 

9See, 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. 

10At 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). 

11See, e.g., Thompson, 86 Wash. L. Rev. 755, 767. 

12Why 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.’’) 

13See 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. 

14See Kurt Eggert, Limiting Abuse and 

Opportunism by Mortgage Servicers 15:3 Housing 

Policy Debate (2004), available at http://ssrn.com/ 

abstract=992095 (collecting cases). 

15OCC 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/newsissuances/news-releases/2011/nr-occ-2011-47.html, 

and Federal Reserve Board Press Release, Federal 

Reserve Issues Enforcement Actions Related to 

Deficient Practices in Residential Mortgage Loan 

Continued 

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 nonbank 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 

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 

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. 

Consumer harm has manifested in many 

different areas, and major servicers have 

entered into significant settlement 

agreements with Federal and State 

governmental authorities. For example, 

in April 2011, the Office of the 

Comptroller of the Currency (OCC) and 

the Federal Reserve Board (the Board) 

undertook formal enforcement actions 

against several major servicers for 

unsafe and unsound residential 

mortgage loan servicing practices.15


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57322 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

Servicing (April 13, 2011), available at http:// 

www.federalreserve.gov/newsevents/press/ 

enforcement/20110413a.htm, and accompanying 

documents. In addition to enforcement actions 

against major servicers, Federal agencies have also 

undertaken formal enforcement actions against 

major service providers to mortgage servicers. See 

id. 

16See id. None of the servicers admitted or 

denied the OCC’s or Federal Reserve Board’s 

findings. 

17See, 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). 

18See 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. 

19Sumit Agarwal et. Al, Second Liens and the 

Holdup Problem in First Mortgage Renegotiation 

(December 2011), available at http://ssrn.com/ 

abstract=2022501. 

20 Id. 

21See 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. 

22See 12 U.S.C. 2605(a)–(e). 

23See 12 U.S.C. 2605(e) and 2609. 

24See 12 CFR 1026.36(c). 

25See 50 U.S.C. App. 501 et seq. 

These enforcement actions generally 

focused on practices relating to (1) filing 

of foreclosure documents without, for 

example, proper affidavits or 

notarizations; (2) failing to always 

ensure that loan documents were 

properly endorsed or assigned and, if 

necessary, in the possession of the 

appropriate party at the appropriate 

time; (3) failing to devote sufficient 

financial, staffing, and managerial 

resources to ensure proper 

administration of foreclosure processes; 

(4) failing to devote adequate oversight, 

internal controls, policies and 

procedures, compliance risk 

management, internal audit, third party 

management, and training to foreclosure 

processes; and (5) failing to sufficiently 

oversee outside counsel and other thirdparty providers handling foreclosurerelated services.16 Congress has held 

significant detailed hearings on the 

issue of servicer ‘‘robo-signing’’ of 

foreclosure related documentation.17

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.18

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.19 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.’’ 20 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.21

B. Mortgage Servicing Consumer 

Protection Regulation Before the Recent 

Crisis 

Prior to the adoption of the DoddFrank 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.22 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.23

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 to include 

certain limited requirements directly on 

servicers, such as requirements to 

timely credit payments, provide payoff 

balances and prohibit pyramiding of late 

fees.24 Servicers also had some 

obligations under other Federal laws, 

including, for example, the 

Servicemembers Civil Relief Act.25

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 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. 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57323 

26Oklahoma elected not to join the settlement. 

27The 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. 

28See http:// 

www.nationalmortgagesettlement.com/. 

29Office 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. 

30See 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. 

31See 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/news-releases/ 

2011/nr-occ-2011-47.html. 

32See, 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). 

For example, 49 State attorneys 

general,26 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 2012.27 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 settlement.28 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,29 conducted 

coordinated reviews of the nation’s 

largest servicers,30 and taken 

enforcement actions against individual 

companies.31 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 non-depository 

institutions, and to all segments of the 

mortgage market, regardless of the 

ownership 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 forceplaced 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 

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.32

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 

foreclosure. 

Third, servicers would have to 

provide delinquent borrowers with a 

point of contact that provides continuity 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57324 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

33Other changes in section 1463 of the DoddFrank Act relate to increases in penalties for 

violations. These provisions are not addressed in 

this rulemaking. 

34 12 U.S.C. 2605(k)(1)(E). 

