[Federal Register Volume 74, Number 103 (Monday, June 1, 2009)]
[Proposed Rules]
[Pages 26118-26130]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-12595]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Proposed 
Rules

[[Page 26118]]


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FEDERAL TRADE COMMISSION

16 CFR Parts 321 and 322

[RIN 3084-AB18]


Advance Notice of Proposed Rulemaking: Mortgage Acts and 
Practices

AGENCY: Federal Trade Commission (FTC or Commission).

ACTION: Advance Notice of Proposed Rulemaking; request for comment.

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SUMMARY: President Obama signed the 2009 Omnibus Appropriations Act on 
March 11, 2009. Section 626 of the Act directed the Commission to 
initiate, within 90 days of the date of enactment, a rulemaking 
proceeding with respect to mortgage loans. To implement the Act, the 
Commission has commenced a rulemaking proceeding in two parts. This 
Advance Notice of Proposed Rulemaking (ANPR), the Mortgage Acts and 
Practices Rulemaking, addresses activities that occur throughout the 
life-cycle of a mortgage loan, i.e., practices with regard to mortgage 
loan advertising and marketing, origination, appraisals, and servicing. 
Another ANPR, the Mortgage Assistance Relief Services Rulemaking, 
addresses the practices of entities (other than mortgage servicers) who 
offer assistance to consumers in dealing with owners or servicers of 
their loans to modify them or avoid foreclosure. The Commission is 
seeking public comment with regard to the unfair and deceptive acts and 
practices that should be prohibited or restricted pursuant to any rules 
adopted in these proceedings. Any rules adopted will apply to entities, 
other than banks, thrifts, federal credit unions, and non-profits, that 
are engaged in such unfair and deceptive acts and practices.

DATES: Comments must be received by July 30, 2009.

ADDRESSES: Interested parties are invited to submit written comments 
electronically or in paper form. Comments should refer to ``Mortgage 
Acts and Practices Rulemaking, Rule No. R911004'' to facilitate the 
organization of comments. Please note that comments will be placed on 
the public record of this proceeding--including on the publicly 
accessible FTC website, at (http://www.ftc.gov/os/publiccomments.shtm)--and therefore should not include any sensitive or 
confidential information. In particular, comments should not include 
any sensitive personal information, such as an individual's Social 
Security Number; date of birth; driver's license number or other state 
identification number, or foreign country equivalent; passport number; 
financial account number; or credit or debit card number. Comments also 
should not include any sensitive health information, such as medical 
records or other individually identifiable health information. In 
addition, comments should not include any ``[t]rade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential . . .,'' as provided in Section 6(f) of the 
FTC Act, 15 U.S.C. 46(f), and Commission Rule 4.10(a)(2), 16 CFR 
4.10(a)(2). Comments containing material for which confidential 
treatment is requested must be filed in paper form, must be clearly 
labeled ``Confidential,'' and must comply with FTC Rule 4.9(c), 16 CFR 
4.9(c).\1\
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    \1\ The comment must be accompanied by an explicit request for 
confidential treatment, including the factual and legal basis for 
the request, and must identify the specific portions of the comment 
to be withheld from the public record. The request will be granted 
or denied by the Commission's General Counsel, consistent with 
applicable law and the public interest. See FTC Rule 4.9(c), 16 CFR 
4.9(c).
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    Because paper mail addressed to the FTC is subject to delay due to 
heightened security screening, please consider submitting your comments 
in electronic form. Comments filed in electronic form should be 
submitted by using the following weblink: (https://secure.commentworks.com/ftc-mortgageactsandpractices) (and following 
the instructions on the web-based form). To ensure that the Commission 
considers an electronic comment, you must file it on the web-based form 
at the weblink (https://secure.commentworks.com/ftc-mortgageactsandpractices). If this Notice appears at (http://www.regulations.gov/search/index.jsp), you may also file an electronic 
comment through that website. The Commission will consider all comments 
forwarded to it by regulations.gov. You may also visit the FTC website 
at http://www.ftc.gov to read the Notice and the news release 
describing it.
    A comment filed in paper form should include the reference 
``Mortgage Acts and Practices Rulemaking, Rule No. R911004'' both in 
the text of the comment and on the envelope, and should be mailed or 
delivered to the following address: Federal Trade Commission, Office of 
the Secretary, Room H-135 (Annex T), 600 Pennsylvania Avenue, NW, 
Washington, DC 20580. The FTC requests that any comment filed in paper 
form be sent by courier or overnight service, if possible, because U.S. 
postal mail in the Washington area and at the Commission is subject to 
delay due to heightened security precautions.
    The FTC Act and other laws administered by the Commission permit 
the collection of public comments to consider and use in this 
proceeding as appropriate. The Commission will consider all timely and 
responsive public comments received, whether filed in paper or 
electronic form. Comments received will be available to the public on 
the FTC website, to the extent practicable, at (http://www.ftc.gov/os/publiccomments.shtm). As a matter of discretion, the Commission makes 
every effort to remove home contact information from comments filed by 
individuals before placing those comments on the FTC website. More 
information, including routine uses permitted by the Privacy Act, may 
be found in the FTC's privacy policy, at (http://www.ftc.gov/ftc/privacy.shtm).

FOR FURTHER INFORMATION CONTACT: Laura Johnson, Attorney, 202-326-3224, 
Division of Financial Practices, Federal Trade Commission, 600 
Pennsylvania Avenue, NW, Washington, DC 20580.

SUPPLEMENTARY INFORMATION:

I. Background

A. FTC Rulemaking Authority Pursuant to the Omnibus Appropriations Act 
of 2009

    Section 626 of the Omnibus Appropriations Act of 2009 \2\ requires 
that, within 90 days of enactment, the FTC initiate a rulemaking 
proceeding

[[Page 26119]]

with respect to mortgage loans. Pursuant to the Act, the rulemaking 
proceeding will be conducted in accordance with the requirements of 
Section 553 of the Administrative Procedure Act.\3\ To implement the 
Omnibus Appropriations Act of 2009, the Commission has commenced a 
rulemaking proceeding in two parts.
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    \2\ Omnibus Appropriations Act of 2009, Pub. L. No. 111-8, Sec.  
626, 123 Stat. 524 (Mar. 11, 2009).
    \3\ 5 U.S.C. 553. Section 626 of the Omnibus Appropriations Act 
of 2009 authorizes use of these procedures in lieu of the procedures 
set forth in Section 18 of the FTC Act, 15 U.S.C. 57a. Note that, 
because this rulemaking is not undertaken pursuant to Section 18, 15 
U.S.C. 57a(f), federal banking agencies are not required to 
promulgate substantially similar regulations for entities within 
their jurisdiction. Nonetheless, the Commission plans to consult 
with the federal banking agencies in this proceeding.
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    This ANPR, the Mortgage Acts and Practices (MAP) Rulemaking, 
addresses activities that occur throughout the life-cycle of a mortgage 
loan, i.e., practices with regard to mortgage loan advertising and 
marketing, origination, appraisals, and servicing. Another ANPR, the 
Mortgage Assistance Relief Services (MARS) Rulemaking, addresses the 
practices of entities (other than mortgage servicers) who offer 
assistance to consumers in dealing with owners or servicers of their 
loans to modify them or avoid foreclosure. Although the Omnibus 
Appropriations Act of 2009 specifies neither the types of conduct nor 
the types of entities any proposed rules should address, the Commission 
has used its organic statute, the FTC Act, in establishing the 
parameters for this rulemaking.\4\ In particular, the types of conduct 
that the FTC proposes to cover include acts and practices that meet the 
FTC's standards for unfairness or deception under Section 5 of the FTC 
Act.\5\ In addition, the entities that the FTC intends to cover are 
those over which the FTC has jurisdiction under the FTC Act--
specifically, entities other than banks, thrifts, federal credit 
unions,\6\ and non-profits \7\ that engage in the conduct the rules 
would cover.
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    \4\ The available legislative history is consistent with the 
Commission's determination as to the scope of the FTC's rulemaking. 
See 155 Cong. Rec. S2816-S2817 (2009).
    \5\ 15 U.S.C. 45(a)(1). For a comprehensive description of the 
FTC's application of its unfairness and deception authority in the 
context of financial services, see Letter from the FTC staff to John 
E. Bowman, Chief Counsel of the Office of Thrift Supervision (Dec. 
12, 2007), available at (http://www.ftc.gov/os/2007/12/P084800anpr.pdf).
    \6\ 15 U.S.C. 45(a)(2).
    \7\ 15 U.S.C. 44. Bona fide non-profit entities are exempt from 
the jurisdiction of the FTC Act. Sections 4 and 5 of the FTC Act 
confer on the Commission jurisdiction only over persons, 
partnerships, or corporations organized to carry on business for 
their profit or that of their members. See 15 U.S.C. 44, 45(a)(2).
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    Based on its law enforcement experience and the limited scope of 
current federal regulation, the Commission believes that the servicing 
of mortgage loans is a topic on which proposed rules may be needed. The 
FTC, however, also recognizes that proposed rules also may be needed to 
address acts and practices related to mortgage loan advertising and 
marketing, origination, and appraisals. The Commission therefore is 
seeking public comment on whether proposed rules are needed concerning 
acts and practices throughout the life-cycle of mortgage loans.
    The Commission is seeking comments to determine whether certain 
acts and practices of non-bank financial companies related to mortgage 
loans are unfair or deceptive under Section 5 of the FTC Act and should 
be incorporated into a proposed rule. These acts and practices include 
conduct that the FTC currently could challenge in a law enforcement 
action as violating Section 5 of the FTC Act. However, the Commission 
is not seeking comments on statutes that have been enacted and rules 
that have been issued on these topics. The FTC also specifically is not 
seeking comments on the Federal Reserve Board's (Board) new rules 
concerning mortgage loans.\8\
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    \8\ See infra Part I.D.
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    Pursuant to Section 626 of the Omnibus Appropriations Act of 2009, 
any violation of a rule adopted under that section will be treated as a 
violation of a rule promulgated pursuant to Section 18 of the FTC 
Act.\9\ Therefore, pursuant to Section 5(m)(1)(A) of the FTC Act,\10\ 
the Commission may seek civil penalties as a remedy for such rule 
violations. In addition, pursuant to Section 626(b) of the Omnibus 
Appropriations Act of 2009, a state may bring a civil action, in either 
state or federal court, to enforce the FTC mortgage loan rules and 
obtain civil penalties and other relief for violations. Before 
initiating an enforcement action, the state must notify the FTC, at 
least 60 days in advance, and the Commission may intervene in the 
action.
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    \9\ 15 U.S.C. 57a.
    \10\ 15 U.S.C. 45(m)(1)(A).
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B. FTC Authority Over Mortgage Loans and Other Financial Services

    The Commission protects consumers from harmful acts and practices 
at every stage of the mortgage life-cycle--from the advertisement of 
mortgages to the collection of mortgage debts. At the early stages of 
the cycle, the FTC protects consumers from unfair, deceptive, or 
otherwise unlawful acts and practices of brokers, lenders, and others 
that advertise or offer mortgages, including entities that market loans 
on behalf of lenders. At the middle and later stages of the cycle, the 
agency protects consumers from the unlawful conduct of creditors, 
mortgage servicing agents, and debt collectors that collect payments 
from consumers. The Commission also protects consumers from the 
unlawful acts and practices of those that market credit repair or debt 
relief services, including entities (other than mortgage servicers) who 
offer assistance to consumers struggling with mortgage debt in dealing 
with the owners or servicers of their loans to modify their loans or 
avoid foreclosure.
    The Commission has law enforcement authority over a wide range of 
acts and practices throughout the consumer credit life-cycle. The 
agency enforces Section 5 of the Federal Trade Commission Act, which 
prohibits ``unfair or deceptive acts or practices in or affecting 
commerce.'' \11\ The Commission also enforces other consumer protection 
statutes that govern financial services providers. These include the 
Truth in Lending Act (TILA),\12\ the Home Ownership and Equity 
Protection Act (HOEPA),\13\ the Consumer Leasing Act,\14\ the Fair Debt 
Collection Practices Act (FDCPA),\15\ the Fair Credit Reporting Act 
(FCRA),\16\ the Equal Credit Opportunity Act (ECOA),\17\ the Credit 
Repair Organizations Act,\18\ the Electronic Funds Transfer Act,\19\ 
the Telemarketing and Consumer Fraud and Abuse Prevention Act,\20\ and 
the privacy

