[Federal Register Volume 73, Number 104 (Thursday, May 29, 2008)]
[Notices]
[Pages 30997-31005]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-11850]
[[Page 30997]]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket ID OCC-2008-0007]
FEDERAL RESERVE SYSTEM
[Docket No. OP-1292]
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[Docket No. OTS-2008-0003]
NATIONAL CREDIT UNION ADMINISTRATION
Illustrations of Consumer Information for Hybrid Adjustable Rate
Mortgage Products
AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); Federal
Deposit Insurance Corporation (FDIC); Office of Thrift Supervision,
Treasury (OTS); and National Credit Union Administration (NCUA)
(collectively, the Agencies).
ACTION: Final Guidance--Illustrations of Consumer Information for
Hybrid Adjustable Rate Mortgage Products.
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SUMMARY: The Agencies are publishing four documents that set forth
Illustrations of Consumer Information for Hybrid Adjustable Rate
Mortgage Products. The illustrations are intended to assist
institutions in implementing the consumer protection portion of the
Interagency Statement on Subprime Mortgage Lending adopted on July 10,
2007, and in providing information to consumers on hybrid adjustable
rate mortgage (ARM) products as recommended by that interagency
statement. The illustrations are not model forms and institutions may
choose not to use them.
EFFECTIVE DATE: May 29, 2008.
FOR FURTHER INFORMATION CONTACT:
OCC: Michael Bylsma, Director, Stephen Van Meter, Assistant
Director, Carolle Kim, Attorney, Community and Consumer Law Division,
(202) 874-5750; or Joseph A. Smith, Group Leader, Mortgage Banking &
Securitization, Retail Credit Risk, (202) 874-5170.
Board: Kathleen C. Ryan, Counsel, or Jamie Z. Goodson, Attorney,
Division of Consumer and Community Affairs, (202) 452-3667. For users
of Telecommunication Device for Deaf only, call (202) 263-4869.
FDIC: Luke H. Brown, Associate Director, Compliance Policy Branch,
(202) 898-3842, Samuel Frumkin, Senior Policy Analyst, Division of
Supervision and Consumer Protection, (202) 898-6602; or Richard Foley,
Counsel, Legal Division, (202) 898-3784.
OTS: Glenn Gimble, Senior Project Manager, Compliance and Consumer
Protection Division, (202) 906-7158, or Suzanne McQueen, Consumer
Regulations Analyst, Compliance and Consumer Protection Division, (202)
906-6459.
NCUA: Matthew J. Biliouris, Program Officer, Examination and
Insurance, (703) 518-6360.
SUPPLEMENTARY INFORMATION:
I. Background
On March 8, 2007, the Agencies published the Interagency Statement
on Subprime Mortgage Lending (Subprime Statement) for comment. 72 FR
10533 (March 8, 2007). After carefully reviewing and considering all
comments received, the Agencies published the Subprime Statement
(applicable to all banks and their subsidiaries, bank holding companies
and their nonbank subsidiaries, savings institutions and their
subsidiaries, savings and loan holding companies and their
subsidiaries, and credit unions) in final form on July 10, 2007. 72 FR
37569 (July 10, 2007).
The Subprime Statement set forth recommended practices to ensure
that consumers have clear and balanced information about certain hybrid
adjustable rate mortgage products during the product selection process,
not just upon submission of an application or at consummation of the
loan. This information should address the relative benefits and risks
of these products and describe their costs, terms, features, and risks
to the borrower.
Some industry group commenters on the proposed Subprime Statement
asked the Agencies to provide uniform disclosures for these products,
or to publish illustrations of the consumer information contemplated by
the Subprime Statement similar to those previously proposed by the
Agencies in connection with nontraditional mortgage products. (These
illustrations were subsequently revised and published in final form.\1\
) The Agencies determined that illustrations of the consumer
information contemplated by the Subprime Statement may be useful to
institutions as they seek to ensure that consumers receive the
information they need about the material features of these loans. On
August 14, 2007, the Agencies published for comment two Proposed
Illustrations of Consumer Information for Subprime Mortgage Lending
(Proposed Illustrations). 72 FR 45495 (Aug. 14, 2007).
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\1\ Illustrations of Consumer Information for Nontraditional
Mortgage Products, 72 FR 31825 (June 8, 2007).
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The two Proposed Illustrations consisted of (1) a narrative
explanation of some of the key features of certain ARM loans that are
identified in the Subprime Statement, including payment shock,
responsibility for taxes and insurance, prepayment penalties,\2\
balloon payments, and increased costs associated with stated income or
reduced documentation loans, and (2) a chart with numerical examples
that is designed to show the potential consequences of payment shock in
a concrete, readily understandable manner for a loan structured with a
discounted interest rate for the first two years.
