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.

Proposed Rules Federal Register

26118 

Vol. 74, No. 103 

Monday, June 1, 2009 

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). 

2 Omnibus Appropriations Act of 2009, Pub. L. 

No. 111-8, § 626, 123 Stat. 524 (Mar. 11, 2009). 

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. 

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 lifecycle 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 nonprofits, 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

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/ftcmortgageactsandpractices) (and 

following the instructions on the webbased form). To ensure that the 

Commission considers an electronic 

comment, you must file it on the webbased form at the weblink (https:// 

secure.commentworks.com/ftcmortgageactsandpractices). 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 

Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Proposed Rules 26119 

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. 

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). 

8 See infra Part I.D. 

9 15 U.S.C. 57a. 

10 15 U.S.C. 45(m)(1)(A). 

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 

Continued 

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. 

This ANPR, the Mortgage Acts and 

Practices (MAP) Rulemaking, addresses 

activities that occur throughout the lifecycle 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. 

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

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. 

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 

26120 Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Proposed Rules 

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 nonaffiliated third parties; and safeguards customers’ 

personally identifiable information). 

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, § 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). 

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). 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. 

27 Deception Policy Statement at 177-81. 

28 Id. at 178. 

29 Id. at 182-83. 

30 Novartis Corp. v. FTC, 223 F.3d 783, 786-87 

(D.C. Cir. 2000). 

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.’’ 

provisions of the Gramm-Leach-Bliley 

(GLB) Act.21

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, nonbank 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. 

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. 

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

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

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

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. 

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. 

Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Proposed Rules 26121 

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). 

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 § 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). 

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. 

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. 

44 See 73 FR at 44599-602 (to be codified at 12 

CFR 226.16, 226.24). 

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

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

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

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. 

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. 

26122 Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Proposed Rules 

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. 

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. 

53 See id. at 44586-590, 44602, 44610. The Board 

promulgated these rules using its authority under 

TILA Section 129(l)(2). 

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. 

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-C5078 (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). 

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

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

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

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

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 costs61 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 

Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Proposed Rules 26123 

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). 

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). 

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). 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. 69 ‘‘Higher-priced mortgage loans’’ are consumerpurpose, 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 variablerate 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. 

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). 

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

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, fixedrate 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 nontraditional, 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. 

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

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. 

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

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 

26124 Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Proposed Rules 

76 12 U.S.C. 2603-04. 

77 15 U.S.C. 1604. 

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). 

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). 

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 §§ 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 § 130 (Oct. 3, 2008). 

83 Timeshare plans are subject to some, but not 

all, of these requirements. See MDIA § 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). 

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 Rentto-Own Customers’’ (April 2000). 

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. 

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

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. 

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. 

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

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 

Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Proposed Rules 26125 

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). 

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). 

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-ASFMRANAIFATestimonyonMortgageReform042309final

.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). 

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. 

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. 

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). 

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, fullyamortizing 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. 

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. 

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). 

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 selfregulatory and government restrictions 

have been imposed to protect the 

independence of appraisers and the 

integrity of the mortgage lending 

process. 

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

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 

26126 Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Proposed Rules 

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. 

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. 

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). 

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 noncompliance 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 governmentinsured 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. 

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 appraiser98 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. 

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 dayto-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 

Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Proposed Rules 26127 

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. 

104 See 12 U.S.C. 2605, 2609, 2610; 24 CFR 

3500.17, 3500.21. 

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). 

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). 

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. 

110 See FTC v. EMC Mortgage Corp., No. 4:08-cv338 (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). 

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. 

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. 

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. 

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: 

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

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. 

In addition to requiring the 

defendants to pay $28 million to redress 

consumer injury, the settlement bars the 

26128 Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Proposed Rules 

111 See note 37, supra. 

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

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, 

Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Proposed Rules 26129 

112 See id. 113 See text discussion in Part V.C, supra. 

thrifts, and federal credit unions were 

not similarly prohibited or restricted? 

7. Are there features of any nontraditional, 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

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: 

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 

26130 Federal Register / Vol. 74, No. 103 / Monday, June 1, 2009 / Proposed Rules 

114 See note 102, supra. 

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 amendments114 ); 

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/postpetition 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 

FEDERAL TRADE COMMISSION 

16 CFR Parts 321 and 322 

[RIN 3084-AB18] 

Advance Notice of Proposed 

Rulemaking: Mortgage Assistance 

Relief Services 

AGENCY: Federal Trade Commission 

(FTC or Commission) 

ACTION: Advance Notice of Proposed 

Rulemaking; request for comment 

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