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-sizefits-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 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 DoddFrank 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 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 

inquiries generally, as well as refund 

escrow accounts upon payoff.33

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.’’ 34 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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57325 

35The 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 Public Law 104–121, tit. II, 110 Stat. 

847, 857 (1996) (as amended by Pub. L. 110–28, sec. 

8302 (2007)). 

36See SBREFA Final Report, supra note 22. 

37 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). 

38Available at http://www.consumerfinance.gov/

notice-and-comment/. 39 Id. 

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. 

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).35 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).36

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 DoddFrank Act and provide information to 

consumers in a manner that would be 

understandable and useful. These 

disclosures related to the ARM notices, 

the force-placed insurance notices, and 

the periodic statements. Macro 

conducted three rounds of one-on-one 

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.37

C. Other Dodd-Frank Act MortgageRelated Rulemakings 

Including this proposal, the Bureau 

currently is engaged in seven 

rulemakings relating to mortgage credit 

to implement requirements of the DoddFrank 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) 

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 TILA–RESPA Proposal).38

• 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 1639.39 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 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. 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 DoddFrank 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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57326 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

40SBREFA Final Report, supra note 22, at 16, 21. 

41SBREFA Final Report, supra note 22, at 16–19, 

21, and 23–24. 

42Public Law 111–203, 124 Stat. 1376, section 

1400(c) (2010). 

other provisions, pursuant to TILA 

section 129D as established by DoddFrank Act sections 1461 and 1462. 15 

U.S.C. 1639d. 

With the exception of the 

requirements being implemented in the 

2012 TILA–RESPA Proposal, the DoddFrank 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 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 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.40 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.41

Informed by this process, the Bureau 

is proposing 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 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 RESPA Servicing Proposal. 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.42 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 

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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57327 

43 52 FR 48665 (Dec. 24, 1987). 

44 74 FR 43232, 43269 (Aug. 26, 2009) (citing 52 

FR 48665, 48668 (Dec. 24, 1987)). 

45 Id. at 43272. 

46 Id. at 43269. 

47 Id. 

48Press 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. 

49 Id. 

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 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-bysection 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.43 In 2009, the 

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 OCC and to provide 

creditors with flexibility in giving 

adjustment notices for a variety of 

ARMs.44 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.45

Since 1987, the popularity of ARMs 

has increased, especially during the 

period from 2002 to 2007.46 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.47 According to Freddie 

Mac, ‘‘[i]n June 2004, ARMs hit a peak 

share of 40% of the home-purchase 

market but by early 2009, that share had 

fallen to just 3%, according to the 

Federal Housing Finance Agency.’’ 48

Generally, ARMs are financing just over 

10% of new home-purchase loans but 

are expected to rise to a 14% share of 

that market in 2012.49

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 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 reflects the time needed for 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57328 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

50Robert B. Avery, Kenneth P. Brevoort, & Glenn 

B. Canner, The 2007 HMDA Data, 94 Fed. Reserve 

Bull. A107 (Dec. 23, 2008). 

51Nick 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/SB100014240527023034590045

77364102737025584.html. 

52 74 FR 43232, 43269–73 (Aug. 26, 2009). 

53The 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). 

54TILA section 128(f)(1)(H). 

55TILA section 128(f)(2). 

56TILA section 128(f)(3). 

consumers to refinance a loan.50 In the 

current market, the nation’s biggest 

mortgage lenders take an average of 

more than 70 days to complete a 

refinance.51

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 look-back 

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 prepayment penalty. Much 

of this additional content was proposed 

by the Board’s 2009 Closed-End 

Proposal to amend Regulation Z’s 

payment change interest rate adjustment 

disclosures.52

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 government-certified 

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. 

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 forms 53 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). 

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.’’ 54 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.55 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.56


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57329 

57TILA section 103(cc)(5). 

58 12 U.S.C. 5581(a)(1). 

59 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 1400(b), 15 

U.S.C. 1601 note (defining ‘‘enumerated consumer 

laws’’ to include certain subtitles and provisions of 

Title XIV). 

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. 

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 

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.’’ 57 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.’’ 58

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.59

Accordingly, the Bureau has 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). 

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). 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57330 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

60 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. 

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-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 129 60 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; 

(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. 