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provisions of the Gramm-Leach-Bliley (GLB) Act.\21\
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    \11\ 15 U.S.C. 45(a)(1).
    \12\ 15 U.S.C. 1601-1666j (mandates disclosures and other 
requirements in connection with consumer credit transactions).
    \13\ 15 U.S.C. 1639 (provides protections for consumers entering 
into certain high-cost mortgage refinance loans).
    \14\ 15 U.S.C. 1667-1667f (requires disclosures, limits balloon 
payments, and regulates advertising in connection with consumer 
lease transactions).
    \15\ 15 U.S.C. 1692-1692p (prohibits abusive, deceptive, and 
unfair debt collection practices by third-party debt collectors).
    \16\ 15 U.S.C. 1681-1681x (imposes standards for consumer 
reporting agencies and information furnishers; places restrictions 
on the use of consumer report information). The Fair and Accurate 
Credit Transactions Act of 2003 amended the FCRA. Pub. L. No. 108-
159, 117 Stat. 1952 (2003).
    \17\ 15 U.S.C. 1691-1691f (prohibits creditor practices that 
discriminate on the basis of race, religion, national origin, sex, 
marital status, age, receipt of public assistance, or the exercise 
of certain legal rights).
    \18\ 15 U.S.C. 1679-1679j (mandates disclosures and other 
requirements in connection with credit repair organizations, 
including a prohibition against charging fees until services are 
completed).
    \19\ 15 U.S.C. 1693-1693r (establishes rights and 
responsibilities of institutions and consumers in connection with 
electronic fund transfer services).
    \20\ 15 U.S.C. 6101-6108 (provides consumer protection from 
telemarketing deception and abuse and requires the Commission to 
promulgate implementing rules).
    \21\ 15 U.S.C. 6801-6809 (requires financial institutions to 
provide annual privacy notices; provides consumers the means to opt 
out from having certain information shared with non-affiliated third 
parties; and safeguards customers' personally identifiable 
information).
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    Notwithstanding the Commission's broad authority over acts and 
practices related to financial services, the FTC does not have 
jurisdiction over all providers of these services. The FTC Act 
specifically excludes banks, thrifts, and federal credit unions from 
the agency's jurisdiction.\22\ However, non-bank affiliates of banks, 
such as parent companies or subsidiaries, are subject to the 
Commission's jurisdiction.\23\ Likewise, the FTC has jurisdiction over 
entities that have contracted with banks to perform certain services on 
behalf of banks, such as credit card marketing and other services, but 
which are not themselves banks.\24\ As a result, non-bank entities that 
provide financial services to consumers are subject to Commission 
jurisdiction, even if they are affiliated with, or are contracted to 
perform services for, banking entities.
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    \22\ 15 U.S.C. 45(a)(2). The FTC Act defines ``banks'' by 
reference to a listing of certain distinct types of legal entities. 
See 15 U.S.C. 44, 57a(f)(2). That list includes: national banks, 
federal branches of foreign banks, member banks of the Federal 
Reserve System, branches and agencies of foreign banks, commercial 
lending companies owned or controlled by foreign banks, banks 
insured by the Federal Deposit Insurance Corporation, and insured 
state branches of foreign banks.
    \23\ Congress clarified FTC jurisdiction when it enacted the GLB 
Act. Section 133(a) of the GLB Act states that an entity that is 
affiliated with a bank, but which is not itself a bank, is not a 
bank for purposes of the FTC Act. Section 133(a) of the GLB Act 
specifically provides:
     CLARIFICATION OF FEDERAL TRADE COMMISSION JURISDICTION. Any 
person that directly or indirectly controls, is controlled directly 
or indirectly by, or is directly or indirectly under common control 
with, any bank or savings association . . . and is not itself a bank 
or savings association shall not be deemed to be a bank or savings 
association for purposes of any provisions applied by the Federal 
Trade Commission under the Federal Trade Commission Act.
    Pub. L. No. 106-102, Sec.  133(a), 113 Stat. 1383; 15 U.S.C. 41 
note (a). This section has been interpreted to apply to subsidiaries 
of banks that are not themselves banks. Minnesota v. Fleet Mortgage 
Corp., 181 F. Supp. 2d 995 (D. Minn. 2001).
    \24\ See, e.g., FTC v. CompuCredit Corp., Civil Action No. 1:08-
CV-01976-BBM-RGV (N.D. Ga. 2008) (approving stipulated final order 
involving FTC action against entity that contracted to perform 
credit card marketing services for a bank); FTC v. Am. Standard 
Credit Sys., 874 F. Supp. 1080, 1086 (C.D. Cal. 1994) (dismissing 
argument that entity that contracted to perform credit card 
marketing and other services for a bank is not subject to FTC Act).
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    As discussed above, the Commission intends that any rules that it 
issues in this proceeding would apply only to the same types of 
entities over which the Commission has jurisdiction under the FTC Act.

C. Deceptive and Unfair Acts and Practices

1. Deceptive Acts and Practices
    Section 5 of the FTC Act broadly proscribes deceptive or unfair 
acts or practices in or affecting commerce. An act or practice is 
deceptive if there is a representation, omission of information, or 
practice that is likely to mislead consumers, who are acting reasonably 
under the circumstances, and the representation, omission, or practice 
is one that is material.\25\ Injury is likely if the misleading or 
omitted information is material to consumers, i.e., likely to affect a 
decision to purchase or use a product or service.
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    \25\ Federal Trade Commission Policy Statement on Deception, 
appended to In re Cliffdale Assocs., 103 F.T.C. 110, 174-84 (1984) 
(Deception Policy Statement).
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    To determine that an act or practice is deceptive, the Commission 
first must conclude that there is a representation, omission of 
information, or a practice that is likely to mislead consumers. A claim 
about a product or service may be either express or implied. An express 
claim generally is established by the representation itself. An implied 
claim, on the other hand, is an indirect representation, which must be 
examined within the context of other information that is either 
presented or omitted. Deception may occur based on what is stated or 
because of the omission of information that would be important to the 
consumer. In determining that an advertisement is deceptive, for 
example, the Commission considers whether the overall net impression of 
the ad (including language and graphics) is likely to mislead 
consumers.\26\
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    \26\ Disclaimers or qualifying statements are important to 
consider for deception analysis. Such disclaimers must be 
sufficiently clear, prominent, and understandable to convey the 
qualifying information effectively to consumers. The Commission 
recognizes that often ``reasonable consumers do not read the 
entirety of an ad or are directed away from the importance of the 
qualifying phrase by the acts or statements of the seller.'' 
Deception Policy Statement at 181. Thus, fine print disclosures at 
the bottom of a print ad or television screen are unlikely to cure 
an otherwise deceptive representation.
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    Second, the Commission considers the act or practice from the 
perspective of a consumer acting reasonably under the 
circumstances.\27\ Reasonableness is evaluated based on the 
sophistication and understanding of consumers in the group to whom the 
representation or sales practice is directed. If a specific audience is 
targeted, the Commission will consider the effect on a reasonable 
member of that target group. A representation may be susceptible to 
more than one reasonable interpretation, and if one such interpretation 
is misleading, the advertisement is deceptive, even if other non-
deceptive interpretations are possible.\28\
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    \27\ Deception Policy Statement at 177-81.
    \28\ Id. at 178.
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    Third, to conclude that deception has occurred, the Commission must 
determine that the representation, omission, or practice is material, 
i.e., one that is likely to affect a consumer's decision to purchase or 
use a product or service. A deceptive representation, omission, or 
practice that is material is likely to cause consumer injury--that is, 
but for the deception, the consumer may have made a different 
choice.\29\ Express claims about a product or service, such as 
statements about cost, are presumed to be material. Claims about 
purpose and efficacy of a product or service are also presumed to be 
material.\30\
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    \29\ Id. at 182-83.
    \30\ Novartis Corp. v. FTC, 223 F.3d 783, 786-87 (D.C. Cir. 
2000).
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2. Unfair Acts and Practices
    Section 5(n) of the FTC Act also sets forth a three-part test to 
determine whether an act or practice is unfair.\31\ First, the practice 
must be one that causes or is likely to cause substantial injury to 
consumers. Second, the injury must not be outweighed by countervailing 
benefits to consumers or to competition. Third, the injury must be one 
that consumers could not reasonably have avoided.
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    \31\ 15 U.S.C. 45(n). Section 5(n) of the FTC Act also provides 
that ``[i]n determining whether an act or practice is unfair, the 
Commission may consider established public policies as evidence to 
be considered with all other evidence.''
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    In analyzing whether injury is substantial, the Commission is not 
concerned with trivial, speculative, or more subjective types of harm. 
The substantial injury test may be met by small harm to a large number 
of consumers. In most cases, substantial injury involves monetary harm. 
Once it determines that there is substantial consumer injury, the 
Commission considers whether the harm is offset by any countervailing 
benefits to consumers or to competition. Thus, the Commission considers 
both the costs of imposing a remedy and any benefits that consumers 
enjoy as a result of the practice at issue. Finally, the injury must be 
one that consumers cannot reasonably avoid. If consumers reasonably 
could have made a different choice that would have avoided the injury, 
but did not do so, the practice is not deemed to be unfair under the 
FTC Act.

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    In applying its unfairness standard, the Commission takes the 
approach that well-informed consumers are capable of making choices for 
themselves. The agency therefore may prohibit or restrict acts and 
practices if they unreasonably create, or take advantage of, an 
obstacle to the ability of consumers to make informed choices, thus 
causing, or being likely to cause, consumer injury.\32\
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    \32\ See Letter from the FTC to Hon. Wendell Ford and Hon. John 
Danforth, Committee on Commerce, Science and Transportation, United 
States Senate, Commission Statement of Policy on the Scope of 
Consumer Unfairness Jurisdiction (December 17, 1980), reprinted in 
In re Int'l Harvester Co., 104 F.T.C. 949, 1070, 1073 (1984) 
(Unfairness Policy Statement). See also Trade Regulation Rule 
Concerning Cooling-Off Period for Sales Made at Homes or at Certain 
Other Locations, 16 CFR 429 (making it an unfair and deceptive 
practice for anyone engaged in ``door-to-door'' sales of consumer 
goods or services with a purchase price of $25 or more to fail to 
provide buyer with certain oral and written disclosures regarding 
buyer's right to cancel within three business days); Holland Furnace 
Co. v. FTC, 295 F.2d 302 (7th Cir. 1961) (seller's servicemen 
dismantled home furnaces then refused to reassemble them until 
consumers agreed to buy services or replacement parts).
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D. Federal Reserve Board's Rules Concerning Mortgage Loans