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\2\ Federal credit unions are prohibited from charging
prepayment penalties. 12 CFR 701.21.
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The Agencies requested comment on all aspects of the Proposed
Illustrations. Specifically, commenters were asked to address whether
the illustrations, as proposed, would be useful to institutions,
including community banks, seeking to implement the ``Consumer
Protection Principles'' portion of the Subprime Statement, or whether
changes should be made. The Agencies also encouraged specific comment
on whether the illustrations, as proposed, would be useful in promoting
consumer understanding of the risks and material terms of certain ARM
products, as described in the Subprime Statement, or whether changes
should be made. Additionally, the Agencies sought comment on whether
the information in the Proposed Illustrations is set forth in a clear
manner and format; whether these illustrations or a modified form
should be adopted by the Agencies; and whether additional illustrations
relating to certain ARM products would be useful to consumers and
institutions. Finally, the Agencies requested information on any
consumer testing that commenters may have conducted in connection with
comparable disclosures.
After considering the comments received, the Agencies are now
issuing final illustrations of consumer information for certain hybrid
ARMs. The Subprime Statement recommended that communications with
consumers, including advertisements, oral statements, and promotional
materials, provide clear and balanced information about the relative
benefits, costs, terms, features, and risks of certain ARM
[[Page 30998]]
products to the borrower. This includes information about the risk of
payment shock, the ramifications of prepayment penalties, balloon
payments, and a lack of escrow for taxes and insurance, and any pricing
premium associated with a stated income or reduced documentation loan
program.
Use of the illustrations is entirely voluntary. Accordingly, there
is no Agency requirement or expectation that institutions must use the
illustrations in their communications with consumers. Institutions
seeking to follow the recommendations set forth in the Subprime
Statement may, at their option, elect to:
Use the illustrations;
Provide information based on the illustrations, but
expand, abbreviate, or otherwise tailor any information in the
illustrations as appropriate to reflect, for example:
[cir] The institution's product offerings, such as by deleting
information about loan products and loan terms not offered by the
institution and by revising the illustrations to reflect specific terms
currently offered by the institution;
[cir] The consumer's particular loan requirements or
qualifications;
[cir] Current market conditions, such as by changing the loan
amounts, interest rates, and corresponding payment amounts to reflect
current local market circumstances;
[cir] Other material information relating to the loan consistent
with the Subprime Statement; and
[cir] The results of consumer testing of the illustrations or
comparable disclosures; or
Provide the information described in the Subprime
Statement, as appropriate, in an alternate format.
To assist institutions that wish to use the illustrations, the
Agencies will be posting each of the illustrations on their respective
Web sites in a form that can be downloaded and printed for easy
reproduction. The Agencies also will develop and post Spanish-language
versions of the illustrations on their respective Web sites.
Additionally, in response to concerns that the interest rates used in
Illustrations Nos. 2A, 2B, and 2C may become outdated with changes in
market interest rates--and consistent with the Agencies' intention,
expressed above, that the illustrations may be modified to reflect,
among other things, current market conditions--the Agencies also will
be posting on their respective Web sites a template that can be used by
institutions that wish to modify the information presented in these
illustrations to reflect more current interest rates (and corresponding
payment amounts).
II. Overview of the Comments
Collectively, the Agencies received approximately 25 comment
letters on the proposal, including comments from one federal regulatory
agency, a group of three associations of state banking and consumer
protection agencies, six financial institutions, ten trade
organizations, two community organizations, and five individuals.
Most commenters encouraged the Agencies to adopt the illustrations.
These commenters stated that the illustrations would be useful to
financial institutions, including community banks, seeking to implement
the consumer protection principles of the Subprime Statement. At least
one commenter also noted that the illustrations would help reduce
implementation costs and compliance burden.
Several trade organizations supported making use of the
illustrations voluntary. These commenters also urged the Agencies to
notify their examiners that use of the illustrations is not required to
show compliance with the Subprime Statement. One of these commenters
stated that in developing the illustrations the Agencies have
appropriately balanced the need for institutions to provide meaningful
disclosures and the need to avoid unnecessary burdens. On the other
hand, one community organization advocated that use of the
illustrations should be made mandatory to prevent consumer confusion
due to lack of uniform disclosures from lender to lender.
Many commenters suggested that the Proposed Illustrations could
confuse consumers about whether the illustrations are describing
features of hybrid ARMs generally or, instead, describing the mortgage
they are actually considering or being offered. These commenters
suggested modifying the illustrations by revising statements that
appear specific to a particular borrower and loan product. Other
commenters, however, suggested modifying the illustrations so that they
would be based on the actual loan product or product choices lenders
will offer to the particular applicant, and include more loan-specific
details.