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. 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 sectionby-section analysis for proposed 

§§ 1026.20(d) and 1026.41, the Bureau is 

proposing model forms for ARM interest 

rate adjustment notices and periodic 


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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 DoddFrank 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. 

In developing proposed rules for 

residential mortgage loans under DoddFrank 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). 

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. 

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 

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. 


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57332 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

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. 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) crossreferences § 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 

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 variable-rate 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 

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 DoddFrank 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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57333 

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 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 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. 

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. 

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 postconversion. 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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57334 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

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-bysection 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 

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 email. 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 principal 

dwelling with a term of greater than one 

year. The Bureau proposes deleting the 

cross-reference 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 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 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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57335 

61 74 FR 43232, 43264, 43387 (Aug. 26, 2009). 

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 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 

measuring prices or inflation; 

graduated-payment mortgages or steprate transactions; renewable balloonpayment 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 sharedequity 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 

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 preferred-rate 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.61

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 before a 

new payment amount is due. There are 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
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62Timiraos & Simon, supra note 52. 

63No 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. 

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.62 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, 

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 lookback 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.63 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 

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 look-back 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 Bureau 

solicits comment on whether it should 

grandfather existing ARMs with lookback 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 lookback 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 lookVerDate Mar<15>2010 20:28 Sep 14, 2012 Jkt 226001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 E:\FR\FM\17SEP3.SGM 17SEP3

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64Macro Report, supra note 38, at vii. 65 Id. 

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 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 testing 

understood that, under the scenario 

presented to them, their interest rate 

would change annually.64

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 negatively- mortizing 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. 

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.65

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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
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66 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. 

67 Id. at viii. 

68 Id. 69 Id. at viii–ix. 

adjustments—with interest-only 

payments for the first three years. On 

the date of the adjustment, the interestonly 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.66

The Bureau recognizes that certain 

Dodd-Frank Act amendments to TILA 

will restrict origination of nonamortizing 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 interestonly 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 

understanding the relationship of the 

index, margin, and interest rate.67

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 preconsummation 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.68 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(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. 

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 negatively-amortizing features and 

the allocation of interest, principal, and 

escrow payments for such loans. In 

response, the Bureau has simplified the 

explanation of carryover interest.69

The Bureau recognizes that the 

disclosure of rate limits and unapplied 


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Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57339 

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. 

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. 

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 NegativeAmortization 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 negatively-amortizing 

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 negativelyamortizing 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 negativelyamortizing as a result of the adjustment 

but does not require the statement 

regarding amortization. Proposed 

§ 1026.20(c)(2)(vi) and proposed 

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 nonamortizing 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 fullyamortizing 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 negatively-amortizing 

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 

concept of amortization. Thus, the 

Bureau is weighing the value of 

disclosing specific information 

regarding amortization, such as the 

payment needed to fully amortize 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57340 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

70 Id. at vi. 

71Other § 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. 

72Macro Report, supra note 38, at viii. 

73 Id. at viii–ix. 

negatively-amortizing 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 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.70 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 DoddFrank 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) 

disclosures.71 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.72 They 

also had difficulty with the concepts of 

amortization and interest rate 

carryover.73 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 

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 H–4(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 


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Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57341 

74 Id. at vii. 

75 74 FR 43232, 43272 (Aug. 26, 2009). 

76Regulation 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. 

77 74 FR 43232, 43273 (citing 52 FR 48665, 48671 

(Dec. 24, 1987)). 

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 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.74 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.’’ 75 The Board 

explained that when it originally 

adopted the provision in 1987, as 

footnote 45c of § 226.20(c) of Regulation 

Z,76 the regulations of other financial 

institution supervisory agencies— 

namely the OCC, the Federal Home 

Loan Bank Board (the FHLBB), and 

HUD—contained subsequent disclosure 

requirements for ARMs.77

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. 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 

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 128A that 

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 

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 


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78Timiraos & Simon, supra note 52. 

79See SBREFA Final Report, supra note 22, at 20– 

21, 29–30. 80 Id. 

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 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 . * * * ’’ 78

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 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.79 Several 

SERS expressed concern that the 

estimates would confuse consumers. 

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).80

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 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 


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Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57343 

81 Id. at 21. 

§ 1026.20(d) notice.81 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. 

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 postconversion. 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 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 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 adjustablerate 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 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 closedend transactions. Regulation Z generally 

requires disclosures for closed-end 

credit transactions to be provided 

‘‘before consummation of the 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57344 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

82TILA 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. 