    In determining the restrictions on mortgage loans that should be 
included in an FTC proposed rule, it is important to consider the rules 
related to mortgage loans that the Board issued last year. On July 14, 
2008, the Board announced new rules amending several aspects of 
Regulation Z, which implements TILA and HOEPA.\33\ TILA generally 
requires that creditors and certain advertisers make disclosures to 
consumers so that they can make better informed credit decisions, 
including decisions related to mortgages. HOEPA, which amended TILA, 
imposes substantive restrictions on certain high-priced loans, all of 
which are subprime loans.\34\ Section 105(a) of TILA gives the Board 
the authority to promulgate rules necessary or proper to carry out 
TILA's purposes.\35\ Section 129(l)(2) of TILA gives the Board the 
authority to promulgate rules to prohibit ``unfair'' or ``deceptive'' 
acts and practices in connection with mortgage loans generally. It also 
gives the Board the authority to promulgate rules to prohibit practices 
that are ``abusive'' or ``not in the interest of the borrower'' in 
connection with the refinancing of mortgage loans.\36\ The Board used 
its general authority under Section 105(a) to promulgate some of its 
new rules and its HOEPA authority under Section 129(l)(2) to promulgate 
other new rules.\37\
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    \33\ Truth in Lending, 73 FR 44522 (July 30, 2008). This ANPR 
summarizes the Board's rules, infra, but does not provide a full 
analysis because they are explained in detail in the supplementary 
information portion of the July 2008 final rule. See id.
    \34\ HOEPA applies to loans that are closed-end, non-purchase 
money mortgages (such as refinancings or home equity loans) secured 
by a consumer's principal dwelling (other than a reverse mortgage) 
where either: (a) the APR at consummation will exceed the yield on 
Treasury securities of comparable maturity by more than 8 percentage 
points for first-lien loans, or 10 percentage points for 
subordinate-lien loans; or (b) the total points and fees payable by 
the consumer at or before closing exceed the greater of 8 percent of 
the total loan amount, or $583. See 12 CFR 226.32; FRB Regulation Z 
Official Staff Commentary, 12 CFR 226.32(a), Supp. I (2008); see 
also definition of ``closed-end credit,'' infra note 45.
    \35\ 15 U.S.C. 1604(a).
    \36\ 15 U.S.C. 1639(l)(2).
    \37\ The FTC has the authority to obtain civil penalties for 
violations of the rules that the Board promulgates under its Section 
129(l)(2) authority. See infra notes 53, 70, 97, and 101 and 
accompanying text; Omnibus Appropriations Act of 2009 Sec.  626(c); 
15 U.S.C. 45(l), 45(m), 1607(c). The FTC does not have the authority 
to obtain civil penalties for violations of rules the Board 
promulgates under its Section 105(a) authority. See infra notes 46, 
48, 55, 57, 81, and 84 and accompanying text. In contrast, the 
federal banking regulatory agencies may obtain civil penalties from 
entities under their jurisdiction for any violation of TILA, HOEPA, 
or Regulation Z. See 15 U.S.C. 1607(a); 12 U.S.C. 1786(k), 1818(I).
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    The federal banking agencies and the FTC enforce TILA (including 
HOEPA) and Regulation Z. TILA specifically provides enforcement 
authority to the Board (for state member banks of the Federal Reserve 
System), the Office of the Comptroller of the Currency (OCC) (for 
national banks), the Federal Deposit Insurance Corporation (FDIC) (for 
other insured banks), the Office of Thrift Supervision (OTS) (for 
savings associations), and the National Credit Union Administration 
(NCUA) (for federal credit unions).\38\ TILA provides the FTC with 
enforcement authority as to all entities that are not specifically 
committed to another government agency.\39\ Thus, the FTC enforces TILA 
(including HOEPA) and Regulation Z for non-bank financial companies, 
such as non-bank mortgage companies, mortgage brokers, and finance 
companies.\40\
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    \38\ 15 U.S.C. 1607(a).
    \39\ 15 U.S.C. 1607(c).
    \40\ See Part I.B, supra, for discussion of FTC jurisdiction.
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    The Board's final rules make changes to Regulation Z in what the 
FTC describes as essentially four parts of the mortgage life-cycle. The 
rules address acts and practices related to: (1) advertising and 
marketing; (2) origination (including underwriting, loan terms, and 
disclosures); (3) appraisals; and (4) servicing. Most of the new rules 
will take effect on October 1, 2009, although the rules related to 
escrows do not take effect until 2010.

II. Mortgage Advertising and Marketing

A. Overview

    The mortgage life-cycle begins when a consumer initially shops for 
a mortgage. The consumer may seek out mortgage loan information on his 
or her own, whether on the Internet or through oral or written contacts 
with a real estate broker, mortgage lender, mortgage broker, or other 
source. The consumer also may see or hear more widely disseminated 
mortgage advertisements through various sources, whether in print 
(including billboards, direct mailings, emails, and faxes), or through 
television, radio, the Internet, or other electronic media. The 
advertiser or marketer may be the creditor itself, or a mortgage 
broker, real estate broker, lead generator, rate aggregator, or another 
person or entity.

B. Mortgage Advertising and Marketing Laws the FTC Enforces

    The FTC Act requires that claims in advertising and marketing, 
including claims about mortgage loans, be truthful and non-
misleading.\41\ Mortgage advertisers are also subject to TILA 
(including HOEPA) and its implementing Regulation Z, among other 
laws.\42\ In general, TILA and Regulation Z contain four basic 
requirements for mortgage advertisements.\43\ First, an advertisement 
must reflect terms actually available to the consumer. Second, required 
disclosures must be made clearly and conspicuously in the 
advertisement. Third, any advertisement that includes any credit rate 
must state the annual percentage rate, or ``APR.'' The APR must be 
stated at least as conspicuously as any other stated rates. Fourth, if 
any major triggering loan term (e.g., a monthly payment amount) is 
advertised, other major terms, including the APR, must also be 
advertised.
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    \41\ See 15 U.S.C. 45; see also Part I.C.1, supra.
    \42\ This discussion is not intended as a comprehensive list of 
all potentially applicable mortgage advertising and marketing laws. 
Marketers of credit products also may be subject to requirements 
under laws such as the FCRA--for example, regarding firm offers of 
credit. The Commission is not seeking comment on FCRA issues in 
response to this ANPR.
    \43\ See, e.g., 15 U.S.C. 1661-1665b; 12 CFR 226.16, 226.24.
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    In July 2008, the Board issued rules under Regulation Z addressing 
mortgage advertising issues.\44\ Some of these rules apply to closed-
end credit, and others apply to open-end home equity plans. The Board's 
rules take effect on October 1, 2009.
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    \44\ See 73 FR at 44599-602 (to be codified at 12 CFR 226.16, 
226.24).

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[[Page 26122]]

1. Closed-End Credit
    Closed-end credit includes a standard mortgage loan in which the 
proceeds are paid out in full at loan closing.\45\ Regarding closed-end 
credit, the Board made three significant changes to the advertising 
provisions in Regulation Z. First, the Board strengthened the ``clear 
and conspicuous'' Regulation Z standards for disclosures of 
information.\46\ The standards vary greatly depending on the type of 
media used for the advertisement, but generally disclosures about 
promotional rates and payments must be prominent and appear close to 
triggering terms.\47\
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    \45\ TILA Section 144 and Regulation Z Section 226.24 govern 
advertising of ``closed-end credit,'' which is defined as consumer 
credit other than open-end credit. 15 U.S.C. 144; 12 CFR 226.2(10), 
226.24. Open-end credit is credit extended to a consumer under a 
plan in which: (1) the creditor reasonably contemplates repeated 
transactions; (2) the creditor may impose a finance charge from time 
to time on the outstanding unpaid balance; and (3) the amount of 
credit that may be extended to the consumer during the plan's term 
is generally made available to the extent that any unpaid balance is 
repaid. 12 CFR 226.2(20).
    \46\ See 73 FR at 44579-85, 44601-602, 44608-610. The Board 
promulgated these rules using its authority under TILA Section 
105(a).
    \47\ For example, disclosures in the context of visual text 
advertisements on the Internet must not be obscured by graphic 
displays, shading, or coloring. See id. at 44581, 44608.
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    Second, the Board addressed a variety of practices regarding 
advertising mortgage rates and payments.\48\ For example, mortgage 
advertisements must not state any rate other than the APR, except that 
the simple annual rate applied to an unpaid balance may be stated in 
conjunction with, but not more conspicuous than, the APR.\49\ If 
mortgage advertisements contain limited duration ``teaser'' rates or 
payment amounts, then the advertisements must also clearly and 
conspicuously disclose the duration of these rates or payment 
amounts.\50\ The rules prohibit advertisement of rates that are lower 
than the rate at which interest is accruing (referred to as ``payment 
rates,'' ``effective rates,'' or ``qualifying rates'') because 
consumers may not understand these rates.\51\ The rules also revise the 
requirements regarding the disclosures that must be made when any one 
of certain triggering terms is advertised by clarifying the meaning of 
the ``terms of repayment'' and adding a new disclosure requirement if a 
mortgage advertisement states the amount of any payment.\52\
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    \48\ See id. at 44581-585, 44601-602, 44608-610. The Board 
promulgated these rules using its authority under TILA Section 
105(a).
    \49\ See id. at 44581, 44601, 44608. The rules prohibit 
advertisement of a periodic rate, other than the simple annual rate 
of interest, for credit secured by a dwelling. Id.
    \50\ See id. at 44583, 44601-602, 44609-610.
    \51\ See id. at 44581. Payment rates are often featured in 
option adjustable rate mortgages and various other non-traditional 
mortgages. A payment rate is used to calculate the consumer's 
monthly payment amount and is not necessarily the same as the 
interest rate. If the payment rate is less than the interest rate, 
the consumer's monthly payment amount does not include the full 
interest owed each month; the difference between the amount the 
consumer pays and the amount the consumer owes is added to the total 
amount due from the consumer. After a specified number of years, or 
if the loan reaches a negative amortization cap, the required 
monthly payment amount is recast to require payments that will fully 
amortize the balance over the remaining loan term, leading to 
sharply increased payments by the consumer.
    \52\ See, e.g., id. at 44582-585, 44601-602, 44608-610.
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    Third, the Board prohibited the following seven specific mortgage 
advertising claims based on its conclusion that the claims are per se 
``misleading or deceptive:'' \53\
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    \53\ See id. at 44586-590, 44602, 44610. The Board promulgated 
these rules using its authority under TILA Section 129(l)(2).
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    1. advertising as ``fixed'' a rate or payment that will change 
after a period of time unless the advertisement meets certain criteria, 
such as having an equally prominent and closely proximate disclosure 
that the rate or payment is ``fixed'' for only a limited period of 
time;
    2. comparing actual or hypothetical rates or payments to the rates 
or payments on an advertised loan unless the advertisement discloses 
the rates or payments that will apply over the full term of the 
advertised loan;
    3. misrepresenting an advertised loan as being part of a 
``government loan program'' or otherwise endorsed or sponsored by a 
government entity;
    4. using the name of the consumer's current lender unless the 
advertisement has an equally prominent disclosure of the person 
actually making the advertisement and includes a clear and conspicuous 
statement that the advertiser is not associated with the consumer's 
current lender;
    5. making any misleading claim that an advertised loan will 
eliminate debt or result in a waiver or forgiveness of a consumer's 
existing loan terms with, or obligations to, another creditor;
    6. using the term ``counselor'' in an advertisement to refer to a 
for-profit mortgage broker or mortgage lender; and
    7. advertising mortgages in a language other than English while 
giving critical disclosures only in English.
2. Open-End Home Equity Plans
    The Board's new mortgage rules also addressed the advertising of 
open-end home equity plans,\54\ such as home equity lines of credit 
(HELOCs). Regarding open-end home equity plans, the Board made two 
significant changes. First, the rules modify Regulation Z's ``clear and 
conspicuous'' standard.\55\ The standards vary greatly depending on the 
type of media used for the advertisement, but generally disclosures 
about promotional rates and payments must be prominent and appear close 
to triggering terms.\56\ Second, the rules address a variety of 
practices regarding advertising rates and payments.\57\ Most 
significantly, the rules add new disclosure requirements for the 
advertisement of promotional rates and payments.\58\ The standards vary 
greatly depending on the type of media used for the advertisement.\59\
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    \54\ Open-end home equity plans are open-end credit secured by a 
consumer's dwelling. See 12 CFR 226.5b; see also definition of 
``open-end credit,'' supra note 45.
    \55\ See 73 FR at 44574-79, 44599-600, 44605-606. The Board 
promulgated these rules using its authority under TILA Section 
105(a).
    \56\ For example, disclosures in the context of visual text 
advertisements on the Internet must not be obscured by graphic 
displays, shading, or coloring. See id. at 44575, 44605.
    \57\ See id. at 44575-579, 44599-600, 44606. The Board 
promulgated these rules using its authority under TILA Section 
105(a).
    \58\ See id. at 44576-579, 44600, 44606.
    \59\ See id.
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C. FTC Mortgage Advertising and Marketing Law Enforcement