Commenters also suggested changes to make the illustrations more
accurately reflect the actual terms of products prevalent in the
market. For example, it was noted that the illustrations focused on
hybrid ARM products structured with a discounted interest rate for the
first two years. Due to recent market developments, such products have
become uncommon, and have been replaced, to some extent, by products
with somewhat longer discounted initial interest rate periods.
Finally, commenters made a number of suggestions to change the
wording, format, or content of the illustrations in order to improve
the accuracy, clarity, or usefulness of the illustrations for
consumers.
III. Final Illustrations
After carefully considering all of the comments received, the
Agencies have decided to publish the proposed illustrations in final
form, with some modifications.\3\ Additionally, the Agencies believe
that issuing these materials as nonmandatory illustrations will provide
institutions with the flexibility needed to tailor the materials to
their own circumstances and consumer needs.
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\3\ The Agencies are using a different title for this final
guidance than for the proposed guidance to reflect more closely the
types of mortgage products covered by the Subprime Statement.
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In response to commenter concerns, the Agencies have made three
sets of changes to the proposed illustrations, as described more fully
below. The first change relates to the language and format of
Illustration No. 1. The Agencies have modified this illustration so it
clearly will be a general description of the features of the products
covered by the Subprime Statement, rather than a loan-specific
disclosure. Second, the Agencies have included additional versions of
Illustration No. 2 to provide institutions with illustrations
reflecting products that may be more prevalent in the market, and to
show how institutions might provide this information when they offer
multiple products subject to the Subprime Statement. Finally, the
Agencies have adopted a number of wording and format changes to improve
the readability and usefulness of the illustrations for consumers, and
to make it easier for consumers to understand the key risks of the
products covered by the Subprime Statement.
A. Proposed Illustration No. 1
As noted above, several commenters suggested that Illustration No.
1 should generally describe features found in the subprime ARM products
covered by the Subprime Statement. Given that the Subprime Statement
called for early delivery--during the product selection process--of the
consumer information contemplated in the Statement, the Agencies agree
that it could be inappropriate and confusing for Illustration No. 1 to
appear to set forth
[[Page 30999]]
specific loan terms. At this stage, consumers have not yet selected a
specific loan, and institutions likely will not have performed the
credit underwriting necessary to determine all of the terms that may be
offered to the consumer. In view of these uncertainties, and in light
of the fact that hybrid ARMs may include various combinations of the
risks and features highlighted in the Subprime Statement, it would not
be possible for this narrative description to convey loan-specific
information in a way that would be accurate or relevant for all
consumers. For these reasons, attempting to include loan-specific
information would frustrate one of the Agencies' primary goals in
issuing these illustrations: Namely, to create a set of documents that
institutions can use to satisfy the expectations outlined in the
Subprime Statement.\4\
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\4\ In this regard, the Agencies note that institutions will
continue to have obligations under the Truth in Lending Act, Real
Estate Settlement Procedures Act, and other laws to provide
consumers with timely, loan-specific information.
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Accordingly, in order to make clear that this illustration is
simply a generic description of key risks and features that may be
found in the products covered by the Subprime Statement, and to improve
readability and usefulness, the Agencies have made substantial changes
to proposed Illustration No. 1, and have adopted, to a large extent,
the format used in the Agencies' nontraditional mortgage product
illustrations.\5\ Most significantly, the document has been revised and
reformatted to emphasize the risk of payment shock present in all
products covered by the Subprime Statement, as opposed to other
features (such as prepayment penalties) that may (or may not) be found
in any particular loan.\6\ These other features are now described under
a general heading, ``Additional Information.'' The Agencies also
believe that distinguishing between the inherent and potential risks of
these products, and formatting the document accordingly, helps to make
the document easier to use and understand. The Agencies also have
revised the language in the subject matter headings of the ``Additional
Information'' portion of the document. These changes are designed to
conform to the approach used in the nontraditional mortgage product
illustrations and to clarify that the features described therein are
not necessarily included in the loan to be offered to the consumer.
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\5\ Illustrations of Consumer Information for Nontraditional
Mortgage Products, 72 FR 31825 (June 8, 2007).
\6\ The title of this illustration also has been revised, in
response to commenter suggestions, to stress that the document
includes important facts about any adjustable rate mortgage with a
reduced initial interest rate.
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The Agencies also adopted several suggestions from commenters to
place more emphasis on the nature of the risks associated with
obtaining a hybrid ARM product of the type covered by the Subprime
Statement, and to focus consumers' attention on those risks. For
example, the Agencies have added language directing consumers not to
assume that they will be able to refinance their ARM to a lower rate in
the future. The final illustration also states that consumers ``need to
know'' whether the monthly payment includes taxes and insurance,
whether their loan would have a prepayment penalty or balloon payment,
and whether obtaining a ``full documentation'' loan would be more cost-
effective.