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 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 closed-end transactions, the Bureau 

believes, in light of the factors in TILA 

section 105(f)(2), that requiring the 

proposed § 1026.20(d) notice for openend 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.’’ 82 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 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 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 shortterm construction loan. Thus, 

exempting such loans is necessary and 

proper under TILA section 105(a) to 

further the consumer protection 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57345 

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 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 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 

measuring prices or inflation; 

graduated-payment mortgages or steprate transactions; renewable balloonpayment 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. 

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 

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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57346 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

83Macro Report, supra note 38, at viii. 84See proposed § 1026.20(d)(2). 

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-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 interest-rate 

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). 

See 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 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.83

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 

§ 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.84 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 

inform consumers that these changes are 

dictated by the terms of their adjustablerate 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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57347 

85Macro Report, supra note 38, at vii. 

86 Id. 

87 Id. at vii–viii. This revision was made after the 

third round of testing, and therefore was not tested 

with consumers. 

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.85

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 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.86

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 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.87

The Bureau recognizes that certain 

Dodd-Frank Act amendments to TILA 

will restrict origination of nonamortizing 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 fullyamortizing 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 interestonly 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 

form to see if it rectified the confusion 

caused by the allocation table or if the 

concepts of non-amortizing 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 preVerDate Mar<15>2010 20:28 Sep 14, 2012 Jkt 226001 PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 E:\FR\FM\17SEP3.SGM 17SEP3

tkelley on DSK3SPTVN1PROD with PROPOSALS3
57348 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

88 Id. at viii. 

89 Id. 90 Id. at viii-ix. 

consummation disclosure requirements 

of current rule § 1026.19(b)(2)(iii). The 

2012 TILA–RESPA Proposal’s 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.88

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.89 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, 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 negatively-amortizing features and 

the allocation of interest, principal, and 

escrow payments for such loans. In 

response, the Bureau has simplified the 

explanation of carryover interest.90

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 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 § 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 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 NegativeAmortization 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 negatively-amortizing 

loans. If negative amortization occurs as 

a result of the interest rate adjustment, 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57349 

91 Id. at viii. 92 Id. at vi. 

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 interestonly 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 negativelyamortizing 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. 

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 nonamortizing 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 fullyamortizing 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 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 preforeclosure 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.91

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 

Web site and telephone number to 

access the most current list of 

homeownership 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 adjustable-rate 

mortgages.92 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 DoddFrank 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 


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93See 2012 HOEPA Proposal, available at 

http://files.consumerfinance.gov/f/ 

201207_cfpb_proposed-rule_high-cost-mortgageprotections.pdf, at 29–35. 

94The 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 Web site 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)). 

95At 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. 

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 section 1301 of FIRREA) 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).93 The 2012 HOEPA 

proposal also proposed to implement 

other homeownership-counselingrelated requirements that are not 

amendments to HOEPA, including a 

proposed amendment to Regulation X 

that lenders provide a list of five 

homeownership counselors or 

counseling organizations to applicants 

for a federally related mortgage loan.94

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 Web site 

address to access either the Bureau list 

or the HUD list of homeownership 

counseling agencies and programs,95

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 

Web site would involve more 

programming burden than simply listing 

one of the agencies’ Web sites. 

Providing consumers with the Web 

site 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 (including related 

financial arrangements, financial 

sophistication, and the importance to 

the borrower of the loan). The Bureau 


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96Macro Report, supra note 38, at viii. 

97 Id. at viii-ix. 

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 ESign 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 § 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.96 They 

also had difficulty with the concepts of 

amortization and interest rate 

carryover.97 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 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 H–4(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 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 adjustablerate 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 H–4(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 


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98 Id. at vii. 

identify and understood the table and 

its contents.98 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. 

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 nonconforming 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 

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 

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 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 


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99SBREFA Final Report, supra note 22, at 32. 

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 

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.99 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. 

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 nonconforming 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 § 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 TILA. The 

Bureau interprets this term to expand 


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57354 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

100 Id. 101TILA section 129(f)(1). 

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.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. 

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.101 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 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 ongoing 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. 