    The FTC has brought numerous enforcement actions challenging the 
conduct of lenders, brokers, and other advertisers of mortgage loans in 
violation of the FTC Act or the TILA.\60\ In most of its mortgage 
lending cases, the Commission has challenged alleged deception in the 
advertising or marketing of mortgage loans, with a focus on subprime 
and non-traditional loans. For example, the Commission has brought 
actions against mortgage lenders or brokers for alleged deceptive 
marketing of loan costs\61\ or other key loan terms, such as 
misrepresenting the absence of or failing to adequately disclose the 
existence of a prepayment penalty \62\ or a large balloon payment due 
at the end of the loan.\63\ Most

[[Page 26123]]

recently, in February 2009, the Commission announced settlements with 
three mortgage companies charged with advertising low interest rates 
and low monthly payments, but allegedly failing to disclose adequately 
that the low rates and payment amounts would increase substantially 
after a limited period of time.\64\
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    \60\ See, e.g., FTC v. Mortgages Para Hispanos.Com Corp., No. 
06-00019 (E.D. Tex. 2006); FTC v. Ranney, No. 04-1065 (D. Colo. 
2004); FTC v. Chase Fin. Funding, No. 04-549 (C.D. Cal. 2004); FTC 
v. OSI Fin. Svcs., Inc., No. 02-C-5078 (N.D. Ill. 2002); United 
States v. Mercantile Mortgage Co., No. 02-5079 (N.D. Ill. 2002); FTC 
v. Associates First Capital Corp., No. 01-00606 (N.D. Ga. 2001); FTC 
v. First Alliance Mortgage Co., No. 00-964 (C.D. Cal. 2000).
    \61\ See, e.g., FTC v. Associates First Capital Corp., No. 01-
00606 (N.D. Ga. 2001); FTC v. First Alliance Mortgage Co., No. 00-
964 (C.D. Cal. 2000).
    \62\ FTC v. Chase Fin. Funding, No. 04-549 (C.D. Cal. 2004); FTC 
v. OSI Fin. Svcs., Inc., No. 02-C-5078 (N.D. Ill. 2002).
    \63\ E.g., FTC v. OSI Fin. Svcs., Inc., No. 02-C-5078 (N.D. Ill. 
2002); FTC v. Associates First Capital Corp., No. 1:01-CV-00606 
(N.D. Ga. 2001).
    \64\ See, e.g., In the Matter of American Nationwide Mortgage 
Company, Inc., FTC Dkt. No. C-4249 (Feb.17, 2009); In the Matter of 
Shiva Venture Group, Inc., FTC Dkt. No. C-4250 (Feb. 17, 2009); In 
the Matter of Michael Gendrolis, FTC Dkt. No. C-4248 (Feb. 17, 
2009).
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III. Mortgage Origination--Underwriting, Loan Terms, and Disclosure 
Issues

A. Underwriting and Loan Terms

1. Overview
    For many years, consumers purchased homes with traditional, fully 
documented, 30-year, amortizing, fixed-rate or adjustable rate 
mortgages (ARMs), under which the borrower pays principal and interest 
each month for the life of the loan. However, over the past decade, 
there has been an increase in the use of increasingly complex non-
traditional, or alternative, mortgage products.\65\ Several of these 
products offer consumers the option of making lower initial monthly 
payments in the early years of the loan, which makes it easier for some 
consumers to purchase homes, or to purchase more expensive homes than 
they might otherwise buy at the time. After the introductory period 
ends, however, the monthly payments can increase significantly, and 
some consumers can no longer afford their loans. For example, payment 
option ARMs do not require that the consumer's initial payments cover 
the accruing interest. The remaining interest is added to the loan 
balance, resulting in negative amortization and larger subsequent 
payments. Interest-only loans require the borrower to pay only the 
monthly interest due during an initial period, causing the principal 
balance to remain unchanged. When the initial period expires, the 
consumer's payments increase to include both principal and interest. In 
addition, some consumers who use these products are subject to 
prohibitive prepayment penalties if they refinance their loans.
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    \65\ These products include 2/28 and 2/27 ARMs, fixed- and 
adjustable-rate interest-only loans, payment option ARMs, 40-year 
fixed-rate mortgages, and 50-year hybrid ARMs. In May 2006, to 
explore the financial benefits and risks of several alternative 
mortgage products, the Commission sponsored a day-long public 
workshop, ``Protecting Consumers in the New Mortgage Marketplace.'' 
See 71 FR 15417 (Mar. 28, 2006) and (http://www.ftc.gov/bcp/workshops/mortgage/index.html).
---------------------------------------------------------------------------

    The growth of these products coincided with the rise of independent 
brokers originating loans and the ``originate-to-distribute'' model 
under which lenders immediately sell loans to the secondary market 
instead of holding them in their portfolios. Because these brokers and 
lenders are compensated early on in the loan transaction, the 
incentives do not facilitate diligent underwriting or interest in the 
long-term performance of loans.\66\
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    \66\ See Ben Bernanke, Chairman, Board of Governors of the 
Federal Reserve System, ``Housing, Housing Finance, and Monetary 
Policy,'' Remarks at Federal Reserve Bank of Kansas City's Economic 
Symposium, Jackson Hole, Wyo. (Aug. 31, 2007) available at (http://www.federalreserve.gov/newsevents/speech/bernanke20070831a.htm).
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2. Mortgage Origination Laws the FTC Enforces
    Mortgage loan originators are subject to numerous federal laws that 
the FTC enforces.\67\ Section 5 of the FTC Act prohibits unfair or 
deceptive acts or practices in or affecting commerce, including unfair 
or deceptive mortgage loan origination activities. In addition, 
mortgage loan originators are subject to disclosure, and other 
requirements under the TILA (including HOEPA) and its implementing 
Regulation Z. In July 2008, the Board issued rules under Regulation Z 
addressing certain mortgage origination issues, including substantive 
restrictions on underwriting and loan terms.\68\ Most of the Board's 
rules take effect on October 1, 2009, although the rules concerning 
escrows do not take effect until 2010.
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    \67\ This discussion is not intended as a comprehensive list of 
all potentially applicable mortgage origination laws. Mortgage 
originators also are subject to requirements under laws such as 
ECOA. See, e.g., FTC v. Gateway Funding Diversified Mortgage Servs. 
L.P., No. 08-5805 (E.D. Pa. 2008). The Commission is not seeking 
comments on discrimination and fair lending issues in response to 
this ANPR.
    \68\ 73 FR at 44602-604 (to be codified at 12 CFR 226.32, 
226.34, 226.35). See note 34, supra, for definition of HOEPA loans.
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    The Board's rules establish a new category of ``higher-priced 
mortgage loans,'' which effectively includes HOEPA loans and virtually 
all subprime loans.\69\ The Board added four new provisions to 
Regulation Z that apply to these higher-priced loans, three of which 
also specifically apply to HOEPA loans.\70\ First, creditors are 
prohibited from making higher-priced loans or HOEPA loans without 
regard to the borrower's ability to repay the loans.\71\ Second, for 
higher-priced loans or HOEPA loans, creditors must verify the income 
and assets of borrowers using reliable third-party documents.\72\ 
Third, prepayment penalties are restricted on higher-priced loans and 
HOEPA loans. If mortgage payments can change during the first four 
years of the loan, creditors cannot impose a prepayment penalty. If 
mortgage payments will not change during the first four years of the 
loan, creditors can charge a prepayment penalty only if borrowers 
prepay during the first two years of the loan.\73\ Finally, creditors 
must establish an escrow account for property taxes and homeowner's 
insurance for first-lien higher-priced mortgage loans.\74\
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    \69\ ``Higher-priced mortgage loans'' are consumer-purpose, 
closed-end loans secured by a consumer's principal dwelling and 
having an APR that exceeds the average prime offer rates for a 
comparable transaction published by the Federal Reserve Board by at 
least 1.5 percentage points for first-lien loans, or 3.5 percentage 
points for subordinate-lien loans. The term excludes initial 
construction loans, bridge loans for 12 months or less, reverse 
mortgages, and home equity lines of credit. See 73 FR at 44603.
    \70\ The Board promulgated these rules using its authority under 
TILA Section 129(l)(2).
    \71\ The final rules provide that creditors are presumed to have 
adequately considered ability to pay if they have: (1) verified 
repayment ability based on reliable third-party documents; (2) 
determined repayment ability using the ``largest scheduled payment'' 
of principal and interest in the first seven years of the loan (in 
the case of variable-rate loans, the applicable rate is the fully-
indexed rate as of the date of consummation, not the maximum note 
rate); and (3) assessed the borrower's repayment ability using a 
ratio of the borrower's total debt obligations to income, and/or a 
borrower's residual income (income after paying debt obligations). 
See 73 FR at 44539-551, 44603, 44611-613.
    \72\ See id. at 44546-548, 44603, 44611-612.
    \73\ See id. at 44551-557, 44603-604, 44610-611, 44613.
    \74\ Borrowers may cancel their escrow accounts 12 months after 
loan consummation. The requirement for a creditor to establish an 
escrow account for loans secured by site-built homes becomes 
effective April 1, 2010; for loans secured by manufactured housing, 
it becomes effective October 1, 2010. See id. at 44557-562, 44604, 
44613.
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3. FTC Mortgage Origination Law Enforcement
    The FTC's law enforcement program protects consumers in connection 
with various aspects of their mortgage origination, including those 
related to mortgage underwriting requirements and loan terms that are 
restricted or prohibited for HOEPA loans. Some lenders against whom the 
FTC has taken action \75\ allegedly violated HOEPA by engaging in one 
or more of the following prohibited acts and practices: extending

[[Page 26124]]

credit based on the value of consumers' collateral without regard to 
their repayment ability, charging prepayment penalties, requiring 
balloon payments, providing negatively amortized loans (causing the 
loan balance to increase), including provisions to increase the 
interest rate after default, making direct payments to home improvement 
contractors, or failing to make required HOEPA disclosures.
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    \75\ See, e.g., FTC v. Safe Harbour Found. of Fl., Inc., No. 08-
1185 (N.D. Ill. 2008); United States v. Delta Funding Corp., No. 00-
1872 (E.D.N.Y. 2000) (brought in conjunction with Department of 
Justice and Department of Housing and Urban Development); FTC v. 
NuWest, Inc., No. 00-1197 (W.D. Wash. 2000); FTC v. Capitol Mortgage 
Corp., No. 2-99-CV580G (D. Utah 1999); FTC v. Cooper, No. CV 99-
07782 WDK (C.D.Cal. 1999); FTC v. CLS Fin. Servs., Inc., No. C99-
1215 Z (W.D. Wash. 1999); FTC v. Granite Mortgage, LLC, No. 99-289 
(E.D. Ky. 1999); FTC Interstate Resource Corp., No. 99 Civ. 5988 
(S.D. N.Y. 1999); FTC v. LAP Fin. Servs., Inc., No. 3:99 CV-496-H 
(W.D. Ky. 1999); FTC v. Wasatch Credit Corp., No. 2-99CV579G (D. 
Utah 1999).
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B. Mortgage Disclosures

