[Federal Register Volume 63, Number 137 (Friday, July 17, 1998)]
[Rules and Regulations]
[Pages 38461-38463]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19143]



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Rules and Regulations
                                                Federal Register
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Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Rules 
and Regulations

[[Page 38461]]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 560

[No. 98-70]
RIN 1550-AB12


Disclosures for Adjustable-Rate Mortgage Loans

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (OTS) is issuing a final rule 
revising adjustable-rate mortgage loan (ARM) disclosure requirements 
for savings associations. In the interim final rule, the OTS conformed 
its ARM disclosure rule text to recent changes to related disclosure 
provisions in Regulation Z, which was issued by the Federal Reserve 
Board (FRB) under the Truth in Lending Act (TILA). In today's final 
rule, the OTS replaces its existing rule with a simple cross-reference 
to the Regulation Z disclosure provisions. The rule also makes minor 
technical changes. This substitution does not affect the rule's 
function of promoting safe and sound lending by savings associations 
nor OTS's enforcement of its provisions.

EFFECTIVE DATE: Effective date: July 17, 1998. Compliance date: 
Compliance is optional until October 1, 1998.

FOR FURTHER INFORMATION CONTACT: Susan Miles, Attorney, (202) 906-6798, 
Regulations and Legislation Division, Chief Counsel's Office, Office of 
Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

    To assist borrowers in making informed decisions on the cost of 
credit, the OTS and FRB have issued regulations imposing disclosure 
requirements on creditors issuing ARMs. The FRB disclosure rules at 12 
CFR Part 226 implement TILA <SUP>1</SUP> and are commonly referred to 
as Regulation Z. Regulation Z applies to all lenders subject to TILA, 
including savings associations. Regulation Z, however, specifically 
states that information provided in accordance with the variable rate 
regulations of other federal agencies, such as the OTS, may be 
substituted for the disclosures required by Regulation Z.<SUP>2</SUP> 
To this extent, Regulation Z incorporates the OTS ARM disclosure rule 
at 12 CFR 560.210, and the OTS rule serves as an implementing 
regulation of TILA.
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    \1\ 15 U.S.C. 1601 et seq.
    \2\ 12 CFR 226.19(b) n. 45a and 226.20(c) n. 45c.
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    Section 560.210 applies to ARMs with a term of more than one year 
that are secured by property occupied by or to be occupied by the 
borrower. This rule was first issued by the OTS's predecessor agency, 
the Federal Home Loan Bank Board (FHLBB) under the agency's authority 
under the Home Owners' Loan Act (HOLA) <SUP>3</SUP> to ensure that 
savings associations operate in a safe and sound manner. The FHLBB 
believed the regulation was necessary because ``[s]afe and sound 
lending using ARMs requires that the borrower have a full understanding 
of the type of obligation being incurred in order to make a reasonable 
and meaningful decision concerning ability to repay.'' <SUP>4</SUP> The 
OTS continues to consider promoting safe and sound lending an important 
function of this regulation.
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    \3\ 12 U.S.C. 1463(a) and 1464(a).
    \4\ 50 FR 32005 (Aug. 8, 1985).
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    Although the original FHLBB regulation was more detailed than 
Regulation Z, the disclosures required under OTS regulations have been 
identical to those required under Regulation Z since 1988. Under 
Regulation Z, if a variable rate transaction exceeds a term of one year 
and is secured by the consumer's principal dwelling, the creditor must 
provide various initial disclosures for each variable rate program in 
which the consumer is interested.<SUP>5</SUP> Until recently amended, 
Regulation Z required an institution to provide: (1) A fifteen-year 
historical example, based on a $10,000 loan amount, illustrating how 
payments and the loan balance would have been affected by interest rate 
changes implemented according to the terms of the loan program; and (2) 
The maximum interest rate and payment for a $10,000 loan, originated at 
the most recent interest rate shown in the historical example assuming 
the maximum periodic increases in rates and payments under the loan, 
and the initial interest rate and payment for that loan.
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    \5\ 12 CFR 226.19(b)(2) (1997).
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    Section 2105 of the Economic Growth and Regulatory Paperwork 
Reduction Act of 1996 (EGRPRA) <SUP>6</SUP> amended section 128(a) of 
TILA to permit a creditor to elect to provide a statement that periodic 
rates may substantially increase or decrease (together with the maximum 
interest rate and payment amount based on a $10,000 loan amount), in 
lieu of the historical example. On December 1, 1997, the FRB published 
a final rule implementing section 2105 of EGRPRA.
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    \6\ Pub. L. 104-208, 110 Stat. 3009 (September 30, 1996).
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    On January 8, 1998, the OTS published an interim final rule making 
identical amendments to Sec. 560.210.<SUP>7</SUP> Under the OTS interim 
final rule, a savings association may provide either the historical 
example or the maximum interest rate and payment. If the savings 
association chooses the maximum interest rate and payment option, 
however, it must also provide the initial rate and payment amount and a 
statement that the periodic rate may increase or decrease 
substantially.
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    \7\ 63 FR 1051.
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    Consistent with the FRB final rule, the OTS interim rule also 
modified how the interest rate is calculated under the maximum interest 
rate and payment option. Before the interim final rule, a savings 
association calculated the maximum interest rate using ``the most 
recent interest rate shown in the historical example.'' Since a savings 
association is not required to provide the historical example when it 
elects the maximum interest rate and payment option, the interim final 
rule provided for the disclosure of ``the initial interest rate (index 
value plus margin, adjusted by the amount of any discount or premium) 
in effect as of an identified month and year for the particular loan 
program.''
    Similarly, before the interim final rule, the OTS required a 
savings association to explain how a customer could calculate payments 
for the loan