• 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 closedend 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 

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 


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Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57355 

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 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 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 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. Proposed 

comment 41(b)–1 provides that four 

days after the close of any grace period 

would be considered reasonably 

prompt. 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57356 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

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 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 H–28. 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 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 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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57357 

102Macro Report, supra note 38, at 4. 

103See comments 24(b)–2 and 48–3 respectively. 

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 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. 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 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 easy-to-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 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.102

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.103

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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57358 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

104Macro Report, supra note 38, at 12. 

105 Id. at 4. 

106See id. at 6. 

107 Id. 

108 Id. at 14. 

109 Id. at 9. 

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 

‘‘impound account’’ to refer to the 

account holding funds for taxes and 

insurance.104 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.105 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 participants were able to identify the 

amount due on the sample periodic 

statement presented to them.106

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 

participants understood the amount due 

included a regular monthly payment 

and a late fee.107 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.108 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. 

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.109

Both the breakdown since the last 

billing cycle and the breakdown of the 


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110 Id. at 11. 

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 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.110 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 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, 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 interestonly 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 require 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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57360 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

111See 2012 HOEPA Proposal, available at 

http://files.consumerfinance.gov/f/ 

201207_cfpb_proposed-rule_high-cost-mortgageprotections.pdf, at 29–35. 

112The 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. 

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 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 other rulemakings 

addressing mortgages and, as necessary, 

reconciles their differences. For 

example, the Bureau is proposing to 

incorporate the language from the 

Board’s 2009 Closed-End 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 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 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 connection 

with the application process for 

mortgage loans.111 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.112

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 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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57361 

113At 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. 

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.113 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 

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 governmentcertified 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 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, 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 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. 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57362 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

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, 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 

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. 

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 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. 


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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 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. 

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 

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 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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57364 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

114See 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. 

115SBREFA Final Report, supra note 22, at 16– 

19. 

116 Id. 

117 Id. at 17. 

118This 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/nct10q_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). 

119SBREFA 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). 

120 Inside Mortgage Finance, Issue 2012:13 

(March 30, 2012) at 12. 

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 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.114 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. 

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.115 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.116

The SERs explained that due to their 

small size, they generally do not 

maintain in-house technological 

expertise and would generally use thirdparty vendors to develop periodic 

statements. Due to their small size, they 

believed they would have no control 

over these vendor costs.117

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 

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.118

The SERs estimated that the periodic 

statement burden could cost thousands 

of dollars each month.119 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 share 120) each service 

in excess of $3 billion of unpaid 

principal balance. 

In addition to the 1,000 loan 

threshold, the exemption from the 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57365 

121As discussed above, for the purposes of 

§ 1026.41, the term ‘‘servicer’’ includes creditors, 

assignees and servicers. 

122Specifically, 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. 

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 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. 

The Bureau seeks comment on all 

aspects of the proposed exemption, 

particularly whether the regulation 

should exempt small servicers,121 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 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 

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.122 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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57366 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

123Reference in parts VII, VIII, and IX to 

‘‘servicers’’ with regard to the proposed rule for 

requests for payoff amounts means creditors and 

servicers. 

124Reference in parts VII, VIII, and IX to 

‘‘servicers’’ with regard to the proposed rules for 

adjustable-rate mortgages means creditors, 

assignees, and servicers. 

its implementation of the Dodd-Frank 

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 adjustablerate 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 DoddFrank 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 

management policies and procedures; 

early intervention for delinquent 

borrowers; continuity of contact for 

delinquent borrowers; and lossmitigation 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 adjustablerate 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 open- and closedend) secured by a dwelling. 

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 selfeffectuating, 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 

over-compliance 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 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 servicer 123

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 servicers 124 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 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 


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125See Christopher Mayer, Karen Pence, & Shane 

Sherlund, The Rise in Mortgage Defaults, 23 J. Econ. 

Persps. 27, 37 (2009). 

126The 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. 

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 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 fixedrate period of two or three years was 3.5 

percentage points below the fully 

indexed rate.125 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 

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 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 negativelyamortizing 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.126 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 testing. The 

Bureau believes that disclosures that 

satisfy the proposed formatting 

requirements likely provide greater 

benefits to consumers than both the 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57368 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

127For 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). 

128Brent 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). 

129Mayer, Pence, & Sherlund, supra note 125, at 

37. 