1. Overview, Relevant Federal Laws, and FTC Law Enforcement
    Consumers are faced with numerous factors to take into 
consideration when comparing the terms of various mortgage loans, such 
as the duration of the loan, the interest rate, whether that rate is 
fixed or adjustable, the amount of closing costs, and other 
characteristics such as prepayment penalties and balloon payments. As 
consumers shop for a mortgage, it is important that they receive timely 
and understandable information about the terms and costs of the 
particular products they are trying to analyze and compare. Moreover, 
for many alternative mortgage products--where the payment schedule may 
increase substantially in future years, or prepayment penalties may 
apply--it is important that consumers receive information about their 
payments and other important loan terms at a time when they can use 
that material in selecting their preferred loan and terms.
    Federal agencies other than the Commission currently have the 
specific authority to promulgate rules specifying mortgage disclosure 
requirements. These disclosures are intended to provide consumers with 
the opportunity to review, understand, and agree to the offered loan 
terms. The Department of Housing and Urban Development (HUD) has 
responsibility for disclosure of settlement costs under the Real Estate 
Settlement Procedures Act (RESPA).\76\ The Board also has 
responsibility for disclosure of certain loan costs under TILA.\77\
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    \76\ 12 U.S.C. 2603-04.
    \77\ 15 U.S.C. 1604.
---------------------------------------------------------------------------

    Under RESPA, a lender or broker must provide consumers of 
``federally related mortgage loans'' \78\ with a Good Faith Estimate of 
Settlement Costs (GFE) within three days of receiving a written 
application and with a HUD-1 Settlement Statement at closing. The GFE 
currently is not a standardized form, but it must include an 
itemization of the estimated costs and services the borrower is likely 
to incur in connection with the settlement. The HUD-1 shows the actual 
costs of settlement services for the loan. HUD recently amended RESPA's 
implementing rules to require new standardized GFE and HUD-1 forms. 
These new rules take effect on January 1, 2010.\79\ The FTC does not 
have authority to enforce RESPA or its implementing regulations.
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    \78\ This term includes the vast majority of residential 
purchase money, refinance, and home equity mortgage transactions. 
See 12 U.S.C. 2601 et seq.
    \79\ See Real Estate Settlement Procedures Act (RESPA): Rule to 
Simplify and Improve the Process of Obtaining Mortgages and Reduce 
Settlement Costs, 73 FR 68204 (Nov. 17, 2008) (to be codified at 24 
CFR parts 203 and 3500).
---------------------------------------------------------------------------

    In general, under TILA and the Board's implementing Regulation Z, 
creditors currently must provide disclosures within three days of 
receiving a consumer's written application for a purchase-money 
mortgage loan. For non-purchase (e.g., refinance) mortgage loans, the 
creditor must provide the disclosures prior to loan consummation. The 
FTC has the authority to enforce TILA's mortgage disclosure 
requirements for non-bank financial companies. Many of the FTC's law 
enforcement cases regarding mortgage loans allege that companies have 
failed to provide, or to provide timely, specific TILA disclosures,\80\ 
including one or more of the following: the amount financed, the 
finance charge, the APR, the payment schedule, the total of payments, 
and the fact that the creditor has or will acquire a security interest 
in the consumer's principal dwelling.
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    \80\ See, e.g., FTC v. Safe Harbour Found. of Fl., Inc., No. 08-
1185 (N.D. Ill. 2008); United States v. Mercantile Mortgage Co., No. 
02-5079 (N.D. Ill. 2002); FTC v. Associates First Capital Corp., No. 
1:01-CV-00606 (N.D. Ga. 2001); FTC v. First Alliance Mortgage Co., 
No. SA CV 00-694 (C.D. Cal. 2000); FTC v. NuWest, Inc., No. 00-1197 
(W.D. Wash. 2000); FTC v. Capitol Mortgage Corp., No. 2-99-CV580G 
(D. Utah 1999); FTC v. Granite Mortgage, LLC, No. 99-289 (E.D. Ky. 
1999); FTC v. LAP Fin. Servs., Inc., No. 3:99 CV-496-H (W.D. Ky. 
1999); FTC v. Wasatch Credit Corp., No. 2-99CV579G (D. Utah 1999).
---------------------------------------------------------------------------

    In July 2008, the Board issued new rules under Regulation Z that 
require transaction-specific, earlier mortgage loan disclosures for 
closed-end loans secured by a consumer's principal dwelling (including 
non-purchase money mortgages, such as refinancings, but excluding 
HELOCs).\81\ On the same day, Congress enacted the Mortgage Disclosure 
Improvement Act of 2008 (MDIA), which amended TILA.\82\ The MDIA 
broadened and added to the Board's new disclosure requirements. The 
MDIA requirements apply to any closed-end, dwelling-secured loan 
(including refinancings and loans secured by a dwelling other than the 
consumer's principal dwelling).\83\ Among other things, they require 
that disclosures include new language, which varies depending on the 
type of loan (e.g., fixed- or variable-rate). The TILA disclosures must 
be given to the consumer no later than three business days after the 
creditor receives the written application and at least seven business 
days before closing and before the consumer pays a fee to any person 
(other than for obtaining the consumer's credit history). In addition, 
if the originally disclosed APR is incorrect, the creditor must provide 
a corrected disclosure at least three business days before closing. The 
consumer can waive this waiting period for a ``bona fide personal 
financial emergency.'' Nevertheless, final disclosures are still 
required no later than the time of the waiver. Certain aspects of the 
MDIA's requirements, including the early disclosure changes, take 
effect on July 30, 2009; other MDIA requirements for variable-rate 
transactions become effective contingent on the Board's actions. The 
Board has issued final rules implementing those aspects of the MDIA 
that become effective on July 30, 2009 and conforming the Board's July 
2008 rules regarding disclosures to the requirements of the MDIA.\84\
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    \81\ See 73 FR at 44600-601 (to be codified at 12 CFR 226.17, 
226.19). The Board promulgated these rules using its authority under 
TILA Section 105(a).
    \82\ Mortgage Disclosure Improvement Act of 2008, Pub. L. 110-
289, 122 Stat. 2654 Sec. Sec.  2501-2503 (July 30, 2008) (enacted in 
Housing and Economic Recovery Act of 2008); amended by Emergency 
Economic Stabilization Act of 2008, Pub. L. 110-343, 122 Stat. 3765 
Sec.  130 (Oct. 3, 2008).
    \83\ Timeshare plans are subject to some, but not all, of these 
requirements. See MDIA Sec.  2502 (to be codified at 15 U.S.C. 
1638(b)(2)(E)); see also 11 U.S.C. 101(53D).
    \84\ See Federal Reserve Board, Press Release, Board Approves 
Final Rules Revising Disclosure Requirements for Mortgage Loans 
Under Regulation Z (May 8, 2009), (http://www.federalreserve.gov/newsevents/press/bcreg/20090508a.htm). For example, the disclosure 
rules will become effective on July 30, 2009, instead of October 1, 
2009. The Board promulgated these rules using its authority under 
TILA Section 105(a).
---------------------------------------------------------------------------

2. FTC Empirical Testing Regarding Mortgage Disclosures
    The Commission has a long history of conducting empirical tests of 
the efficacy of disclosures relating to financial services.\85\ Most 
recently, in 2007, the FTC's Bureau of Economics published a research 
report concluding that the current mortgage disclosure requirements do 
not work and that alternative disclosures should be

[[Page 26125]]

considered and tested.\86\ The study, based on in-depth interviews with 
several dozen recent mortgage customers and quantitative testing with 
over 800 mortgage customers, found that: (1) the current federally 
required disclosures fail to convey key mortgage costs to many 
consumers, even for relatively simple, fixed-rate, fully-amortizing 
loans; (2) better disclosures can significantly improve consumer 
recognition of mortgage costs; (3) both prime and subprime borrowers 
failed to understand key loan terms when viewing the current 
disclosures, and both benefitted from improved disclosures; and (4) 
improved disclosures provided the greatest benefit for more complex 
loans, for which both prime and subprime borrowers had the most 
difficulty understanding loan terms.
---------------------------------------------------------------------------

    \85\ See, e.g., Federal Trade Commission, Bureau of Economics 
Staff Report, ``The Effect of Mortgage Broker Compensation 
Disclosures on Consumers and Competition: A Controlled Experiment'' 
(February 2004); Federal Trade Commission, Bureau of Economics Staff 
Report, ``Survey of Rent-to-Own Customers'' (April 2000).
    \86\ See Federal Trade Commission, Bureau of Economics Staff 
Report, ``Improving Consumer Mortgage Disclosures: An Empirical 
Assessment of Current and Prototype Disclosure Forms'' (June 2007), 
available at (http://www2.ftc.gov/os/2007/06/P025505MortgageDisclosureReport.pdf). Following up on this research, 
in 2008 the FTC's Bureau of Economics convened a conference to 
evaluate how mortgage disclosures could be improved. See Federal 
Trade Commission, ``May 15, 2008 Mortgage Disclosure Conference,'' 
available at (http://www2.ftc.gov/opa/2008/05/mortgage.shtm).
---------------------------------------------------------------------------

    The results of the FTC staff study indicate that consumers in both 
the prime and subprime markets would benefit substantially from 
comprehensive reform of mortgage disclosures that would create a 
single, comprehensive disclosure of all key costs and terms of a loan, 
presented in language consumers can easily understand and in a form 
they can easily use, and provided early in the transaction to aid 
consumers shopping for the best loans.

IV. Mortgage Appraisals

A. The Role of Appraisals in Mortgage Loans

    Mortgage lenders and brokers compete with each other to offer loan 
products to consumers. Regardless of which entity the consumer 
initially contacts, during the purchase money or refinance mortgage 
loan shopping process one of the parties seeks an appraisal \87\ to 
obtain an estimate of the market value of a specific property.\88\ 
Lenders rely on the appraisal to evaluate the collateral that will 
secure the loan. Brokers obtain an appraisal to shop a complete loan 
package (including the appraisal) to multiple lenders. Accurate 
appraisals therefore are important to the integrity of the mortgage 
lending process.
---------------------------------------------------------------------------

    \87\ This summary does not address automated valuation models, 
in which computers generate the estimated property value by 
performing a data analysis using an automated process.
    \88\ See 12 CFR 34.42(a), 225.62(a), 323.2(a), 564.2(a), 
722.2(a); Uniform Standards of Professional Appraisal Practice, 
Definitions, available at (http://commerce.appraisalfoundation.org/html/USPAP2008/USPAP_folder/uspap_foreword/DEFINITIONS.htm).
---------------------------------------------------------------------------

    Several parties to the loan transaction may have an incentive to 
influence the appraisal valuation process. Borrowers want an appraisal 
valuation high enough that they can obtain a loan to purchase the 
property at the sales price. Mortgage brokers want an appraisal 
valuation high enough for the transaction to occur because they get 
paid only if the loan is made, and their commissions usually are based 
on the loan amount. Individual loan officers also want an appraisal 
valuation high enough for the transaction to occur, particularly if 
their compensation is tied to overall loan volume or the amount of the 
loan. Although lenders may have some interest in obtaining an appraisal 
valuation high enough so that the loan is made (particularly if they 
immediately sell the loan),\89\ they also have a very strong interest 
in the property being accurately valued to ensure that it provides 
adequate security for the loan (particularly if they hold the loan in 
their portfolio).
---------------------------------------------------------------------------

    \89\ See, e.g., Prepared Statement of the Appraisal Institute, 
American Society of Appraisers, American Society of Farm Managers 
and Rural Appraisers, and National Association of Independent Fee 
Appraisers on H.R. 1728 The Mortgage Reform and Anti-Predatory 
Lending Act Before the H. Comm. on Financial Services, 111th Cong. 
5-6 (Apr. 23, 2009), available at (http://www.appraisalinstitute.org/newsadvocacy/downloads/ltrs_tstmny/2009/AI-ASA-ASFMRA-NAIFATestimonyonMortgageReform042309final.pdf); Joe 
Eaton, ``The Appraisal Bubble: In Run Up to Real Estate Bust, 
Lenders Pushed Appraisers to Inflate Values,'' The Center for Public 
Integrity, Apr. 14, 2009, available at (http://www.publicintegrity.org/investigations/luap/articles/entry/1264).
---------------------------------------------------------------------------