[[Page 38462]]

amount based on the most recent payment shown in the historical 
example. To allow customers to understand the relationship between 
their transactions and the disclosures made under the maximum interest 
rate and payment option, the interim final rule permits a savings 
association to provide a customer with a similar explanation using the 
initial interest rate. The FRB made a similar change to Regulation Z.

II. Discussion of Comments

    The OTS received comments from three commenters: one state-
chartered savings institution, one federal savings bank, and one law 
firm. All three commenters supported the substantive changes in the 
interim final rule. Accordingly, today's final rule incorporates the 
substantive changes to the ARM disclosure requirements.
    The OTS specifically solicited comment on whether it should delete 
the text of the disclosure requirements in Sec. 560.210 and rely on the 
disclosure requirements in Regulation Z. All three commenters urged the 
OTS to adopt this approach.
    The OTS has deleted the text of the disclosure requirements from 
the final rule and has substituted appropriate cross-references to 
Regulation Z. This approach will permit OTS-regulated institutions to 
immediately comply with all future changes to the Regulation Z 
disclosures in this area without waiting for the OTS to conform its 
rule through the rulemaking process.<SUP>8</SUP> Thus, the rule will 
ensure that all competing lenders are subject to similar regulatory 
requirements for ARM loans. This approach is consistent with section 
303 of the Community Development Regulatory Improvement Act of 1994 
(CDRIA), which instructs each banking agency to review their 
regulations and remove duplicate requirements and encourages common 
interagency supervisory policies. Finally, this change more closely 
conforms OTS rules to those issued by the Office of the Comptroller of 
the Currency and Federal Deposit Insurance Corporation. These agencies' 
rules do not prescribe any ARM disclosures and, instead, rely entirely 
on Regulation Z.
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    \8\ We note that the recent FRB final rule was effective on 
November 21, 1997. The OTS's related interim final rule was 
effective on January 8, 1998.
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    Rather than delete all references to ARM disclosure requirements 
from the regulations, the OTS has decided to retain appropriate cross-
references to the disclosure provisions in Regulation Z. This approach, 
which two commenters supported, preserves the OTS's authority to 
utilize the full panoply of enforcement actions available under the 
HOLA and section 8 of the Federal Deposit Insurance Act (FDIA) 
<SUP>9</SUP> when an institution has improperly adjusted ARM interest 
rates. As noted above, Sec. 560.210 implements both HOLA and TILA. 
Although TILA authorizes the OTS to utilize the standard enforcement 
remedies under section 8 of the FDIA, it limits when an agency may 
require an institution to ``make dollar adjustments'' for errors. Under 
TILA, the agency is authorized to direct an institution to make dollar 
adjustments only where an annual percentage rate or finance charge was 
inaccurately disclosed.<SUP>10</SUP>
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    \9\ 12 U.S.C. 1818.
    \10\ 15 U.S.C. 1607(b) & (e)(5).
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    By contrast, the OTS may seek any remedy authorized under the HOLA 
or section 8 of the FDIA for violations of regulations adopted pursuant 
to its authority under the HOLA.<SUP>11</SUP> As previously discussed, 
a long-standing purpose of the disclosure requirements of Sec. 560.210 
and its predecessor regulations has been promoting safe and sound 
lending by savings associations through ensuring that borrowers have a 
full understanding of their obligations and can therefore make 
reasonable and meaningful decisions about their ability to repay their 
loans. Thus, when enforcing Sec. 560.210 as a safety and soundness 
regulation, the agency has a wider array of enforcement tools than 
would be available if it were solely enforcing violations of TILA. 