130Anthony Pennington-Cross & Giang Ho, The 

Termination of Subprime Hybrid and Fixed-Rate 

Mortgages, 38 Real Est. Econs. 399, 420 (2010). 

131 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. 

alternatives tested and disclosures that 

do not satisfy these requirements.127

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.128

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.129 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.130

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 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 adjustable-rate 

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 interestonly 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 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.131

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 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 


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132As discussed in part VI, the Bureau believes 

that annual notice is duplicative given the proposed 

Continued 

confusion on this point. The Bureau 

notes that section 1418 of the DoddFrank 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 

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 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 adjustablerate 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. 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 

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).132 The 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
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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. 

133As 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. 

134Of 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. 

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.133 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 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 

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 negativelyamortizing 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 interestonly 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 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.134

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. 


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Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57371 

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 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. 

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 look-back 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. 

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 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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57372 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

135Reference in parts VII, VIII, and IX to 

‘‘servicers’’ with regard to the proposed rule for the 

periodic statement, means creditors, assignees, and 

servicers. 

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 servicers 135 to 

include 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 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 

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; 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 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. 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
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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. 

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 loan-level 

information to consumers. 

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 onetime 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 

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. 

There is no reasonably available data 

with which the Bureau can accurately 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57374 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

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 

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 

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 prestatute 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 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 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 adjustablerate 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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57375 

136More information about the Mortgage Call 

Report can be found at http:// 

mortgage.nationwidelicensingsystem.org/slr/ 

common/mcr/Pages/default.aspx. 

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. 

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 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. The expanded report collects 

more detailed information in each of 

these areas for those firms that sell to 

Fannie Mae or Freddie Mac.136 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 nondepository 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 non-depository 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 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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57376 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

137As 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). 

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 

Dodd-Frank 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 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 nonresponse 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, small 

governmental units, and small not-forprofit 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 DoddFrank 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 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 fulltime 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.137

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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57377 

138The Bureau posted these materials on its 

website and invited the public to email remarks on 

the materials. See http:// 

www.consumerfinance.gov/pressreleases/consumerfinancial-protection-bureau-outlines-borrowerfriendly-approach-to-mortgage-servicing/ (the 

materials are accessible via the links within this 

document). 

139This written feedback is attached as appendix 

A to the SBREFA Final Report, discussed below. 

140SBREFA Final Report, supra note 22. 

from small entity representatives to 

inform the SBREFA Panel pursuant to 

sections 609(b)(2) and 609(b)(4) 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 process 

generally.138 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.139

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).140

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 

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 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 adjustable-rate 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57378 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

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 

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 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 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 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 


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141The current SBA size standards are found on 

SBA’s Web site at http://www.sba.gov/content/

table-small-business-size-standards. 

142See id. 

143Savings institutions include thrifts, savings 

banks, mutual banks, and similar institutions. 

144The 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. 

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 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.141 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.142

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 

institutions 143 (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. 

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 nonprofit 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.144

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 

Other activities related to credit 

intermediation (includes loan 

servicing).

522390 $7,000,000 revenues 5,494 5,319 1,388 800 

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. 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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57380 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

145The 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. 

146Conventional 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. 

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 mortgagerelated 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.145

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 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.).146

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. 

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 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. 

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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57381 

147Roughly 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. 

perhaps new or updated software. Inhouse 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 

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-bysection 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 fixedrate 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 

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.147 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-bysection 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 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. 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57382 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

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 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. 

• 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 

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 onetime 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 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. 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57383 

148See 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). 

149See 5 U.S.C. 603(d)(2)(B). 

150See TILA section 104(1); RESPA section 

7(a)(1). 

151See 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’’). 

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 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 

accomplish the stated objectives of 

applicable statutes and which minimize 

any increase in the cost of credit for 

small entities.148 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.149

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.150

At the SBREFA Panel outreach 

meeting, the Bureau asked the SERs a 

series of questions regarding cost of 

business credit issues.151 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, 

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 homesecured 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) Mortgage 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, 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. 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 nondepository 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 


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152For purposes of this PRA analysis, the 

Bureau’s depository respondents under the 

proposed rule are 130 depository institutions and 

depository institution affiliates that service closedend consumer mortgages. The Bureau’s nondepository respondents are an estimated 1,388 nondepository 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. 

153Based on discussions with industry, the 

Bureau assumes that all depository respondents 

except for one large entity and 95% of nondepository respondents (100% of small nondepository 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. 