    Appraisers are paid to value property for their customers, who 
primarily are lenders or mortgage brokers.\90\ Some lenders and 
mortgage brokers may use coercion or pressure appraisers to obtain the 
valuations they want. To satisfy and retain customers, appraisers have 
some incentive to provide an appraisal at or above the amount sought. 
In the face of these incentives, industry self-regulatory and 
government restrictions have been imposed to protect the independence 
of appraisers and the integrity of the mortgage lending process.
---------------------------------------------------------------------------

    \90\ Appraisers also are paid to value property for appraisal 
management companies (AMCs). Typically, AMCs are hired by lenders to 
provide appraisal and, in some cases, other settlement services. 
AMCs, in turn, typically develop, and purchase appraisals from, a 
network of independently contracted appraisers.
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B. Laws and Standards for Appraisals

    Typically, the conduct of appraisers is governed through the 
Appraisal Foundation and its Uniform Standards of Professional 
Appraisal Practice (USPAP) guidelines,\91\ as well as through various 
state appraiser licensing and certification laws. These laws primarily 
address the conduct of appraisers and preparation of appraisals, not 
the entities that order appraisals, such as mortgage lenders and 
brokers. The federal bank regulatory agencies have issued appraisal 
guidance that applies to the entities under their jurisdiction,\92\ but 
there is no equivalent federal guidance for non-bank entities under the 
FTC's jurisdiction. Nevertheless, the FTC Act prohibits unfair or 
deceptive acts or practices in or affecting commerce, including unfair 
or deceptive appraisal activities, whether by non-bank financial 
companies that order appraisals, or by appraisers under the FTC's 
jurisdiction. In addition, the FTC enforces TILA, HOEPA, and Regulation 
Z, among other laws, with regard to non-bank mortgage lenders and 
brokers that order appraisals.\93\
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    \91\ The Financial Institutions Reform, Recovery, and 
Enforcement Act, Pub. L. 101-73, 103 Stat. 183 (1989), requires that 
real estate appraisals used in conjunction with federally-related 
transactions be performed in accordance with USPAP.
    \92\ See, e.g., Proposed Interagency Appraisal and Evaluation 
Guidelines, 73 FR 69647 (Nov. 19, 2008) (issued jointly by OCC, 
Board, FDIC, OTS, and NCUA, proposing revisions to Interagency 
Appraisal and Evaluation Guidelines issued jointly on Oct. 27, 
1994); Independent Appraisal and Evaluation Functions (Oct. 28, 
2003) (issued jointly by OCC, Board, FDIC, OTS, and NCUA).
    \93\ This discussion is not intended as a comprehensive list of 
all potentially applicable mortgage appraisal laws.
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1. Home Valuation Code of Conduct
    On March 3, 2008, the New York Attorney General (NYAG) announced 
settlement agreements with the Federal Home Loan Mortgage Corporation 
(Freddie Mac), Federal National Mortgage Association (Fannie Mae), and 
the Office of Federal Housing Enterprise Oversight (OFHEO).\94\ The 
settlement agreements and corresponding Home

[[Page 26126]]

Valuation Code of Conduct (Code) impose various restrictions, 
prohibitions, and requirements to promote independent appraisals.\95\ 
The primary provisions of the Code address: (1) general appraiser 
independence safeguards, such as prohibiting specific parties from 
influencing the appraisal process;\96\ (2) timing and cost for the 
borrower to receive a copy of the appraisal; (3) hiring of appraisers, 
such as prohibiting third parties (e.g., mortgage brokers) from 
selecting, retaining, or compensating appraisers; (4) prevention of 
improper influences on appraisers, such as prohibiting lenders from 
using an appraisal prepared by an employee of the lender (with certain 
exceptions) or by an entity that is an affiliate of another entity the 
lender retained to provide other settlement services in the same 
transaction (with certain exceptions); (5) establishment of the 
Independent Valuation Protection Institute to take and review 
complaints about non-compliance with the Code; and (6) other compliance 
issues, such as required quality control testing, referrals of 
appraiser misconduct, and certification that appraisals are obtained in 
compliance with the Code. As of May 1, 2009, Freddie Mac and Fannie Mae 
do not purchase single-family home mortgage loans (except government-
insured loans) from lenders that do not adopt the Code. Because Freddie 
Mac and Fannie Mae purchase a significant number of single-family home 
mortgage loans in the United States, the Code may have a substantial 
impact on the conduct of appraisers in the mortgage market. The FTC 
cannot enforce the settlement agreements or Code provisions.
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    \94\ See New York Attorney General Cuomo Announces Agreement 
with Fannie Mae, Freddie Mac, and OFHEO (Mar. 3, 2008), (http://www.oag.state.ny.us/media_center/2008/mar/mar3a_08.html) (last 
visited May 18, 2009). At the time of the settlement, OFHEO was the 
agency within HUD with oversight of Freddie Mac and Fannie Mae. On 
July 30, 2008, OFHEO staff and other federal agency staff combined 
to become the Federal Housing Finance Agency (FHFA), a new agency 
that is no longer part of HUD. See About FHFA, (http://www.fhfa.gov/Default.aspx?Page=4) (last visited May 18, 2009).
    \95\ The parties to the settlement requested public comment on 
the original Code that was proposed in March 2008. The FTC staff 
submitted a comment to Freddie Mac to convey its concerns about 
aspects of the proposed Code. Letter from FTC Staff to Senior Vice 
President, Credit Risk Oversight, Freddie Mac (Apr. 30, 2008), 
available at (http://www.ftc.gov/opa/2008/05/freddiemac.shtm) 
(prepared by the staff of the Office of Policy Planning and the 
Bureau of Economics). On December 23, 2008, the FHFA (see supra note 
94) announced that Freddie Mac and Fannie Mae would implement a 
revised Code, which includes modifications reflecting many comments 
received, including those of the FTC staff.
    \96\ Specifically, the Code prohibits any employee, director, 
officer, or agent of the lender, or other party affiliated in any 
way with the lender from influencing or attempting to influence the 
development, reporting, result or review of an appraisal through 
coercion, extortion, collusion, compensation, inducement, 
intimidation, bribery, or in any other manner, including but not 
limited to the several examples provided in the Code.
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2. Board's Regulation Z Amendments
    As discussed above, in July 2008, the Board issued rules under 
Regulation Z addressing appraisal issues.\97\ In connection with any 
covered closed-end loan secured by a consumer's principal dwelling, 
creditors and mortgage brokers, and their affiliates, cannot directly 
or indirectly coerce, influence, or otherwise encourage an 
appraiser\98\ to misstate or misrepresent the home's value.\99\ If a 
creditor knows or has reason to know, at or before loan consummation, 
of a violation of the above requirement, the creditor must not extend 
credit based on that appraisal unless the creditor documents that it 
acted with reasonable diligence to determine that the appraisal does 
not materially misstate or misrepresent the home's value. The Board's 
rules take effect on October 1, 2009.
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    \97\ See 73 FR at 44604 (to be codified at 12 CFR 226.36). The 
Board promulgated its appraisal rules using its authority under TILA 
Section 129(l)(2).
    \98\ Under the Board's rules, an ``appraiser'' refers to a 
person who engages in the business of providing assessments of the 
value of dwellings. It includes persons that employ, refer, or 
manage appraisers, and affiliates of such persons. See 73 FR at 
44604. Thus, it includes appraisal management companies.
    \99\ See id. at 44565-568, 44604, 44614. Note that this language 
used in the Board's rules is similar in concept to, but not the same 
as, the appraiser independence safeguard language in the NYAG 
settlement's Code. See note 96, supra for the Code's language.
---------------------------------------------------------------------------

V. Mortgage Servicing

A. The Role of Mortgage Loan Servicers

    Mortgage servicers handle day-to-day duties for those who own 
mortgage loans. They collect mortgage payments, provide customer 
service, handle delinquencies (including bankruptcies and 
foreclosures), and otherwise protect the interests of the loans' 
owners. The loans' owners may be the original lenders or other 
investors in the future proceeds of the loans (and can include 
servicers themselves).
    The relationship between mortgage servicers and consumers is 
vulnerable to abuse. Mortgage servicers typically do not have a 
customer relationship with homeowners; rather, they work for the loans' 
owners. Moreover, borrowers cannot shop for a loan based on the quality 
of servicing, and they have virtually no ability to change servicers if 
they are dissatisfied. Mortgage servicing rights can be transferred 
frequently, causing consumers confusion about who owns their loan and 
where to send their payments.
    In addition, servicers have financial incentives to impose fees on 
consumers. Servicers are compensated in three main ways. First, they 
receive a fixed fee for each loan, such as a fee based on the unpaid 
principal balance of the loan. Second, servicers earn ``float'' income 
from accrued interest between when consumers pay and when those funds 
are sent to investors. Third, servicers derive ancillary income from 
charges imposed on consumers, such as late fees or other delinquency-
related fees. Thus, a borrower's default can increase a servicer's 
revenues.
    For these reasons, it is important that servicers take appropriate 
care in acquiring and handling consumers' mortgages, including 
providing consumers with complete and accurate information about fees 
and other account information. However, the process of acquiring, 
securitizing, and transferring large volumes of loans on the secondary 
market has raised concerns about the integrity of consumers' loan 
information and the mistakes that can occur due to mishandling or lack 
of documentation. For example, courts have dismissed foreclosure cases 
against borrowers because the companies failed to show proof of 
ownership, and the United States Trustee Program has announced an 
effort to move against mortgage servicers that file false and 
inaccurate claims in consumer bankruptcy cases. The FTC is also 
concerned about the servicing of consumers' loans in bankruptcy.
    Because of these concerns and because mortgage servicers are the 
day-to-day contact for many homeowners, the FTC has been active in 
monitoring the servicing industry for potential abuses. The FTC's 
experience in this area suggests that there is a need for comprehensive 
rules with respect to mortgage servicing.

B. Federal Mortgage Servicing Laws

    The FTC Act prohibits unfair or deceptive acts or practices in or 
affecting commerce, including unfair or deceptive mortgage servicing 
activities. In addition, servicers may be subject to a patchwork of 
other laws.\100\ In July 2008, the Board issued rules under Regulation 
Z addressing certain mortgage servicing issues.\101\ These rules apply 
to all consumer-purpose, closed-end loans secured by a consumer's 
principal dwelling. They prohibit mortgage servicers from the

[[Page 26127]]

following abusive servicing practices: (1) failing to credit a 
consumer's payment as of the date received (except under specified 
circumstances); (2) imposing a late fee or delinquency charge when the 
delinquency is due only to the consumer's failure to include in the 
current payment a late fee or delinquency charge that was imposed on an 
earlier payment;\102\ and (3) failing to provide an accurate payoff 
statement to borrowers within a reasonable period of time after it is 
requested.\103\ The Board's rules take effect on October 1, 2009.
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    \100\ This discussion is not intended as a comprehensive list of 
all potentially applicable mortgage servicing laws. Mortgage 
servicers also may be subject to requirements under other laws the 
FTC enforces, such as the FDCPA and FCRA. The Commission is not 
seeking comment on FDCPA or FCRA issues in response to this ANPR.
    \101\ See 73 FR at 44604 (to be codified at 12 CFR 226.36). The 
Board promulgated its servicing rules using its authority under TILA 
Section 129(l)(2).
    \102\ This practice is commonly referred to as fee 
``pyramiding.'' See 73 FR 44568-574, 44614.
    \103\ See 73 FR 44568-574, 44604, 44613-44614.
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    In addition, HUD imposes disclosure and other requirements related 
to servicing under RESPA and its implementing Regulation X.\104\ The 
person who makes the mortgage loan must provide consumers with a 
servicing disclosure statement, which discloses whether the person 
intends to transfer the servicing of the loan to another entity at any 
time and also includes complaint resolution information. Both the 
transferor servicer and the transferee servicer have disclosure 
obligations to the consumer about the transfer. Servicers have a duty 
to respond in a timely manner to qualified written consumer inquiries 
with a written explanation or clarification that includes specified 
information. RESPA and Regulation X also regulate servicers regarding 
escrow accounts, such as requiring annual escrow statements and 
prohibiting fees for the preparation of escrow account statements. The 
FTC does not have authority to enforce RESPA or its implementing 
regulations.
---------------------------------------------------------------------------