Section 8 of the FDIA, for example, permits the OTS to issue cease and 
desist orders requiring affirmative corrective actions, which may 
include account adjustments. FDIA also authorizes the OTS to require an 
institution to make restitution if the institution was unjustly 
enriched, or acted with reckless disregard.
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    \11\ 12 U.S.C. 1464(d).
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    Changing the format of the regulation to incorporate some 
provisions of Regulation Z by cross-referencing does not affect this 
authority. As with other OTS regulations that incorporate regulations 
of other agencies by cross referencing (e.g., 12 CFR 560.93, 563.43), 
OTS has the responsibility of enforcing the incorporated regulations as 
they apply to savings associations. The OTS will continue to enforce 
violations of Sec. 560.210 using the enforcement remedies provided 
under the HOLA and FDIA.<SUP>12</SUP>
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    \12\ One commenter noted that borrowers have additional 
enforcement remedies under state law and under RESPA's mortgage loan 
servicing provisions. See 12 U.S.C. 2605(e)(1)(B). The OTS does not 
wish to rely on the efforts of the individual plaintiffs to ensure 
that thrift institutions use safe and sound banking practices and 
comply with applicable laws and regulation. Rather, the OTS has 
retained and will exercise the broadest possible enforcement 
authority permitted under the existing statutes.
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    In the preamble to the interim rule, the OTS observed that 
Sec. 560.210, on its face, applies to loans secured by a borrower's 
principal dwelling or by a second home. By contrast, the applicable 
Regulation Z disclosure requirements at 12 CFR 226.19(b) and 226.20(c) 
apply only when the secured property serves as the borrower's primary 
dwelling.<SUP>13</SUP> Two commenters urged the OTS to eliminate 
coverage for loans secured by second homes.
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    \13\ See e.g., 12 CFR Part 226, Supp. I. Official Staff 
Interpretation, Section 226.19, Paragraph 19(b), Comment 1.
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    In recent years, the OTS has revised the scope of its ARM 
disclosure rule to more closely conform to Regulation Z requirements. 
For example, in the recent Lending and Investment rulemaking, OTS 
eliminated coverage of ARM loans that are primarily for a business, 
commercial, or agricultural purpose. The OTS made this revision to 
minimize the differences between its ARM regulation and Regulation Z 
and to ensure parity in coverage for all lenders.<SUP>14</SUP> To 
ensure that the scope of the OTS rule is, and continues to be, 
coextensive with Regulation Z, the cross-reference in the final rule 
refers to variable rate transactions as described under 12 CFR 
226.19(b) and 226.20(c). These transactions are limited to those 
involving principal residences.
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    \14\ 61 FR 50951, 50962-63 (Sept. 30, 1996). Moreover, we note 
that the FHLBB's initial ARM disclosure regulation originally 
specifically excluded the coverage of second homes. 50 FR 32010 
(August 8, 1985). In 1987, however, the relevant language was 
deleted without any discussion. 52 FR 3668 (February 5, 1987).
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    In addition to the changes discussed above, the OTS has made minor 
technical changes to current Sec. 560.210. For example, the new cross-
references to variable rate mortgage transactions under Regulation Z, 
permit the deletion of the existing definitions of ``adjustable-rate 
mortgage loan,'' ``applicant,'' and ``home.''
    The OTS has also deleted current Sec. 560.210(e). This paragraph 
states that a savings association making a closed- or open-end ARM loan 
must comply with Regulation Z (12 CFR 226.30) by specifying in their 
credit contracts the maximum interest rate that may be imposed during 
the term of the obligation. This section simply reiterates already 
applicable requirements under Regulation Z, and may be deleted as 
unnecessary.