154 Dollar figures include estimated costs to 

vendors. 

respondents), and certain nondepository servicers (the Bureau nondepository respondents). The Bureau 

and the FTC generally both have 

enforcement authority over nondepository institutions under Regulation 

Z. Accordingly, the Bureau has 

allocated to itself half of its estimated 

burden to Bureau non-depository 

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 

respondents,152 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. 

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 

Requirements 153

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 one-time burden to be 140 

hours for CFPB depository respondents 

and 1,488 hours and $115,000 for CFPB 

non-depository respondents.154

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 non-depository respondents. 

2. Changes in the Regulation Z 

§ 1026.20(c) Disclosure for AdjustableRate 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 nondepository 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 

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. 


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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 

one-time burden to be 170 hours for 

CFPB depository respondents and 600 

hours and $20,000 for CFPB nondepository 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 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 nondepository 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 

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, DC 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 flbold-faced arrowsfi, while 

language that would be removed is set 

off with øbold-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 follows: 

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. 


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57386 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

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 E-Sign Act in the circumstances set 

forth in those sections. flExcept for 

§ 1026.20(d), which requires disclosures 

to be provided separate and distinct 

from all other correspondence, thefi 

øThe¿ 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 

§ 1026.18fl, § 1026.20(c),fi 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 

from the other disclosures under 

§ 1026.18, except for private education 

loan disclosures made in compliance 

with § 1026.47. 

* * * * * 

(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)fland (d)fi. 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 øSubsequent d¿flDfiisclosure 

requirementsfl regarding postconsummation eventsfi. 

* * * * * 

(c) øVariable-rate¿ flRatefi 

adjustments. flThe 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 interest rate adjustment results in a 

corresponding payment change.fi 

øExcept 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.¿ 

fl(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 

(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: 

(A) The current and new interest 

rates; 

(B) The current and new payments 

and the date the first new payment is 

due; and 


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(C) For interest-only or negativelyamortizing 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 

(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 negativelyamortizing 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.fi 

(d) øInformation 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.¿fl 

Initial rate adjustments. The creditor, 

assignee, or servicer of an adjustablerate 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: 

(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 negativelyamortizing 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, 

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; 


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(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 negativelyamortizing 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; 

(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 Web site 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 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. fi 

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. fl 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. 

(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.fi 

ø(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 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 


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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 added to read as 

follows: 

fl§ 1026.41 Periodic statements for 

residential mortgage loans. 

(a) In general. A servicer of a closedend 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, a biweekly 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: 

(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. 

(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; 

(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. 


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(3) Coupon Book Exemption. The 

requirements of paragraph (a) do not 

apply to fixed-rate 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) of this section; 

(ii) Provides the consumer with a 

coupon book that includes anywhere in 

the coupon book: 

(A) The account information listed in 

paragraph (d)(7) of this section; 

(B) The contact information for the 

servicer, listed in paragraph (d)(6) of 

this section; and 

(C) Information on how the consumer 

can obtain the information listed in 

paragraph (e)(3)(iii) of this section. 

(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) 

of this section; 

(B) The past payment breakdown 

information, listed in paragraph (d)(3) of 

this section; and 

(C) The transaction activity 

information listed in paragraph (d)(4) of 

this section; 

(iv) Provides the consumer the 

information listed in paragraphs (d)(8) 

of this section 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.fi 

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– 

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 

* * * * * 

øH–4(D) Variable-Rate Model Clauses 

(§ 1026.20(c))¿ 

flH–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))fi 

* * * * * 

flH–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 Informationfi 

* * * * * 

BILLING CODE 4810–AM–P 

H–4(D)(1) Model Form for § 1026.20(c) 


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H–4(D)(2) Sample Form for § 1026.20(c) 


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H–4(D)(3) Model Form for § 1026.20(d) 


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57394 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

H–4(D)(4) Sample Form for § 1026.20(d) 


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57396 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

* * * * * flH–28(A) Sample Form of Periodic 

Statement 


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H–28(B) Sample Form of Periodic Statement 

With Delinquency Box 


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H–28(C) Sample Form of Periodic Statement 

for a Payment-Options Loan 


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Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57399 

BILLING CODE 4810–AM–C 

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. 

fi 

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). 


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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. 

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. 