Other recommendations were adopted by the Agencies to improve the
clarity or usefulness of the document for consumers. For example,
Illustration No. 1 was modified to reflect interest rate indexes more
likely to be used by lenders in the current market.
The Agencies decided not to adopt a number of specific suggestions
made by commenters. Some of these suggestions were largely duplicative
of information already contained in the document, or otherwise would
have made the document too lengthy and less consumer-friendly. Other
comments would have provided substantive advice to consumers about
particular features and terms, and were inconsistent with the purpose
of the illustration to provide important information in an objective,
balanced manner. One commenter representing the credit union industry
suggested deleting the reference to prepayment penalties in
Illustration No. 1 on the grounds that federal credit unions are not
permitted to charge such penalties. The Agencies did not adopt this
suggestion, however, because the illustrations are designed for the use
of all institutions supervised by any of the Agencies. As noted above,
institutions may tailor the information in the illustrations as
appropriate to reflect, for example, their own product offerings. Other
suggested changes that were not adopted would not, in the Agencies'
view, have enhanced the clarity or usefulness of the illustration for
consumers.
B. Proposed Illustration No. 2
After reviewing and considering the comments, the Agencies have
retained Proposed Illustration No. 2--a chart comparing payment
obligations on a fixed rate loan and an ARM with a discounted interest
rate for the first two years--but have re-designated the illustration
as Illustration No. 2A. In response to the comments and market changes,
the Agencies also have included two additional versions of Proposed
Illustration No. 2 for institutions to consider using. Comments on
Illustration No. 2, as well as external data reviewed, indicate that
hybrid ARM products structured with a discounted interest rate for the
first five years may have become more prevalent in the current market
than similar products structured with a discounted interest rate for
the first two years. Accordingly, the Agencies have added a similar
chart, designated as Illustration No. 2B, that compares payment
obligations on a fixed rate loan and an ARM with a discounted interest
rate for the first five years. Institutions may believe that
Illustration No. 2B is more helpful than Illustration No. 2A to
consumers considering loans whose initial rate remains in effect for a
longer period of time. In addition, the Agencies have added a third
chart, designated as Illustration No. 2C, that compares payment
obligations on three products: A fixed rate loan; an ARM with a
discounted interest rate for the first two years; and an ARM with a
discounted rate for five years. Institutions that would like to present
information about multiple products they offer on a single page, rather
than providing a separate illustration for each product, may find this
third chart to be useful.\7\ The Agencies also adopted a number of
minor wording changes, including changes in the left column of the
illustration to clarify that the interest rate conditions specified
therein are specifically referring to movement in index interest rates,
and not the interest rate increases required by the terms of the hybrid
ARM loan. The Agencies also changed the assumed interest rate increase
in the final row of the left column to be more consistent with the
illustration's assumptions about product structure, and thereby less
likely to produce consumer confusion. The Agencies did not adopt some
suggestions made by commenters because they would require the provision
of loan-specific information
[[Page 31000]]
that could not feasibly or accurately be presented in the early product
selection process. However, as noted above, institutions that wish to
modify the information presented in these illustrations will be able to
access relevant templates on the respective Web sites of the Agencies
and insert more loan-specific information. Some recommendations also
were not adopted because, on balance, they would unreasonably increase
or duplicate the information already included or would not otherwise
appear to improve the clarity or usefulness of the information
presented for consumers.
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\7\ Illustrations Nos. 2A, 2B, and 2C reflect typical interest
rates for these products at the time the Agencies issued the
Subprime Statement, and embody other assumptions about typical
features of these products. For example, they reflect assumptions
that: the fully-indexed rate is 4.5 percentage points higher than
the initial rate (based on an initial index rate of 5.5 percent and
a margin of 6 percent); the first interest rate adjustment cannot
exceed 3 percentage points; subsequent interest rate adjustments may
not exceed 1.5 percentage points; and the applicable interest rate
may never be more than 6 percentage points higher than the initial
rate.
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The final illustrations appear below.
BILLING CODE 4810-33-C, 6210-01-C, 6714-01-C, 6720-01-C, 7335-01-C
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Dated: May 15, 2008.
John C. Dugan,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, May 20, 2008.
Robert deV. Frierson,
Deputy Secretary of the Board.
Dated at Washington, DC, the 19th day of May, 2008.
By order of the Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: May 7, 2008.
By the Office of Thrift Supervision.
John Reich,
Director.
By the National Credit Union Administration on May 20, 2008.
JoAnn M. Johnson,
Chairman.
[FR Doc. E8-11850 Filed 5-28-08; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P, 6720-01-P, 7535-01-P