    \104\ See 12 U.S.C. 2605, 2609, 2610; 24 CFR 3500.17, 3500.21.
---------------------------------------------------------------------------

C. FTC Mortgage Servicing Law Enforcement

    The FTC has challenged deceptive and unfair practices in the 
servicing of mortgage loans, addressing core issues such as failing to 
post payments upon receipt, charging unauthorized fees, and engaging in 
deceptive or abusive debt collection tactics.\105\ For example, in 
November 2003, the Commission, along with HUD, announced settlements 
with one of the country's largest third-party subprime loan servicers 
at that time, its parent company, and its founder and former chief 
executive officer.\106\ The Commission alleged that the defendants 
violated several federal laws, including the FTC Act, FDCPA, and FCRA, 
by: (1) failing to post consumers' payments upon receipt; (2) charging 
consumers for unnecessary casualty insurance; (3) assessing illegal 
late fees and other unauthorized fees in connection with alleged 
defaults; (4) using dishonest or abusive tactics to collect debts; and 
(5) reporting consumer payment information that the defendants knew to 
be inaccurate to credit bureaus.
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    \105\ See, e.g., FTC v. Capital City Mortgage Corp., No. 98-
00237 (D.D.C. 1998) (settled in 2005; FTC alleged that defendant 
mortgage lender and servicer deceptively induced consumers into 
taking mortgage loans, included false charges in monthly statements, 
added charges to loan balances, forced consumers to make monthly 
payments for the entire loan amount while withholding some loan 
proceeds, and failed to release liens on homes after loans were paid 
off).
    \106\ U.S. v. Fairbanks Capital Corp., No. 03-12219 (D. Mass. 
2003).
---------------------------------------------------------------------------

    In addition to requiring the defendants to pay over $40 million to 
redress consumer injury, the settlements enjoin the defendants from 
future law violations and impose new restrictions on their business 
practices. Among other things, the settlements:
    1. require the defendants to accept partial payments from most 
consumers and to apply most consumers' mortgage payments first to 
interest and principal;
    2. prohibit the defendants from forcing consumers to buy insurance 
when they know the consumer has insurance or fail to take reasonable 
actions to determine whether the consumer has insurance;
    3. enjoin the defendants from charging unauthorized fees, and place 
limits on specific fees;
    4. require the defendants to acknowledge, investigate, and resolve 
consumer disputes in a timely manner;
    5. require the defendants to provide timely billing information, 
including an itemization of fees charged;
    6. prohibit the defendants from taking any action toward 
foreclosure unless they have reviewed the consumer's loan records to 
verify that the consumer failed to make three full monthly payments, 
confirmed that the consumer has not been the subject of any illegal 
practices, and investigated and resolved any consumer disputes;
    7. prohibit the defendants from piling on late fees in certain 
situations;
    8. prohibit the defendants from enforcing certain waiver provisions 
in forbearance agreements that consumers had to sign to prevent 
foreclosure; and
    9. prohibit the defendants from violating the FDCPA, the FCRA, or 
the RESPA.
    The FTC conducted a review of the defendants' compliance with 
certain aspects of the 2003 settlement.\107\ The FTC and defendants 
negotiated and agreed to several modifications of the settlement.\108\ 
HUD also agreed to these changes, which, among other things, include:
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    \107\ In early 2004, the defendants changed their names to 
Select Portfolio Servicing, Inc. and SPS Holding Corp.
    \108\ FTC v. Select Portfolio Servicing, Inc. (formerly 
Fairbanks Capital Corp.), Civ. No. 03-12219-DPW (D. Mass. 2007) 
(modified stipulated final order).
---------------------------------------------------------------------------

    1. a five-year prohibition on marketing optional products, which 
are products or services that are not required by the consumer's loan 
(such as home warranties);
    2. refunds of optional product fees paid by consumers in certain 
circumstances;
    3. revised limitations on charging attorney fees in a foreclosure 
or bankruptcy to ensure that consumers receive full disclosures, 
including the actual amount due if consumers receive estimated attorney 
fees;\109\
---------------------------------------------------------------------------

    \109\ The defendant servicer also agreed to conduct 
reconciliations after payoff or foreclosure and reimburse consumers 
who may have paid for services that were not actually performed.
---------------------------------------------------------------------------

    4. refunds for consumers who may have paid foreclosure attorney 
fees for services that were not actually performed since November 2003;
    5. a permanent requirement that consumers be provided with monthly 
mortgage statements containing important information about their loans; 
and
    6. a requirement that the company revise its monthly mortgage 
statements based on consumer testing performed by a qualified, 
independent third party.
    In September 2008, the FTC settled charges that another mortgage 
servicer and its parent violated Section 5 of the FTC Act, the FDCPA, 
and the FCRA in servicing mortgage loans.\110\ Among other practices, 
the complaint alleged that the defendants: (1) misrepresented the 
amounts consumers owed; (2) assessed and collected unauthorized fees, 
such as late fees, property inspection fees, and loan modification 
fees; and (3) misrepresented that they had a reasonable basis to 
substantiate their representations about consumers' mortgage loan 
debts. The complaint further alleged the defendants made harassing 
collection calls; falsely represented the character, amount, or legal 
status of consumers' debts; and used false representations and 
deceptive means to collect on mortgage loans.
---------------------------------------------------------------------------

    \110\ See FTC v. EMC Mortgage Corp., No. 4:08-cv-338 (E.D. Tex. 
Sept. 9, 2008); see also Press Release, Federal Trade Commission, 
Bear Stearns and EMC Mortgage to Pay $28 Million to Settle FTC 
Charges of Unlawful Mortgage Servicing and Debt Collection Practices 
(Sept. 9, 2008), available at (http://www2.ftc.gov/opa/2008/09/emc.shtm).
---------------------------------------------------------------------------

    In addition to requiring the defendants to pay $28 million to 
redress consumer injury, the settlement bars the

[[Page 26128]]

defendants from future law violations and imposes new restrictions and 
requirements on their business practices. Among other things, the 
settlement:
    1. bars the defendants from misrepresenting amounts due or any 
other loan terms;
    2. requires them to possess and rely upon competent and reliable 
evidence to support claims made to consumers about their loans;
    3. bars them from charging unauthorized fees, and places specific 
limits on property inspection fees even if they are authorized by the 
contract;
    4. prohibits them from initiating a foreclosure action, or charging 
any foreclosure fees, unless they have reviewed all available records 
to verify that the consumer is in material default, confirmed that the 
defendants have not subjected the consumer to any illegal practices, 
and investigated and resolved any consumer disputes; and
    5. prohibits the defendants from violating the FDCPA, FCRA, or 
TILA.
    The settlement further requires defendants to establish and 
maintain a comprehensive data integrity program to ensure the accuracy 
and completeness of data and other information that they obtain about 
consumers' loan accounts, before servicing those accounts. The 
defendants also are required to obtain periodic assessments over an 
eight-year period from a qualified, independent, third-party 
professional, to assure that their data integrity program meets the 
standards of the order.

VI. Request for Comments

    The Commission is seeking comments on a wide range of topics 
related to mortgage loans, but it is not soliciting views on the merits 
of current statutory and regulatory schemes applicable to these topics.
    The Commission has broad authority over acts and practices related 
to financial services, but the FTC Act specifically excludes banks, 
thrifts, and federal credit unions from the agency's jurisdiction. 
However, non-bank subsidiaries or affiliates of banks are subject to 
the Commission's jurisdiction. Likewise, the FTC has jurisdiction over 
entities that perform services on behalf of banks, but which are not 
themselves banks. As discussed above, the Commission intends that any 
rules it issues in this proceeding would apply only to the same types 
of entities over which the Commission has jurisdiction under the FTC 
Act.
    The Commission is seeking comments to determine whether certain 
acts and practices of non-bank financial companies (such as non-bank 
mortgage lenders, brokers, appraisers, or servicers) related to 
mortgage loans are unfair or deceptive under Section 5 of the FTC Act 
and should be incorporated into a proposed rule. These acts and 
practices include conduct that the FTC currently could challenge in a 
law enforcement action as violating Section 5 of the FTC Act. However, 
the Commission is not otherwise seeking comments on statutes that have 
been enacted and rules that have been issued. The FTC also specifically 
is not seeking comments on the Board's new rules.
    The FTC invites interested persons to submit written comments on 
any issue of fact, law, or policy that may bear upon these issues. 
After examining the comments, the Commission will determine whether and 
how to incorporate them into a possible proposed rule. The Commission 
encourages commenters to respond to the specific questions asked. 
However, commenters do not need to respond to all questions. Please 
provide explanations for your answers and detailed, factual supporting 
evidence.
    The Commission is particularly interested in receiving comments on 
the following questions and issues:

A. Mortgage Advertising

    1. What types of unfair or deceptive acts and practices, if any, do 
non-bank financial companies engage in related to advertising and 
marketing mortgages? For any such act or practice, please answer the 
following questions:
    a. Why is it unfair or deceptive under Section 5 of the FTC Act?
    b. Should it be prohibited or restricted? If so, how? For all loans 
or only certain types of loans? What are the costs and benefits of such 
prohibitions or restrictions?
    c. What would be the effect on competition and consumers if the 
Commission were to prohibit or restrict non-bank financial companies 
with respect to the act or practice, but banks, thrifts, and federal 
credit unions were not similarly prohibited or restricted?
    2. Is there any specific information that non-bank financial 
companies should be required to disclose to prevent unfairness or 
deception in advertising and marketing mortgages? Identify any such 
type of information, and for each, please answer the following 
questions:
    a. Why is the failure to disclose the information unfair or 
deceptive under Section 5 of the FTC Act?
    b. Should disclosure be required for all loans or only certain 
types of loans? What are the costs and benefits of mandating its 
disclosure?
    c. What would be the effect on competition and consumers if the 
Commission were to require non-bank financial companies to disclose 
this information, but banks, thrifts, and federal credit unions were 
not similarly required to do so?
    3. What types of unfair or deceptive acts and practices, if any, do 
non-bank financial companies engage in regarding Internet financial 
services related to mortgage loans, including but not limited to acts 
and practices of mortgage rate aggregators that post rate and points 
charts? For any such act or practice, please answer the following 
questions:
    a. Why is it unfair or deceptive under Section 5 of the FTC Act?
    b. Should it be prohibited or restricted? If so, how? For all loans 
or only certain types of loans? What are the costs and benefits of such 
prohibitions or restrictions?
    c. What would be the effect on competition and consumers if the 
Commission were to prohibit or restrict non-bank financial companies 
with respect to the act or practice, but banks, thrifts, and federal 
credit unions were not similarly prohibited or restricted?
    4. Should the FTC incorporate into a proposed rule any of the 
requirements or prohibitions on acts or practices related to mortgage 
advertising that the Board promulgated under its TILA Section 105(a) 
authority, thereby allowing the FTC to obtain civil penalties for any 
violation of TILA, HOEPA, or Regulation Z, consistent with the 
authority conferred on federal banking regulatory agencies? \111\
---------------------------------------------------------------------------

    \111\ See note 37, supra.
---------------------------------------------------------------------------

    5. Do any recent reports, studies, or research provide data 
relevant to mortgage advertising rulemaking? If so, please provide or 
identify such reports, studies, or research.