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). 

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. 

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. * * * 

(ii) The general segregation requirement 

described in this subparagraph does not 

apply to the disclosures required under 

ø§ ¿§ 1026.19(b) øand 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) fland (d)fi, 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 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. 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57401 

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). 

øCreditors 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 of other Federal 

agencies are exempt from the requirements of 

§ 1026.19(b), by virtue of § 1026.19(d)ø, 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)ø– 

2¿fl(1)(ii)–3.ii, 20(d)(1)(ii)–2.ii,fiand 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) fland (d)fi 

regarding notices of adjustments.) For 

example, the disclosure flprovided pursuant 

to § 1026.20(d)fi might state, ‘‘You will be 

notified flat 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 notifiedfi at least ø25¿fl60fi, but 

no more than 120, days before the due date 

of a payment at a new level. This notice will 

contain information about the fladjustment, 

including thefiøindex and¿ interest ørates¿ 

flratefi, payment amount, and loan 

balance.’’ øIn 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 flRegarding PostConsummation Eventsfi 

20(c) øVariable-¿flRfiate adjustments 

1. flCreditors, assignees, and servicers. 

Creditors, assignees, and servicers are subject 

to the requirements of § 1026.20(c), unless 

they no longer own the applicable adjustablerate 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 ARM converting to a fixedrate transaction when the adjustment to the 

interest rate results in a corresponding 

payment change. When an open-end account 

converts to a closed-end adjustable-rate 

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. fiøTiming 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) 

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.¿ 

flParagraph 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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57402 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

the construction and the permanent phases 

as separate transactions with distinct terms to 

maturity or as a single combined transaction. 

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 steprate transactions; 

iv. Renewable balloon-payment 

instruments; or 

v. Preferred-rate loans.fi 

Paragraph 20(c)(2) 

1. øCurrent 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). 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.¿ 

flTiming. 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) 

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 interestonly 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. 

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 

partially-amortizing 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.fi 

øParagraph 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 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.)¿ 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57403 

fl 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 adjustablerate 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 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 postconversion. 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 § 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 steprate 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 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 interestonly 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 

partially-amortizing 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(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. fi 

* * * * * 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

* * * * * 

Section 1026.36—Prohibited Acts or 

Practices in Connection With Credit 

Secured by a Dwelling 

flParagraph 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) 

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 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57404 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

properly negotiable form, or by electronic 

fund transfer if the servicer and consumer 

have so agreed.fi 

øParagraph 36(c)(1)(ii)¿ 

flParagraph 36(c)(2)fi 

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. 

øParagraph 36(c)(1)(iii)¿ 

flParagraph 36(c)(3)fi 

ø1. 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.¿ 

fl1. 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.fi 

2. Person acting on behalf of the consumer. 

For purposes of § 1026.36(c)ø(1)(iii)¿fl(3)fi, 

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 øin writing and¿ directed to a mailing 

address, email address, or fax number 

specified by the servicer øor 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. 

øParagraph 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.¿ 

* * * * * 

flSection 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 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 biweekly 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 

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. 

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 


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Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 57405 

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. 

(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 as 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. 

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. 

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). 

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. 

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. 


tkelley on DSK3SPTVN1PROD with PROPOSALS3
57406 Federal Register / Vol. 77, No. 180 / Monday, September 17, 2012 / Proposed Rules 

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.fi 

* * * * * 

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. flFor purposes 

of the model forms and samples in H–4(D), 

the term creditors refers to creditors, 

assignees, and servicers.fi 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 flH–4(D),fiH–18, H–19, H–20, 

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 closedend disclosures. 

* * * * * 

Appendix H—Closed Model Forms and 

øClause¿ 

* * * * * 

7. * * * 

i. Model H–4(D) illustrates the adjustment 

ønotice¿flnoticesfi required under 

§ 1026.20(c)fland (d)fi, and provides 

examples of fl§ 1026.20(c)fipayment 

change notices and fl§ 1026.20(d) 

initialfiøannual¿ notices of interest rate 

øchanges¿ fladjustmentsfi. 

* * * * * 

Dated: August 9, 2012. 

Richard Cordray, 

Director, Bureau of Consumer Financial 

Protection. 

[FR Doc. 2012–19977 Filed 9–7–12; 4:15 pm] 

BILLING CODE 4810–AM–P 


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