[[Page 38463]]

III. Effective Date

    The OTS has determined that there is good cause to dispense with a 
30-day delayed effective date under 5 U.S.C. 553(d)(3). The revised 
disclosure requirements reduce regulatory confusion by conforming the 
OTS disclosure rules under the HOLA more closely to those of the FRB 
under TILA. The changes do not have an adverse impact on savings 
associations because they reduce regulatory burden. Moreover, the 
substantive changes to disclosure requirements were immediately 
effective upon publication of the interim rule in January, 1998 and 
many institutions have already adopted the changes. Accordingly, OTS-
regulated institutions will not require additional time to adjust their 
policies or practices to comply with the rule.
    The OTS has also determined, for the reasons stated in the 
preceding paragraph, that good cause exists to adopt an effective date 
that is before date that would otherwise be required by section 302 of 
CDRIA (i.e., the first day of the calendar quarter after the date of 
publication).
    Accordingly, the final rule is effective immediately. However, like 
the FRB rule, compliance with the OTS rule is optional until October 1, 
1998.

IV. Paperwork Reduction Act of 1995

    The collections of information contained in this final rule were 
submitted to and approved by the Office of Management and Budget in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) 
under OMB Control Number 1550-0078.
    Comments on all aspects of this information collection above should 
be sent to the Office of Management and Budget, Paperwork Reduction 
Project (1550-0078), Washington, DC 20503, with copies to the Office of 
Thrift Supervision, 1700 G Street, NW, Washington, DC 20552.
    Under the Paperwork Reduction Act of 1995, no persons are required 
to respond to a collection of information unless it displays a valid 
OMB control number. The valid OMB control number assigned to the 
collection of information in this final rule is displayed at 12 CFR 
506.1(b).
    The collection of information requirements in this final rule are 
found at 12 CFR 560.210. The OTS needs the disclosures requirements to 
ensure that savings associations comply with a statutory TILA 
requirement and to otherwise supervise safe and sound lending by 
savings associations. The likely respondents/recordkeepers are OTS-
regulated savings associations.

V. Executive Order 12866

    The Director of the OTS has determined that this final rule does 
not constitute a ``significant regulatory action'' for the purposes of 
Executive Order 12866.

VI. Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
OTS certifies that this final rule will not have a significant economic 
impact on a substantial number of small entities. The final rule will 
not impose any additional burdens or requirements. Rather, it reduces 
the disclosures required for ARMs and eases the compliance burden on 
all savings associations, including small savings associations. 
Accordingly, a regulatory flexibility analysis is not required.

VII. Unfunded Mandates Act of 1995

    The OTS has determined that the requirements of this final rule 
will not result in expenditures by State, local, and tribal 
governments, or by the private sector, of more than $100 million in any 
one year. Accordingly, a budgetary impact statement is not required 
under section 202 of the Unfunded Mandates Act of 1995, as codified at 
2 U.S.C. 1571(a).

List of Subjects in 12 CFR Part 560

    Consumer protection, Investments, Manufactured homes, Mortgages, 
Reporting and recordkeeping requirements, Savings associations.

    Accordingly, the Office of Thrift Supervision amends title 12, 
chapter V, of the Code of Federal Regulations as set forth below:

PART 560--LENDING AND INVESTMENT

    1. The authority citation for part 560 continues to read as 
follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1701j-3, 
1828, 3803, 3806; 42 U.S.C. 4106.

    2. Section 560.210 is revised to read as follows:


Sec. 560.210  Disclosures for variable rate transactions.

    A savings association must provide the initial disclosures 
described at 12 CFR 226.19(b) and the adjustment notices described at 
12 CFR 226.20(c) for variable rate transactions, as described in those 
regulations. The OTS administers and enforces those provisions for 
savings associations.

    Dated: July 14, 1998.

By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 98-19143 Filed 7-16-98; 8:45 am]
BILLING CODE 6720-01-P