B. Mortgage Origination--Underwriting, Loan Terms, and Disclosure 
Issues

    6. What types of unfair or deceptive acts and practices, if any, do 
non-bank financial companies engage in related to mortgage origination? 
For any such act or practice, please answer the following questions:
    a. Why is it unfair or deceptive under Section 5 of the FTC Act?
    b. Should it be prohibited or restricted? If so, how? For all loans 
or only certain types of loans? What are the costs and benefits of such 
prohibitions or restrictions?
    c. What would be the effect on competition and consumers if the 
Commission were to prohibit or restrict non-bank financial companies 
with respect to the act or practice, but banks,

[[Page 26129]]

thrifts, and federal credit unions were not similarly prohibited or 
restricted?
    7. Are there features of any non-traditional, or alternative, 
mortgage loans that are unfair or deceptive? Identify any such feature, 
and for each, please answer the following questions:
    a. Why is it unfair or deceptive under Section 5 of the FTC Act?
    b. Should it be prohibited or restricted? If so, how? For all loans 
or only certain types of loans? What are the costs and benefits of such 
prohibitions or restrictions?
    c. What would be the effect on competition and consumers if the 
Commission were to prohibit or restrict non-bank financial companies 
with respect to the feature, but banks, thrifts, and federal credit 
unions were not similarly prohibited or restricted?
    8. Is there any specific information that non-bank financial 
companies should be required to disclose to prevent unfairness or 
deception related to the origination of mortgage loans? Identify any 
such type of information, and for each, please answer the following 
questions:
    a. Why is the failure to disclose the information unfair or 
deceptive under Section 5 of the FTC Act?
    b. Should disclosure be required for all loans or only certain 
types of loans? What are the costs and benefits of mandating its 
disclosure?
    c. What would be the effect on competition and consumers if the 
Commission were to require non-bank financial companies to disclose 
this information, but banks, thrifts, and federal credit unions were 
not similarly required to do so?
    9. Should the FTC incorporate into a proposed rule any of the 
requirements or prohibitions on acts or practices related to mortgage 
disclosures that the Board promulgated under its TILA Section 105(a) 
authority, thereby allowing the FTC to obtain civil penalties for any 
violation of TILA, HOEPA, or Regulation Z, consistent with the 
authority conferred on federal banking regulatory agencies? \112\
---------------------------------------------------------------------------

    \112\ See id.
---------------------------------------------------------------------------

    10. Do any recent reports, studies, or research provide data 
relevant to mortgage origination rulemaking? If so, please provide or 
identify such reports, studies, or research.

C. Mortgage Appraisals

    11. What types of unfair or deceptive acts and practices, if any, 
do non-bank financial companies engage in related to mortgage 
appraisals, including but not limited to engaging or selecting 
appraisers, ordering appraisals, or performing as appraisers? For any 
such act or practice, please answer the following questions:
    a. Why is it unfair or deceptive under Section 5 of the FTC Act?
    b. Should it be prohibited or restricted? If so, how? For all loans 
or only certain types of loans? What are the costs and benefits of such 
prohibitions or restrictions?
    c. What would be the effect on competition and consumers if the 
Commission were to prohibit or restrict non-bank financial companies 
with respect to the act or practice, but banks, thrifts, and federal 
credit unions were not similarly prohibited or restricted?
    12. Is there any specific information that non-bank financial 
companies should be required to disclose to prevent unfairness or 
deception related to mortgage appraisals? Identify any such type of 
information, and for each, please answer the following questions:
    a. Why is the failure to disclose the information unfair or 
deceptive under Section 5 of the FTC Act?
    b. Should disclosure be required for all loans or only certain 
types of loans? What are the costs and benefits of mandating its 
disclosure?
    c. What would be the effect on competition and consumers if the 
Commission were to require non-bank financial companies to disclose 
this information, but banks, thrifts, and federal credit unions were 
not similarly required to do so?
    13. Should the FTC incorporate into a proposed rule any of the 
prohibitions or restrictions on acts or practices related to mortgage 
appraisals addressed in the NYAG's settlement and Code? Identify any 
such prohibited or restricted act or practice, and for each, please 
answer the following questions:
    a. Why is it unfair or deceptive under Section 5 of the FTC Act?
    b. Should it be prohibited or restricted? If so, how? For all loans 
or only certain types of loans? What are the costs and benefits of such 
prohibitions or restrictions?
    c. What would be the effect on competition and consumers if the 
Commission were to prohibit or restrict non-bank financial companies 
with respect to the act or practice, but banks, thrifts, and federal 
credit unions were not similarly prohibited or restricted?
    14. Do any recent reports, studies, or research provide data 
relevant to mortgage appraisal rulemaking? If so, please provide or 
identify such reports, studies, or research.

D. Mortgage Servicing

    15. What types of unfair or deceptive acts and practices, if any, 
do non-bank financial companies engage in related to mortgage 
servicing? For any such act or practice, please answer the following 
questions:
    a. Why is it unfair or deceptive under Section 5 of the FTC Act?
    b. Should it be prohibited or restricted? If so, how? For all loans 
or only certain types of loans? What are the costs and benefits of such 
prohibitions or restrictions?
    c. What would be the effect on competition and consumers if the 
Commission were to prohibit or restrict non-bank financial companies 
with respect to the act or practice, but banks, thrifts, and federal 
credit unions were not similarly prohibited or restricted?
    16. Should the FTC incorporate into a proposed rule any of the 
prohibitions or restrictions on acts and practices addressed in its 
settlement orders with mortgage servicers? \113\ Identify any such 
prohibited or restricted act or practice, and for each, please answer 
the following questions:
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    \113\ See text discussion in Part V.C, supra.
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    a. Why is it unfair or deceptive under Section 5 of the FTC Act?
    b. Should it be prohibited or restricted? If so, how? For all loans 
or only certain types of loans? What are the costs and benefits of such 
prohibitions or restrictions?
    c. What would be the effect on competition and consumers if the 
Commission were to prohibit or restrict non-bank financial companies 
with respect to the act or practice, but banks, thrifts, and federal 
credit unions were not similarly prohibited or restricted?
    17. Is there any specific information that non-bank financial 
companies should be required to disclose, or to disclose in a 
particular manner (for example, through uniform or model servicing 
disclosures), to prevent unfairness or deception related to mortgage 
servicing, such as:
    a. information about fees the servicer is authorized to charge 
under the mortgage contract over the life of the loan; or
    b. information about applicable fees the servicer has charged 
during a specific monthly statement period.
    Identify any such type of information, and for each, please answer 
the following questions:
    i. Why is the failure to disclose the information, or to disclose 
it in a particular manner, unfair or deceptive under Section 5 of the 
FTC Act?
    ii. Should disclosure be required in a particular manner (for 
example, through uniform or model servicing disclosures)? Should 
disclosure be required for all loans or only certain

[[Page 26130]]

types of loans? What are the costs and benefits of mandating its 
disclosure?
    iii. What would be the effect on competition and consumers if the 
Commission were to require non-bank financial companies to make these 
disclosures, but banks, thrifts, and federal credit unions were not 
similarly required to do so?
    18. Should the FTC consider prohibiting or restricting as unfair or 
deceptive certain acts and practices related to mortgage servicing fees 
or related charges, such as:
    a. charging fees not authorized under the mortgage contract;
    b. charging fees not authorized by state law;
    c. charging for ``estimated'' attorney fees or other fees for 
services not rendered;
    d. charging late fees that are not permitted under the service 
agreement or that are otherwise improper (other than ``fee 
pyramiding,'' which is already prohibited under the Board's Regulation 
Z amendments\114\ );
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    \114\ See note 102, supra.
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    e. failing to disclose and itemize adequately fees in billing 
statements or other relevant communications with borrowers; or
    f. forcing consumers to buy insurance on their homes when the 
servicer knows or should know that insurance is already in place?
    Identify any such act or practice, and for each, please answer the 
following questions:
    i. Why is it unfair or deceptive under Section 5 of the FTC Act?
    ii. Should it be prohibited or restricted? If so, how? For all 
loans or only certain types of loans? What are the costs and benefits 
of such prohibitions or restrictions?
    iii. What would be the effect on competition and consumers if the 
Commission were to prohibit or restrict non-bank financial companies 
with respect to the act or practice, but banks, thrifts, and federal 
credit unions were not similarly prohibited or restricted?
    19. Should the FTC consider prohibiting or restricting as unfair or 
deceptive certain acts and practices related to how mortgage servicers 
handle payments, amounts owed, or consumer disputes, such as:
    a. failing to post payments in a timely and proper manner (beyond 
the new prohibition under the Board's Regulation Z amendments);
    b. mishandling of partial payments or suspense accounts;
    c. misrepresentation of amounts owed or other account terms or the 
status of the account;
    d. making claims to borrowers about their loan accounts without a 
reasonable basis (i.e., lack of substantiation);
    e. failing to have a adequate procedures to ensure accuracy of 
information used to service loans; or
    f. failing to maintain and provide adequate customer service to 
handle disputes?
    Identify any such act or practice, and for each, please answer the 
following questions:
    i. Why is it unfair or deceptive under Section 5 of the FTC Act?
    ii. Should it be prohibited or restricted? If so, how? For all 
loans or only certain types of loans? What are the costs and benefits 
of such prohibitions or restrictions?
    iii. What would be the effect on competition and consumers if the 
Commission were to prohibit or restrict non-bank financial companies 
with respect to the act or practice, but banks, thrifts, and federal 
credit unions were not similarly prohibited or restricted?
    20. Should the FTC consider prohibiting or restricting as unfair or 
deceptive certain acts and practices related to how mortgage servicers 
handle loan performance and loss mitigation issues, such as:
    a. taking foreclosure action without first verifying loan 
information and investigating any disputes;
    b. taking foreclosure action without first giving the consumer an 
opportunity to attend foreclosure counseling or mediation;
    c. requiring consumers to release all claims (or other 
requirements, such as requiring binding arbitration agreements) in 
connection with loan modifications or other workout agreements/
repayment plans; or
    d. making loan modifications or other workout agreements/repayment 
plans without regard to the consumer's ability to repay?
    Identify any such act or practice, and for each, please answer the 
following questions:
    i. Why is it unfair or deceptive under Section 5 of the FTC Act?
    ii. Should it be prohibited or restricted? If so, how? For all 
loans or only certain types of loans? What are the costs and benefits 
of such prohibitions or restrictions?
    iii. What would be the effect on competition and consumers if the 
Commission were to prohibit or restrict non-bank financial companies 
with respect to the act or practice, but banks, thrifts, and federal 
credit unions were not similarly prohibited or restricted?
    21. Should the FTC consider prohibiting or restricting as unfair or 
deceptive certain acts and practices related to servicing of mortgage 
loans in connection with bankruptcy proceedings, such as:
    a. failing to disclose fees incurred during a Chapter 13 bankruptcy 
case and then seeking to collect them from the consumer after 
discharge/dismissal?
    b. filing of proofs of claim or other bankruptcy filings without a 
reasonable basis (i.e., impose a substantiation requirement beyond Rule 
11 of the Federal Rules of Civil Procedure);
    c. failing to apply properly payments in bankruptcy to pre-
petition/post-petition categories of the consumer's debts; or
    d. charging of specific unnecessary or excessive fees in bankruptcy 
cases (e.g., duplicative attorneys' fees)?
    Identify any such act or practice, and for each, please answer the 
following questions:
    i. Why is it unfair or deceptive under Section 5 of the FTC Act?
    ii. Should it be prohibited or restricted? If so, how? For all 
loans or only certain types of loans? What are the costs and benefits 
of such prohibitions or restrictions?
    iii. What would be the effect on competition and consumers if the 
Commission were to prohibit or restrict non-bank financial companies 
with respect to the act or practice, but banks, thrifts, and federal 
credit unions were not similarly prohibited or restricted?
    22. Do any recent reports, studies, or research provide data 
relevant to mortgage servicing rulemaking? If so, please provide or 
identify such reports, studies, or research.
    By direction of the Commission.

Donald S. Clark
Secretary
[FR Doc. E9-12595 Filed 5-29-09: 8:45 am]
BILLING CODE 6750-01-S